Item Level Permission does not work as designed

Here is the problem. 

1. We have a site with a site members group with created permission level called vnContributor that differs from contributor in that they cannot edit delete items or versions, or create alerts. 
2. We have a site owners group who have a custom permission level called vnOwner that allows them to add, edit, delete, view, and open items and view versions.  They do not have "Manage Lists" 
3. The list permission settings were set to view everyone and edit everyone.  In this setting, however members could not see or edit anything, and owners could see and edit everything, regardless of whether it was theirs or not. 
4. So I changed the list permissions level to edit only their own and changed the members to the OOTB contributor permission level.  I then opened the calendar and added a new item as a user in the members  group.
5. There was no change.  Members still could not edit their items.  Owners could see and edit everyone's items.
6. This is not how this is advertised to work.