Experimental Design Details
Our experimental design follows a within-subject (repeated measures) design, where each participant (or subject) is exposed to a four-arm RCT in the lab. In each arm of the RCT, participants will buy 20 units of item A with a budget of 200 experimental tokens, where 40 tokens are exchanged for $1. Item A is actually a bundle of two products (a perishable and a non-perishable product), however, to simplify the decision-making environment for participants, we collapse the bundle of two products into one item and sum their prices to get one price. In other words, item A represents a grocery basket. Since each participant’s payoff depends on minimizing the cost of buying 20 units of item A in each treatment arm, it doesn’t matter whether we present two products or both as one item because the cost remains the same.
Depending on how many units of item A does a participant buy in one purchase (i.e., one transaction), the per unit price of item A changes, so a participant needs to look for per unit prices that are low. Participants are provided with a table of prices and cost during each transaction. Meanwhile, there is a fixed cost for each transaction, so splitting 20 units’ purchase into many transactions can increase the total fixed cost in a treatment arm. Each participant has to think for the optimal number of units to purchase in a transaction, so that her total costs paid for 20 units are minimized, and the leftover budget out of 200 tokens is maximized. The leftover budget in each treatment arm is a participant’s payoff from that specific arm.
Participants will be students from the ORSEE database at Purdue. ORSEE will randomly select a subset of eligible participants, who will then get an invitation email. The invitation email contains eligible session times, maximum duration (1.5 hours), the location, and expected payoff range of the experiment. If a subject wants to participate in the experiment, they click the associated link in the invitation email to register for a given session using ORSEE. The location of experiment will be the Vernon Smith Experimental Economics Laboratory (VSEEL) at Purdue University.
The 4 treatment arms are:
Arm 1: The Control arm, where participants will see regular prices and regular fixed cost (per transaction).
Arm 2: The Fixed Cost arm, where participants will see regular prices but a high fixed cost, which is stochastic. There is 70% probability that a certain purchase transaction will have a high fixed cost. Using R software, we have determined the order in which high fixed cost transactions will take place in a total of 20 transactions. Participants don’t know in advance if a subsequent transaction has a high fixed cost.
Note: A participant has to purchase at least 1 unit in each transaction, and if that is what the participant prefers, then there will be a maximum of 20 possible transactions. But participants don’t have to buy 1 unit per transaction. A participant may buy all 20 units in one transaction, in which case she will move to the next treatment.
Arm 3: The Price arm, where participants will see low prices (being stochastic) but regular fixed cost. There is 70% probability that a certain purchase transaction will have a low prices. Using R software, we have determined the order in which low-price transactions will take place in a total of 20 transactions. Participants don’t know in advance if a subsequent transaction has low prices.
Arm 4: The Purchase-Limit arm, where participants will see regular prices and fixed cost, but there will be a random purchase limit of 1 unit on some purchase instances. There is 70% probability that a certain purchase transaction will have a purchase limit of 1 unit. Using R software, we have determined the order in which 1-unit transactions will take place in a total of 20 transactions. Participants don’t know in advance if a subsequent transaction has a purchase limit of 1 unit.
We randomize the order of the 4 treatment arms for each participant. Since our experiment is programmed in oTree platform, we write a code snippet that takes care of the random order of the 4 treatment arms for each participant during the actual experiment. This saves us a lot of time and manual effort!
Payoff: Each participant will have 200 tokens in each treatment arm to buy 20 units of item A. Once 20 units are bought, the leftover budget in each treatment arm is the payoff of that arm. At the end of the experiment, the risk and loss aversion elicitation tasks provide lottery choices in dollar amounts, so participants can earn there as well. A participant’s total payoff will be the sum of payoffs from four treatment arms, and the two elicitation tasks.
Participants will also receive $5 for participation fee.