Experimental Design
A player in the lab experiment will act as a firm trying to decide the prices to set for the various goods that they sell. The marginal cost for all goods is zero. The "consumers" that the player is trying to sell to are a set of 10,000 computer buyers or bots that are pre-programmed to purchase goods or bundles of goods if the price is less than or equal to that bot's preset valuation. Firms are monopolistic, so each player is the sole seller in her market and does not compete against other players. We constrain the prices a player can set and the reservation values for the bots to be integers. The goal for the player is to set prices in order to maximize revenue (profit). Play takes place over 40 of rounds. Payouts will be calculated as a fixed percentage of average revenue earned across three randomly selected rounds.
There are four parameters which we will experimentally manipulate in order to induce random variation in the markets that a given play i will face.
1) Pricing Strategy. Through the course of the game, all players will play each of the four pricing strategies and be asked to make decisions about how to price their goods using that strategy. The game will take place in 4 sub-games with 10 rounds in each sub-game. In a sub-game the player is assigned, at random, one of the four pricing strategies. They then use that strategy for all 10 rounds in the sub-game. After the sub-game, the player is then assigned, at random, to a second of the pricing strategies. This continues until the player has played with all 4 pricing strategies.
2) Number of goods sold by the firm. In the experiment, there will be four possible goods that a firm could sell, denoted by color (blue, green, yellow, and red). Before the start of the game each player will be told the number of goods they are selling (2 through 4). For a given number of goods, all players selling that number of goods will be selling the same color goods.
3) Distribution of consumer valuations. At the start of the game, a player will be randomly assigned to a market in which consumer valuations are either uniformly distributed or follow a beta distribution. For the uniform distribution, valuations will follow U ~ (0,100), which has a mean of 50 and a standard deviation of 29. For the beta distribution, valuations will follow B ~ (5,5). Scaling the beta distribution by 100 gives the distribution a mean of 50 and a standard deviation of 15.
4) Correlation between consumer valuations. At the start of the game, a player will be randomly assigned to a market in which every consumer has the same correlation in their valuation for the goods on sale. Consumers will express either a negative correlation in their valuation for the goods or their valuations will be perfectly independent. Regardless of the distribution, the value for all goods will be drawn from distributions that have a correlation coefficient of -0.25.
With these four parameters, we can define four different markets which an individual player will be randomly assigned into: uniform-independent, uniform-negative, beta-independent, and beta-negative. We can also define three different production schedules which an individual player will be randomly assigned into: two goods, three goods, and four goods. This gives us 12 market-schedule combinations.
At the end of every round the participant will be asked to rate how they currently feel using a slide bar that displays different emojis.