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

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

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

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

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

6. Round 1 - Monopoly 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 DEE 2011 - Slide 6

7. Round 1 - Profits 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) DEE 2011 - Slide 7

8. Round 2 – (Cournot) Competition All teams in same market Team 1Team 2Team 3Team 4Team 5Team 6Team 7Team 8QP Round 1 Monopoly 2000 4300 2500 3862.50 3000 2800 900 3062.50 3000 2000.00 3500 1112.50 4000 -1200 3125 2438.72 -- Round 2 Cournot 2000 -700 320 -280 200 -250 300 -275 750 -387.50 400 -300 300 -275 750 -587.50 50200 Round 3 Cournot Round 4 Cournot MC*2 Round 5 Cournot Collusion Total Profit 3600.003582.502550.002787.502412.50812.50-1475.002049.22

9. Round 3 – (Cournot) Competition Repeat of Round 2 DEE 2011 - Slide 9 Team 1Team 2Team 3Team 4Team 5Team 6Team 7Team 8QP Round 1 Monopoly 2000 4300 2500 3862.50 3000 2800 900 3062.50 3000 2000.00 3500 1112.50 4000 -1200 3125 2438.72 -- Round 2 Cournot 2000 -700 320 -280 200 -250 300 -275 750 -387.50 400 -300 300 -275 750 -587.50 50200 Round 3 Cournot 1000 -450 300 -275 700 -375 500 -325 500 -325 500 -325 800 -400.00 777 -394.25 50770 Round 4 Cournot MC*2 Round 5 Cournot Collusion Total Profit 3150.003307.502175.002462.502087.50487.50-1875.001654.97

10. Round 4 – (Cournot) Competition Marginal costs double DEE 2011 - Slide 10 Team 1Team 2Team 3Team 4Team 5Team 6Team 7Team 8QP Round 1 Monopoly 2000 4300 2500 3862.50 3000 2800 900 3062.50 3000 2000.00 3500 1112.50 4000 -1200 3125 2438.72 -- Round 2 Cournot 2000 -700 320 -280 200 -250 300 -275 750 -387.50 400 -300 300 -275 750 -587.50 50200 Round 3 Cournot 1000 -450 300 -275 700 -375 500 -325 500 -325 500 -325 800 -400.00 777 -394.25 50770 Round 4 Cournot MC*2 50 -87.06 210 274.34 100 25.88 600 1155.25 200 251.75 50 -87.06 150 138.81 433 778.04 17932.76 Round 5 Cournot Collusion Total Profit 3062.943581.842200.883617.752339.25400.44-1736.192433.01

11. Round 5 – (Cournot) Competition Collusion allowed DEE 2011 - Slide 11 Team 1Team 2Team 3Team 4Team 5Team 6Team 7Team 8QP Round 1 Monopoly 2000 4300 2500 3862.50 3000 2800 900 3062.50 3000 2000.00 3500 1112.50 4000 -1200 3125 2438.72 -- Round 2 Cournot 2000 -700 320 -280 200 -250 300 -275 750 -387.50 400 -300 300 -275 750 -587.50 50200 Round 3 Cournot 1000 -450 300 -275 700 -375 500 -325 500 -325 500 -325 800 -400.00 777 -394.25 50770 Round 4 Cournot MC*2 50 -87.06 210 274.34 100 25.88 600 1155.25 200 251.75 50 -87.06 150 138.81 433 778.04 17932.76 Round 5 Cournot Collusion 2000 -1200 300 -350.00 500 -450.00 300 -350.00 300 -350.00 5000 -2700 133 -266.50 400 -400 89330 Total Profit 1862.943231.841750.883267.751989.25-2299.56-2002.692033.01

12. Final Results Team 4 win DEE 2011 - Slide 12 Team 1Team 2Team 3Team 4Team 5Team 6Team 7Team 8QP Round 1 Monopoly 2000 4300 2500 3862.50 3000 2800 900 3062.50 3000 2000.00 3500 1112.50 4000 -1200 3125 2438.72 -- Round 2 Cournot 2000 -700 320 -280 200 -250 300 -275 750 -387.50 400 -300 300 -275 750 -587.50 50200 Round 3 Cournot 1000 -450 300 -275 700 -375 500 -325 500 -325 500 -325 800 -400.00 777 -394.25 50770 Round 4 Cournot MC*2 50 -87.06 210 274.34 100 25.88 600 1155.25 200 251.75 50 -87.06 150 138.81 433 778.04 17932.76 Round 5 Cournot Collusion 2000 -1200 300 -350.00 500 -450.00 300 -350.00 300 -350.00 5000 -2700 133 -266.50 400 -400 89330 Total Profit 1862.943231.841750.883267.751989.25-2299.56-2002.692033.01

13. Debrief 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 DEE 2011 - Slide 13

14. A Closer Look 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 DEE 2011 - Slide 14

15. Workings of the Game (1) 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.” DEE 2011 - Slide 15

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

17. Workings of the Game (3) 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 DEE 2011 - Slide 17

18. Organisation 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 DEE 2011 - Slide 18

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

20. Decision Framework 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 DEE 2011 - Slide 20

21. Refereeing the Game 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 DEE 2011 - Slide 21

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

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

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

25. Decision Framework 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 DEE 2011 - Slide 25

26. Other Extensions 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 DEE 2011 - Slide 26

27. References 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 DEE 2011 - Slide 27