The Flexibility of the Oligopoly
Game
By Mike Reynolds
Email: M.Reynolds2@bradford.ac.uk
DEE 2011 - Slide 1
Session Outline
•
•
•
•
Introduction
Example Game
A Closer Look
Extending the Game
DEE 2011 - Slide 2
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
Game Set-Up
• Class Room arranged
• Each team/firm is given an envelope
containing instructions
– See PDF
DEE 2011 - Slide 4
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
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
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
Round 2 – (Cournot) Competition
• All teams in same market
Round 1
Monopoly
Round 2
Cournot
Round 3
Team 1
Team 2
Team 3
Team 4
Team 5
Team 6
Team 7
Team 8
2000
2500
3000
900
3000
3500
4000
3125
4300
2000
-700
3862.50
320
-280
2800
200
-250
3062.50 2000.00 1112.50
300
750
400
-275
-387.50
-300
-1200
300
-275
Q
P
-
-
5020
0
2438.72
750
-587.50
Cournot
Round 4
Cournot
MC*2
Round 5
Cournot
Collusion
Total Profit
3600.00 3582.50 2550.00 2787.50 2412.50 812.50 -1475.00 2049.22
Round 3 – (Cournot) Competition
• Repeat of Round 2
Round 1
Monopoly
Round 2
Cournot
Round 3
Cournot
Team 1
Team 2
Team 3
Team 4
Team 5
Team 6
Team 7
Team 8
2000
2500
3000
900
3000
3500
4000
3125
4300
2000
-700
1000
-450
3862.50
320
-280
300
-275
2800
200
-250
700
-375
3062.50 2000.00 1112.50
300
750
400
-275
500
-325
-387.50
500
-325
-300
500
-325
-1200
300
-275
800
-400.00
P
-
-
5020
0
5077
0
2438.72
750
-587.50
777
-394.25
Round 4
Cournot
MC*2
Round 5
Cournot
Collusion
Total Profit
3150.00 3307.50 2175.00 2462.50 2087.50 487.50 -1875.00 1654.97
DEE 2011 - Slide 9
Q
Round 4 – (Cournot) Competition
• Marginal costs double
Round 1
Monopoly
Round 2
Cournot
Round 3
Cournot
Round 4
Cournot
MC*2
Team 1
Team 2
Team 3
Team 4
Team 5
Team 6
Team 7
Team 8
2000
2500
3000
900
3000
3500
4000
3125
4300
2000
-700
1000
3862.50
320
-280
300
2800
200
-250
700
3062.50 2000.00 1112.50
300
750
400
-275
500
-387.50
500
-300
500
-1200
300
-275
800
P
-
-
5020
0
5077
0
1793
2.76
2438.72
750
-587.50
777
-450
50
-275
210
-375
100
-325
600
-325
200
-325
50
-400.00
150
-394.25
433
-87.06
274.34
25.88
1155.25
251.75
-87.06
138.81
778.04
Round 5
Cournot
Collusion
Total Profit
3062.94 3581.84 2200.88 3617.75 2339.25 400.44 -1736.19 2433.01
DEE 2011 - Slide 10
Q
Round 5 – (Cournot) Competition
• Collusion allowed
Round 1
Monopoly
Round 2
Cournot
Round 3
Cournot
Team 1
Team 2
Team 3
Team 4
Team 5
Team 6
Team 7
Team 8
2000
2500
3000
900
3000
3500
4000
3125
4300
2000
-700
1000
3862.50
320
-280
300
2800
200
-250
700
3062.50 2000.00
300
750
-275
500
-387.50
500
1112.50
400
-300
500
-1200
300
-275
800
-
-
5020
0
5077
0
1793
2.76
8933
0
-587.50
777
-275
210
-375
100
-325
600
-325
200
-325
50
-400.00
150
-394.25
433
Cournot
MC*2
-87.06
274.34
25.88
1155.25
251.75
-87.06
138.81
778.04
Round 5
2000
300
500
300
300
5000
133
400
Cournot
Collusion
-1200
-350.00
-450.00
-350.00
-350.00
-2700
-266.50
-400
Total Profit
1862.94 3231.84 1750.88 3267.75 1989.25 -2299.56 -2002.69 2033.01
DEE 2011 - Slide 11
P
2438.72
750
-450
50
Round 4
Q
Final Results
• Team 4 win
Round 1
Monopoly
Round 2
Cournot
Round 3
Cournot
Team 1
Team 2
Team 3
Team 4
Team 5
Team 6
Team 7
Team 8
2000
2500
3000
900
3000
3500
4000
3125
4300
2000
-700
1000
3862.50
320
-280
300
2800
200
-250
700
3062.50 2000.00
300
750
-275
500
-387.50
500
1112.50
400
-300
500
-1200
300
-275
800
-375
100
-325
600
-325
200
-325
50
-400.00
150
-394.25
433
Cournot
MC*2
-87.06
274.34
25.88
1155.25
251.75
-87.06
138.81
778.04
Round 5
2000
300
500
300
300
5000
133
400
Cournot
Collusion
-1200
-350.00
-450.00
-350.00
-350.00
-2700
-266.50
-400
1862.94 3231.84 1750.88 3267.75 1989.25 -2299.56 -2002.69
DEE 2011 - Slide 12
-
-
5020
0
5077
0
1793
2.76
8933
0
-587.50
777
-275
210
Total Profit
P
2438.72
750
-450
50
Round 4
Q
2033.01
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
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
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
Workings of the Game (2)
• Sketching the demand curve:
Price
5
4000
– Or the equation:
• P = 5 – 0.00125Q
DEE 2011 - Slide 16
Quantity
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
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
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
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
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
Linking The Game
• Sixth-form conference
– 5-10 minute debrief
– Or an extra session talking about the results
DEE 2011 - Slide 22
Extensions
• 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
DEE 2011 - Slide 23
Extensions: Level of Information
• Details of demand
– More detailed information
• Students calculate solutions
– Could even start with a utility function
DEE 2011 - Slide 24
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
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
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: NonComputerised 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. 418430.
• 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