Instructions to Participants

GAS MARKET - PIPELINE OPERATOR

Introduction

Welcome to the Aton Experimental Economics Laboratory.  This is an experiment analysing the economics of decision making.  You will be participating as a pipeline operator engaged in a market for gas. 

You will be paid for participating in this session.  The payment has two compontents - a show-up fee of $5, and a performance payment related to your decisions in the experiment.  If you make good decisions you could make up to $30 (including the show-up fee) in this session.  Your earnings will be paid to you in cash at the end of the session. 

Your screen will show you a "laboratory dollar account balance".  This is used to calculate your performance payment.  The rate that we will use to convert laboratory dollars to Australian dollars is 7,000,000 lab dollars to one (1) Australian dollar.

The amount of money you earn depends on the decisions you make, so it is important to read and understand these instructions.

During the experiment please do not look at other people's information or computer screen, and do not talk.  You are free to ask questions of the experimenter.

Your decisions and payoff are private: do not discuss them with anyone else in the room, during any breaks, or indeed at anytime.

This study is conducted by the Aton Experimental Economics Laboratory (AEElab). 

More information about AEELab is available at http://www.aton.com.au

If the experiment terminates early (for example, due to software problems) all participants will be paid on the basis of their experimental dollar balance at the time of termination if this is determinable.  If this cannot be determined, only the show-up fee will be paid.

You are free to leave the experiment at any time.  However if you leave before the end of the experiment you will only receive your show-up fee.

Risks, Benefits and Disclaimers

There are no foreseeable risks or discomforts from your participation in this experiment.

Apart from the cash payment there are no direct peronal benefits for participation. 

Confidentiality

All data collected will be saved confidentially.  No person-identifiable information will be reported in any published or un-published work.

The Activities For Today Are:

The total time required, including reading instructions and receiving payment at the end of the experiment will be approximately 1.5 hours.

The familiarisation trading session is just for practice, and does not count toward your final earnings.   This is for you to learn how to trade, and to become familiar with what affects your profit.

Introduction to the Market

You are playing the part of one of two pipelines that supply gas to five gas retailers (Retailers A - E) in a market for Gas.   The market runs for 4 years, from 1/1/2001 to 31/12/2004.  The experiment will be measured in experimental days, each day being about 1.5 seconds.  Your job is to make as much money as you can, in any way you see fit.  In broad terms, you can make money by buying gas from the upstream gas field, hauling it through your pipe, and selling it to the retailers.  The difference between your supply cost and your selling price is yours to keep, after converting into Australian dollars. Ideally you would like to sell a lot of gas at a very high price.  However the object is not to sell lots of gas, or to have a high price, but TO MAXIMISE YOUR PROFIT.  Clearly, as with any supplier, this means balancing the increased money from only accepting bids at a high price against the fact that it would reduce the volume you sell.

The specifics of how to do this via the trading screens will be discussed shortly.

You will be able to buy gas from the upstream gas field supplier for a set price of $9.00 per GigaJoule (GJ).  Note that a GJ is simply a set quantity of gas.  The upstream gas price is constant regardless of how much you or the other pipeline purchase, and the gas will be provided to you on demand as you enter contracts to supply retailers.  You need not formally purchase gas from the gas fields. 

In addition to the gas-field price, you also incur a cost for hauling the gas through your pipe.  The haulage cost varies as the utilisation of your pipe changes.  As you increase the amount of gas you haul, the cost of hauling the gas also increases.  Thus your cost-of-delivery is the gas-field price plus your haulage cost.   You will be shown on your screen the cost potentially involved in meeting the demands from retailers.  To make a profit, you would want to sell gas to the retailers at a price higher than your cost of delivery.

Retailers have a need for gas because they sell gas to end consumers.  The retailers make bids to buy gas from you when they need more gas.  Retailer's bids appear on your screen, and are in the form of a price (in $/GJ) and a quantity (how many gigajoules of gas they wish to buy at that price.)  You decide which bids to accept.  Note that the other pipeline can also accept bids, and will be competing with you for sales to retailers. 

When you accept a retailer's bid you are contracting with the retailer to provide gas over 20 days.  So the daily supply you provide to the retailer is the total GJ quantity that they requested in their bid, divided by 20.  For instance, if the bid you accepted was for a quantity of 2,000 GJ, you are expected to provide that retailer with 100 GJ each day for 20 days from the date you accept their bid.  Each day the retailer will pay you for the gas supplied that day.

EXAMPLE:

Q) The gas field price is $9.00/GJ, your current haulage cost is $1.00/GJ, thus your delivery cost is $10.00/GJ.  A retailer has a bid in the market for 4,000GJ at a price of $11/GJ.  If you accept, how much profit will you make?  How much will you earn each day ?

A) If you accept, you make a profit of $1.00/GJ on each GJ delivered.  The 4,000GJ will be delivered over 20 days.  Thus you will deliver 200 GJ each day.  Thus each day, for the next 20 days, your bank balance will go up by $1.00 * 200 = $200/day.  Your total profit on the contract will be $4,000.

Your pipe has a finite capacity - so there is a limit on the amount of gas you can transport.  When your pipe is at capacity you will be unable to accept any retailer's bid that would have the effect of over-using your pipe.  As current supply contracts reach the end of their 20 day life, capacity will re-appear on your pipe.  That is, you will not be able to sell more gas than you can physically move through your pipe. 

The Trading Screen

When the experiment commences, you will see a screen similar to the one below.  We will now introduce you to the trading screen.

The top bar of the window shows the current date, and your current bank balance in experimental dollars.   It is on this experimental bank balance that you will be paid at the end of the experiment.  Your final payment in Australian dollars will be calculated as the difference in your opening balance, and your final balance.  That is, your opening balance will not be used in calculating your final payment.  Each time you make or lose money your bank balance is updated and you will see a small up/down arrow next to the bank balance.  This is indicating if the last change to your bank balance was an increase or a decrease.

Notice the "Retailer Bids Currently In the Market" area, which are the bids from retailers to buy your gas.  It shows you who the retailer is, the date the bid was made (bids expire after 20 days), the price per gigajoule they are willing to pay, total quantity, the daily quantity, the cost to you if you accept this bid, the daily profit of this contract, and the total profit.  If you wish to accept a particular bid, click on that bid, and when presented with the pop-up menu, select "accept".  Once you have accepted a bid it becomes a "Current Supply Contract", listed in the window below.  This means that you will supply the contracted quantity of gas (in GJ) to the retailer, in equal daily amounts, for the next 20 days.  As you have more and more active supply contracts, the utilisation of your pipe will increase.

To the right of these windows is your pipe information area.  In the upper left corner of this area lists the constant $9.00 well head price, and the current haulage cost.  This haulage cost will increase as you supply more gas.  Note that this cost is applied to all gas supplied.  So you may have sold gas to retailers when your haulage is low, but if you increase the haulage, the haulage cost goes up.  The pipe on the left is your pipe, and indicates how much gas you are hauling.  The pipe on the right is your competitors pipe.  Below each pipe is listed how much gas you are hauling, how much you can add to this, and your total haulage capacity. The capacity of your pipe is measured in TeraJoules (TJ).  A TJ is simply 1,000 GJ. 

Default Gas

In the event that a retailer runs out of gas to supplier their customers, a "default bid" will be placed into the market.  Default bids are priced at your current cost of supply (so you make no profit on them), and you will be forced to automatically accept them.  This means that if you attempt to withhold supply to the point where one or more retailers run out of gas, gas will be forceably supplied.  (You can consider this as being the government intervening  to ensure that gas supply is maintained).  Default bids are labelled as such when they appear in your supply contracts.  Like all other contracts, a default contract lasts for 20 days.

If you have any questions, please raise your hand and ask the experimenter.

Last Updated: 2nd February 2007

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