Case Studies

The continuous double auction is one of the most popular and powerful tools for demonstrating how supply meets demand in an open and competitive market. Students learn to appreciate first-hand how trades are made in a market and how prices converge to the equilibrium through the trading process. The work of developing and perfecting this classroom experiment eventually earned its key contributor, Vernon Smith, a Nobel Prize in 2002.

Before EV:

  • The instructor prepares a deck of cards, each with a number specifying a cost (for seller) or value (for buyer).
  • Each student is randomly assigned a card. Those who receive the  'cost' card would become a seller while those receiving the 'value' card will be the buyer.
  • Sometimes the instructor records all bids and asks on the blackboard and records transactions when a bid or ask is accepted. Sometimes students mingle in the center of the classroom and negotiate trades. When a buyer and a seller agree on a price, they will come to the instructor to report the price, which will be written on the blackboard immediately for the rest to see.
  • At the end of the trading period, the instructor will give the data to a research assistant, who will plot the price chart and compute the earnings.
  • Sometime later, the data and graph will be published online or a hardcopy will be handed out to the students.
  • Finally, the instructor often rewards the top performing students in the experiments during the course with bonus points.

After EV:

  • A virtual market emulating real electronic exchanges can be used to replace the manual card based market
  • Students can sign in for the experiment online and see their cost or value, and attempt to trade by posting orders to the market
  • Orders can be immediately crossed whenever there is a match and transaction will be recorded automatically
  • Order data and price chart will be updated in real-time and published on the web for all to see.
  • Market data can be downloaded at any time during or after the market for analytical and learning purpose.
  • The instructor can conveniently aggregate and query student performance over the course of the class and decide to whom the grade point reward will be given.