Multimarket equilibrium, trade, and the law of one price

This paper describes the setup of two classroom markets, one with a thin su pply side and relatively higher prices. A comparison of the equilibrium pri ce tendencies in the two markets helps students discover how to apply suppl y and demand analysis in this context. The introduction of speculators, who buy in one market and sell in the other, reduces or eliminates the price d isparity. Class discussion can be focused on how "nonproductive" speculatio n can increase surplus measures of efficiency when price is permitted to co nvey the correct information about opportunity cost. Use: This experiment can be used in classes in the principles of economics, intermediate economics, or international trade to illustrate supply and de mand analysis and the effects of inter-market trade. In upper-level classes , optimal bidding can be addressed as well. Time: Reading instructions and completing five trading rounds takes 30 to 4 0 minutes. Discussion lasts an additional 15 minutes. Materials: One deck of cards for up to 36 students, one copy of the instruc tions, and eight small blank slips of paper for each student.