2. The Double Auction is like an “Econ Lab” to illustrate How markets work How good the competitive equilibrium model (supply and demand) is as a model of a market Experimental economics –An important branch of economic research today with many real world applications

3. Key Features of a Double Auction Both sellers and buyers call out prices –Buyers “bid” and sellers “ask” Trading takes place during a trading period A trade take place when –a buyer accepts a sellers ask –a seller accepts a buyers bid

4. Buyers each buyer has a “marginal benefit” table for the good gain or reward is the difference between marginal benefit and the price –try to get a low price, but compete with other buyers Any new bid must be higher than outstanding bid

5. Sellers each seller has a “marginal cost” schedule for the good seller’s gain or reward is the difference between the price and the marginal cost –try to get a high price, but must compete with other sellers Any new ask must be lower than outstanding ask

12. Observe Actual Double Auction Notice sellers and buyers first examine marginal costs and marginal benefits During the trading period –Notice how bids, asks, and trades are posted on the board –Notice how the price changes during the trading period