Experimental Instructions for Sellers Baseline (B) Treatment

Does Product Complexity Matter for Competition in Experimental Retail Markets? By Stefania Sitzia and Daniel John Zizzo – Electronic Appendix

Experimental Instructions for Sellers – Baseline (B) treatment

1. Introduction

This is an experiment in the economics of market decision making. There are five participants in the experiment, one sellerand four buyers. You are theseller.Please raise your hand if you have any questions at any point in the experiment.

The experiment is divided into four phases (plus some initial practice). Each phase is divided in 10 periods.In the experiment you are given an opportunity to earn experimental points. At the end of the experiment your earnings throughout the four phases will be added up. You will gain one penny for every 9.75 experimental points you have (one pound for every 975 points), and you will be paid accordingly.

Roles: Each person will be either a buyer or a seller throughout the experiment. As a seller, you will choose how many units of a product you are willing to sell and at what price. The four buyers will then be given the chance to make purchases (if so they wish) from you at thisoffered price.

Product: In the table below you see an example of productof the kind that you can sell each period.

Table 1: Example of Product

In this example, each unit of this product will give the buyer the chance to earn the following returns at the end of the experiment: 50 points with a probability of 35% (Outcome 1); 15 points with a probability of 15% (Outcome 2); 80 points with a probability of 18% (Outcome 3); and so on. As theseller, you cannot keep units of the product for yourself: the only way you may be able to make money out of a product is by selling it.

Phases: You will be able to sell Product A in phases 1 and 2 and Product B in phases 3 and 4. You can currently view both products on the computer screen; once the experiment starts, the product that is being traded at a given point in time will be displayed on the screen.

Practice: Before phase 1 gets started, you will do two periods just for practice with the example product showed in table 1,to get a better understanding of the experiment.Since these periods are only for practice, they do not count towards final earnings.

2. Market Decisions

The Seller’s Decisions. In a given period the seller has the opportunity to sell Product A or Product B (depending on the phase). The decisions that the seller has to make are the price at which he or she is willing to sell the product and the number of units that he or she is willing to sell at this price.

The Buyers’ Decisions. After the seller has made his or her decisions, buyers have the chance to buy the product on sale. Buyers are told the prices at which the product is on sale. Each of them is given an endowment of 390 points every period, and they can use it to buy units of the product if so they wish. First, buyers have to state how many units they are willing to buy from the seller. After they have done this, the computer will randomly select the order in which buyers will purchase. The following system will be followed by the computer:

The first buyer will purchase the desired number of units if enough units are on sale at the lower price; otherwise he or she will purchase the available number of units.
Then, the second buyer will purchase the desired number of units if there are enough units left; otherwise he or she will purchase the available number of units.
Then, it will be the turn of the third buyer, if there are any units left.
Finally, it will be the turn of the fourth buyer, if there are any units left.

3. Your Earnings

In a given period, as a seller, you may be able to earn points by selling units of the product. Each unit sold has a cost, however. You will be given information regarding the cost of each unit sold. The points that youcould earn for each unit are given by the price at which you are selling the unit minus the cost of that unit. Costs are displayed in Table 2:

Table 2 Costs

Table 2 implies that the first unit sold has a cost of 5, the second unit sold has a cost of 5, the third and fourth units sold also have a cost of 5,the fifth, sixth, seventh and eighth units sold have a cost of 10, the ninth and tenth have a cost of 47.5, and so on. The total cost from selling units is equal to the sum of the costs of producing each unit. For example, the total cost from selling 16 units is equal to 5 (cost on the first unit) plus 5 (cost on the second unit) plus 5(cost on the third unit) plus 5 (cost on the fourth unit) plus 10 (cost on the fifth unit) plus 10 (cost on the sixth unit) plus 10 (cost on the seventh unit) plus 10 (cost on the eighth unit) plus 47.5 (cost on the ninth unit) and so on, for a total of cost of 470 points.

After the buyers choose the amounts that they are willing to buy, you will be informed about the

1)number of unitsyouhave been able to sell;

2)revenue from selling these units; revenue is equal toprice times the number of units sold;

3)total cost of the units sold;

4)profit, which is equal to the difference between revenue and total cost.

If, for example, you are able to sell 12 units at a price of 70,

the revenue is equal to 70  12 = 840 points;
total cost is equal to

5 (cost of the first unit) +

5 (cost of the second unit) +

5 (cost of the third unit) +

5 (cost of the fourth unit) +

10 (cost of the fifth unit) +

10 (cost of the sixth unit) +

10 (cost of the seventh unit) +

10 (cost of the eighth unit) +

47.5 (cost of the ninth unit) +

47.5 (cost of the tenth unit) +

50 (cost of the eleventh unit) +

50 (cost of the twelfth unit) +

= 255 points;

Profit = revenue – total cost = 840 – 255 = 585 points.

Note that, if you sell units at less than their cost, you will be making losses on these units, and so, if you want to make money, you may wish to make sure to sell at a price which is not below cost.

Yourfinal earningsas a seller are paid at the end of the experiment and are given by the sum of the profits made in each periodof phases 1 through 4converted into pounds (every 9.75 points are converted into 1 penny, and so for example 9750 points are worth 10 pounds).

Before starting to take decisions, we ask you to fill the enclosed questionnaire, with the only purpose of checking whether you have understood these instructions. Raise your hand when you have completed the questionnaire.

Experimental Instructions for Sellers – IS1 treatment

The instructions are as above with some paragraphs modified and added.

[Phases: You will be able to sell Product A in phases 1 and 2 and Product B in phases 3 and 4. You can currently view both products on the computer screen; once the experiment starts, the product that is being traded at a given point in time will be displayed on the screen.

In order for you to get a better understanding of the products, you have also been given a sheet which orders outcomes in order of returns; buyers have notbeen given this sheet, and so they only see the outcomes in the scrambled order presented on the computer display. Both products have an average return of 60 points to buyers, though buyers have not been explicitly told this. Note that the fact that they have an average return of 60 points is not in itself a reason for you to provide a price of 60 (although you are free to choose this price if so you wish).

Practice: Before phase 1 gets started, you begin with six periods of practice in which you are asked to choose whether to buy units of Product A or Product B at a price randomly chosen by the computer, and given an endowment of 390 (fictional) points to do so. This is to get you a better understanding of how the products ‘feel’ to buyers (but note that buyers do not get an equivalent practice).

Afterwards, you will do two periods just for practice with the example product showed in table 1, to get a better understanding of the experiment as a seller. Since these periods (both as a buyer and as a seller) are only for practice, they do not count towards final earnings.]

[4. Notes on the System

While the two products have the same average return, one of the two products is more complex than the other, because of the larger number of outcomes and because buyers see these outcomes only in scrambled order.

It is up to you to decide whether the greater complexity of one of the two products works to your advantage, disadvantage or neither in making as many profits as possible:

on the one hand, buyers might dislike product complexity and so be less incline to buy the more complex product unless you lower the price;
on the other hand, since it may be harder for buyers to figure out the real value of the more complex product (remember that they are not told explicitly their average return nor provided the products sheet), you might be able to sell the more complex product at a higher price.

It is up to you to decide whether either of these possibilities, both or neither is worth taking into account.]

Experimental Instructions for Sellers – IS2 treatment

The instructions are as for IS1 treatment with some paragraphs modified and some added and some eliminated.

[Roles: Each person will be either a buyer or a seller throughout the experiment. As a seller, you will choose how many units of the products you are willing to sell and at what prices. The four buyers will then be given the chance to make purchases (if so they wish) from you at these offered prices.]

The paragraph about the phases was eliminated and the following was modified:

[You will be able to sell two products, Product A and Product B. You can view both products on the computer screen.]

[Practice: Before phase 1 gets started, you begin with six periods of practice in which you are asked to choose whether to buy units of Product A and Product B at prices randomly chosen by the computer, and given an endowment of 390 (fictional) points to do so. This is to get you a better understanding of how the products ‘feel’ to buyers (but note that buyers do not get an equivalent practice).

[2. Market Decisions

The Seller’s Decisions. In a given period the seller has the opportunity to sell Product A and Product B. The decisions that the seller has to make are the prices at which he or she is willing to sell the products and the number of units that he or she is willing to sell at these prices.

The Buyers’ Decisions. After the seller has made his or her decisions, buyers have the chance to buy the product on sale. Buyers are told the prices at which the product is on sale. Each of them is given an endowment of 390 points every period, and they can use it to buy units of the products if so they wish. First, buyers have to state how many units of each product they are willing to buy from the seller. After they have done this, in relation to each product, the computer will randomly select the order in which buyers will purchase. The following system will be followed by the computer:]

[3. Your Earnings

In a given period, as a seller, you may be able to earn points by selling units of the products. Each unit sold has a cost, however. You will be given information regarding the cost of each unit sold. The points that you could earn for each unit are given by the price at which you are selling the unit minus the cost of that unit. This cost is a function of how many units you produce overall (i.e., whether of Product A or Product B) in any given period. Costs are displayed in Table 2:]

[Table 2 implies that the first unit sold has a cost of 5, the second unit sold has a cost of 5, the third and fourth units sold also have a cost of 5, the fifth, sixth, seventh and eighth units sold have a cost of 10, the ninth and tenth have a cost of 47.5, and so on. The total cost from selling units is equal to the sum of the costs of producing each unit of either product. For example, the total cost from selling 16 units of any combination of Product A and Product B is equal to 5 (cost on the first unit) plus 5 (cost on the second unit) plus 5 (cost on the third unit) plus 5 (cost on the fourth unit) plus 10 (cost on the fifth unit) plus 10 (cost on the sixth unit) plus 10 (cost on the seventh unit) plus 10 (cost on the eighth unit) plus 47.5 (cost on the ninth unit) and so on, for a total of cost of 470 points.

After the buyers choose the amounts that they are willing to buy, you will be informed about the

5)number of units you have been able to sell;

6)revenue from selling these units; revenue is equal to price times the number of units sold;

7)total cost of the units sold;

8)profit, which is equal to the difference between revenue and total cost.]

If, for example, you are able to sell 12 units at a price of 70 for both products (4 units of Product A and 8 units of Product B, or vice versa 8 units of Product A and 4 units of Product B),

the revenue is equal to 70  12 = 840 points;
total cost is equal to]

Experimental Instructions for Buyers – Baseline (B) and IS1treatments

Experimental Instructions for Buyers

1. Introduction

This is an experiment in the economics of market decision making. There are five participants in the experiment, one seller and four buyers. You are a buyer.Please raise your hand if you have any questions at any point in the experiment.

Roles: Each person will be either a buyer or a seller throughout the experiment. The seller will choose how many units of a product he or she is willing to sell and at what price. The four buyers will then be given the chance to make purchases (if so they wish) from the seller at this offered price.

Product: In the table below you see an example of product of the kind that you can buy each period.

Table 1: Example of Product

In this example, each unit of this product will give you (as a buyer) the chance to earn the following returns at the end of the experiment: 50 points with a probability of 35% (Outcome 1); 15 points with a probability of 15% (Outcome 2); 80 points with a probability of 18% (Outcome 3); and so on. The sellercannot keep units of the product for himself or herself: the only way he or she may be able to make money out of a product is by selling it.

Phases: You will be able to sell Product A in phases 1 and 2 and Product B in phases 3 and 4. You can currently view both products on the computer screen; once the experiment starts, the product that is being traded at a given point in time will be displayed on the screen.

Practice: Before phase 1 gets started, you will do two periods just for practice with the example product showed in table 1, to get a better understanding of the experiment. Since these periods are only for practice, they do not count towards final earnings.

2. Market Decisions

The Seller’s Decisions. In a given period the seller has the opportunity to sell Product A or Product B (depending on the phase). The decisions that the seller has to make are the price at which he or she is willing to sell the product and the number of units that he or she is willing to sell at this price.

The Buyers’ Decisions. After the seller has made his or her decision, buyers have the chance to buy the product on sale. Buyers are told the price at which the product is on sale. Each of them is given an endowment of 390 points every period, and they can use it to buy units of the product if so they wish. First, buyers have to state how many units they are willing to buy from the seller. After they have done this, the computer will randomly select the order in which buyers will purchase. The following system will be followed by the computer: