The Flexibility of the Oligopoly Game

1. The Flexibility of the Oligopoly Game By Mike Reynolds Email: M.Reynolds2@bradford.ac.uk DEE 2011 - Slide 1

2. Session Outline DEE 2011 - Slide 2 Introduction Example Game A Closer Look Extending the Game

3. Introduction DEE 2011 - Slide 3 • Meister (1999) • Describes an oligopoly game • Students split into teams/firms • Make decisions on quantity • Complicated set up • Simpler version of game

4. Game Set-Up DEE 2011 - Slide 4 • Class Room arranged • Each team/firm is given an envelope containing instructions • See PDF

5. Example Game DEE 2011 - Slide 5 • Sixth-form visit • Year 12 • 8 teams • 50 minute session • Outcomes will not necessarily look like the theory • This is fine

6. Round 1 - Monopoly DEE 2011 - Slide 6 • Teams hand in output decisions • Team 1: 2000 olives • Team 2: 2500 olives • Team 3: 3000 olives • Team 4: 900 olives • Team 5: 3000 olives • Team 6: 3500 olives • Team 7: 4000 olives • Team 8: 3125 olives

7. Round 1 - Profits DEE 2011 - Slide 7 • Students then see profits of all firms • Team 1: £4300 (from 2000 olives) • Team 2: £3862.50 (from 2500 olives) • Team 3: £2800 (from 3000 olives) • Team 4: £3062.50 (from 900 olives) • Team 5: £2000 (from 3000 olives) • Team 6: £1112.50 (from 3500 olives) • Team 7: £-1200 (from 4000 olives) • Team 8: £2438.72 (from 3125 olives)

8. Round 2 – (Cournot) Competition • All teams in same market

9. Round 3 – (Cournot) Competition DEE 2011 - Slide 9 • Repeat of Round 2

10. Round 4 – (Cournot) Competition DEE 2011 - Slide 10 • Marginal costs double

11. Round 5 – (Cournot) Competition DEE 2011 - Slide 11 • Collusion allowed

12. Final Results DEE 2011 - Slide 12 • Team 4 win

13. Debrief DEE 2011 - Slide 13 • Need to give students a quick overview • In other groups you could go further • Depends on ability of students • In this case, I underlined the contrast between monopoly and competition • Monopolists made profits (and had high prices) • Whilst competition drove prices very low • Lots of other elements that could be teased out • Collusion

14. A Closer Look DEE 2011 - Slide 14 • Have an idea how the game goes • But why is the game set up this way? • Ensures the game is to be successful • Can alter elements to fit the students

15. Workings of the Game (1) DEE 2011 - Slide 15 • Recall • “It is believed that in the relatively small market in which you operate that the total demand for olives even at very low prices is unlikely to be higher than 4000 units, and that even the biggest olive lover in the market is only willing to pay a maximum of around £5 per unit.”

16. Workings of the Game (2) Price 5 Quantity 4000 DEE 2011 - Slide 16 • Sketching the demand curve: • Or the equation: • P = 5 – 0.00125Q

17. Workings of the Game (3) DEE 2011 - Slide 17 • Only simple details given • Emphasise the intuitive aspect • Can appeal to all levels of student • Possible to make it more complicated for more advanced students • Profit maximisation • Could become welfare maximisation

18. Organisation DEE 2011 - Slide 18 • Set up in advance • Need to have an estimate of the number of teams and the abilities of the players • Spreadsheet is set up in advance • Only requires a demand structure

19. Emphasise DEE 2011 - Slide 19 • Non-collusion • Only allow collusion at the end of the game • Costs for firms are the same • Could change to non-symmetric

20. Decision Framework DEE 2011 - Slide 20 • Can vary the types of competition • Start with a (relatively) simple round • Could repeat • Pre-announced game length • Final round can bring odd results (as we saw) • Good idea to change the game at this point • Feedback of results • Profits or… • Can provide hints to class

21. Refereeing the Game DEE 2011 - Slide 21 • Set times that decisions need to be made by • Initially a longer period • Be reactive to behaviour • Warn and then punish teams • Collusion • Late decisions • Plan alterations to the game

22. Linking The Game DEE 2011 - Slide 22 • Sixth-form conference • 5-10 minute debrief • Or an extra session talking about the results

23. Extensions DEE 2011 - Slide 23 • Basic game is appropriate to all • Economic problem solving • Can vary for the type of student or specific learning outcome • Sixth-form conferences • 1st year modules or inductions • 2nd or 3rd years on Microeconomic modules • Postgraduates

24. Extensions: Level of Information DEE 2011 - Slide 24 • Details of demand • More detailed information • Students calculate solutions • Could even start with a utility function

25. Decision Framework DEE 2011 - Slide 25 • Monopoly • Cournot • Bertrand • Price becomes decision variable • Emphasis the Bertand paradox • Stackelberg • Make one team the leader • Bundling • Any firm problem with a demand structure

26. Other Extensions DEE 2011 - Slide 26 • Can be part of a module • Focus of maximisation • Profit or collective welfare? • Length of game • 50 minute session or over several weeks • Assessment • Give marks based on profit/welfare (Meister, 1999) • Gives students the details of the game and ask them to explain them • Lab-based simulation

27. References DEE 2011 - Slide 27 S. R. Beckham. 2003. “Cournot and Bertrand Games”, Journal of Economic Education 2003 34(1), pp. 27-35. J. Brauer. 1994. “Games Economists Play: Non-Computerised Classroom-Games in College Economics” S. Gächter, C. Thoni., and J-R. Tyran. 2006. “Cournot Competition and Hit-and-Run Entry and Exit in a Teaching Experiment”, Journal of Economic Education 37(4), pp. 418-430. J. Meister. 1999. “An In-Class Economic Game”, Journal of Economic Education 30(4): pp. 383-391. A. Ortmann. 2003. “Bertrand Price Undercutting: A Brief Classroom Demonstration”, Journal of Economic Education 34(1): pp. 21-26