Exploring Strategic Behavior in an Oligopoly Market Using Classroom Clickers

Abstract

This article discusses an innovative technique to teach strategic behavior in oligopoly markets. In the classroom exercise, students play the role of a firm that maximizes its profit given the behavior of other firms in the industry. Using classroom clickers to communicate pricing decisions, students explore first-hand the strategic nature of decision-making in an oligopoly market. Students see the diversity of equilibrium outcomes that can be supported in an oligopoly setting and better understand the conditions that lead to one equilibrium over another. The game also illustrates different game theoretic concepts such as the Nash equilibrium (Nash 1950, 1951) and backward induction. The exercise is designed for use in an intermediate microeconomics class, although the technique and exercise could be modified for other courses that examine strategic behavior.

Keywords:

• classroom game
• clickers
• oligopoly

JEL codes:

• A22
• C7
• D43

Notes

1. While the games all model a prisoners’ dilemma scenario, the games differ in terms of the number of players in the market, the mechanism by which students make decisions, and the length of the game. In terms of the number of players, games have students play against one other student (Ray 1993; Holt and Capra 2000; Beckman 2003), small groups of students (Meister 1999; Seiver 1995), or the entire class (Hemenway, Moore, and Whitney 1987; Ortmann and Colander 1995; Ortmann 2003). In terms of decision-making, most games have students make their pricing decisions by writing down and submitting their responses, although some use playing cards (Holt and Capra 2000) or have students raise their hands (Hemenway, Moore, and Whitney 1987). In terms of the length of the game, most play the game within a single class period, but a few extend the game over multiple days (Meister 1999; Lange and Baylor 2007) or even over the entire semester (Sorenson 2002).

2. Clickers have been used for in-class accounting tasks such as taking attendance or giving short quizzes as well as to check student comprehension of central concepts. More advanced uses of clickers would include supporting teaching pedagogies like peer instruction or mentoring (Salemi 2009; Ghosh and Renna 2009) and gathering data from students to demonstrate and analyze economic phenomena such as the law of demand (Bergstrom 2009; Salemi 2009).

3. The handout is available on request from the author.

4. This can be done on the spot in class by simply calling out the ID numbers for three firms that will belong in any single industry. Alternatively, one can prepare a list of firms in each industry prior to class (based upon the clickers that will be used) and then include this information in the handout. While the later technique has the advantage of potentially saving class time, one needs to be aware that perfect attendance is rarely achieved and hence any predetermined industry assignment will need to be modified on the spot to reflect current attendance and current clicker assignment.

5. Depending on the size of the class, the instructor may want to think about different ways to impose these changes in the market rules. For a larger class, the simple mechanics of imposing different market rules may be time-consuming. In this case, it might be easier to have each industry undergo just one of the three market changes, or the instructor can select a few industries to undergo the changes as an example for the whole class. In a smaller class, one might impose different combinations of the three deviations to the game on different industries in the class such that each industry undergoes a unique treatment.

6. Another possible discussion topic to consider at this point is the discount rate. As students understand that acting noncooperatively will typically not yield cooperation in the future, they are faced with determining whether the one-time gains from cheating exceed the loss in profits in all future periods due to the noncooperative outcome. This decision, of course, depends crucially on the number of times the game is played and on the firm's discount rate.

7. The ability of an industry to achieve different outcomes under different market rules provides another opportunity to discuss the concept of a Nash equilibrium. Students can see that different rules may lead to different beliefs on the part of market participants, which in turn can support different outcomes as an equilibrium.

8. On my latest course evaluations, 27 of the 28 students said they enjoyed the exercise. The one student who did not enjoy the exercise said the game was “too slow.”