Now things get a little bit more interesting in the game. Because in phase 2 of the game, quality grade will be available to the market only after trading has been completed. The only thing you really get to see, up front, is the asking price. And so the game's rules have changed. And what you want to think about is, what is the real world? In the real world, how often do you know, with certainty, the quality of products or services that you contract for? There are a variety of markets. I mean, if you want to think about, some markets are very very clear it's a commodity, bushels of corn, or maybe you go look at bestselling books at Barnes and Noble, and you pick up a cover and it's the same book that you could get from Amazon, or buy books, or some other bookstore. Okay. Other times however, you're not sure about what the quality is. Even if you buy a new car, there's some chance it's a lemon, and if you buy a car in the used market, it much more likely could be a lemon. But think about also when you go to look for physicians in a new community. Who's the best doctor there? How do you know the quality of the care that you're being given? Who's the best auditor, one could ask? How do you know the quality of an audit? So, there are different conditions in the real world that match much more readily into the first part of the game, where we pretty much know quality, as opposed to starting with period four, where all we see is the asking price. And then, what you hope. Well, if every seller in society was exceedingly trustworthy and highly ethical, their asking prices themselves would be a signal of quality. In other words, seller 3 and seller 1, if they're asking above $11, compared to seller 2's only 6, there should be an expectation, if these guys are honest. If these sellers are honest, a higher-quality grade. But we don't know that. We might think that reasonably, but we do not know that. So, sellers one and and 3 are attempting to convince buyers that they're selling high-quality products by asking a relatively high price per unit sold. And seller 2 is more, if you might think about at risk averse saying that, look, the participants already realized that, by the invisible hand, it seemed to be that the greatest consumer surplus was at the medium quality grade. So I'm just going to stay right here. So, if you think about these asking prices, you could actually...we could take a poll of the class and say, which of these asking prices do you think are most likely or least likely to be in alignment with the quality grade that's actually being sold? And you're gonna learn the quality grade, but the problem is you learn it only after the trading has occurred. So, in this period, most buyers are willing to risk that sellers are trustworthy. Empirically, when you run this within a lab market, and I think the reason you see that is that for many, many years for millennia, what has happened in our society is that we've come to learn that there is value in cooperation. And when there is value in cooperation, there is a expectation that most people are trustworthy. That's not the same thing, of course it says that everyone is trustworthy. But we do know that the lowest transaction costs to do in business, would occur if all of the sellers were competent and honest in all locations, okay? And then you really wouldn't need an auditor. You wouldn't really need a verifier. If every person who had something to sell, whether it was a good or service, were completely competent and completely honest, and highly ethical, well, then we wouldn't need an auditor. So what happens here, in this particular game, is that in this particular round, 2 units are sold to the medium quality seller, the seller sells 2, I should say, and 1 high-quality unit is sold, and 1 buyer decides to sit on the sidelines because just not quite...the risk preferences there are just averse enough to say, let's just not chance losing a lot of money. So, when you look at this particular slide, and looking in period five where it's only price information, I would like you just to think about, suppose an examination question I said, take a look at these prices, which sellers asking price is most indicative of a... one might say a fraud, a strategic misrepresentation? Any of these could be, potentially, I suppose, a strategic misrepresentation. It's just that, if that were the case, not all the sellers would be equally competent, would they? Okay. So which seller appears to be engaging in strategic misrepresentation? Well, hopefully you'll see that if there's no quality information, the one seller who could be trying to take buyers is seller 1. Seller 1 could be implicitly advertising, if you will, a high-quality product, but, after the reveal, could in fact be selling low-quality. Seller 3 cannot be engaging in strategic misrepresentation, because the asking prices commensurate already with a low quality grade. It could be that seller 2 is engaging in some strategic misrepresentation, making it look like he or she was selling medium quality products, when in fact it was low. But the most representative of strategic misrepresentation is seller 1. When this behavior occurs in a real game, you sometimes do see some buyers get snookered. And in a game where students are all... if we were all together, and doing this in a synchronous way and this is what happened, and say 2 or 3 of you were on a team that bought seller 1's product, there would be, you know, a collective moan, or an applause, and then we'd all rethink how we're going to deal with seller 1 in the future. Seller 1 says 11.25, but low quality, 1 unit sold. What do you think's going to happen to seller 1 in the future? Is that seller 1 going to be getting a lot of repeat business, or is seller 1 now going to be shunned? And if you think it's the latter, and it's more likely the latter, then is there something even seller 1 can do to earn back business? So, this is when we would enter into the third stage of the game, where we add the auditor, the verifier. The verifier can advertise her services to sellers, or buyers, and what would happen at this point is that before bidding on the products being sold, there would be a collection of bids for the auditors services, and the highest bid would win. And if the highest bid was a buyer, the buyer would get from the auditor ahead of anybody else the quality... the true quality for all 3 sellers. Okay. If a seller's bid was the highest, that seller, and that seller alone, could advertise the quality of the product before the transactions occur. So, what would happen, once you bring in an auditor, you still have only price information but, seller 3 who ends up offering the most money for the auditor, gets the advantage of having audit verified, a quality grade that they can put out to the market in conjunction with their asking price. And that particular auditor, excuse me seller, easily sells 2 products. Seller 1 is not getting any business even though has a pretty reasonable price, and it would have been interesting if seller 1 had even asked 5.40, you know. You might see people not go to seller 1 because they still might be trying to ostracize that seller for earning $9.85 in a dishonest way, from the earlier maneuver. Seller 2 would sell one product here, and the market would go on. And then we would have another period. We typically would go on in the lab... we would go on for maybe 10 or 11 periods, how much time would allow. We track the profits for the sellers, we track the profits for the buyers, and we kick back and we try to think about, what it is that we just learned, besides having some fun and seeing people earned some money, which turns into lottery tickets for typically some nominal gift card, maybe an Illini gnome [laughter], you would...then we would talk about the game. So what I want you to do, I'm want to debrief in the next lesson about the market game. But what would be probably helpful is, jot down on a scratch piece of paper, or just think about in your own mind before you go onto the next lesson, you know, what are the key takeaways here? How did this game unfold? What was the market equilibration process like? What were some of the conditions that you needed to make the market really work? What role, if any, did the auditor play? And when was the auditor needed?
