Thursday, 8 November 2012

Great Market for Lemons Game: Worked Wonders in Class

So I ended up teaching a micro course and wanted to do something different. The "Market for Lemons" by George Akerlof, which explains how information asymmetry between the consumer and the producer is a hard concept for students to get.

It suggests that if sellers know more information by consumers (such in the purchase of second hard cars for example) then the quality in the market will be poor (not allocative efficient) and the consumers will only be willing to buy with a massive discount, hurting both buyers and suppliers.

To teach it I tried the game created by Charles A. Holt and Roger Sherman in Journal of Economic Perspectives, Winter 1999. It was a great success!
I used groups of 3 sellers and 4 buyers as suggested - to make more sellers and buyers will take too long.
With only minimal coaching, the students under full information in the market (i.e. both sellers and buyers had full knowledge) reached the allocativevly efficient quality grade and very close in reaching the equilibrium price in the market.

Then information on quality was withheld as suggested and after the buyers were ripped off in the first term, the quality grade dropped to the less efficient grade 1 and prices radical started declining.

I tried to pair up the stronger students with the weaker ones because if you loose the weak ones they start randomly guessing rather than trying to make money - so a bit more coaching (on a one to one basis) that what is suggested by Holt and Sherman was needed. Try and split up your strong students between the buyers and sellers and see them thrive in this game!

The appointment of representatives was an amazing success. The seller representative went first and called for consumer  protection if they were miss-sold a grade of car that was poorer than what was advertised, to the shock of the buyer representative, who was about to argue the same thing.

Try it - worked so much better than a boring lecture....
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