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.
- 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.
- 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.