Cartel game

Enrique Valdes graduate student FIU
Author Profile
This material was originally created for Starting Point: Teaching Economics
and is replicated here as part of the SERC Pedagogic Service.

Summary

In a Microeconomics course students will be broken down into groups and be asked to act as individual firm in an Oligopoly market. They will submit how much of a given good or service they are going to produce in order to maximize profits. The students will be put into a situation where their group will be able to increase their profits by lowering the profits of all the other group members. This game will help illustrate to students the instability of cartels. Lastly, this game will reinforce the topic of profit maximization.

Learning Goals

This should reinforce the concept of profit maximization and calculating profits. The students will learn about instability of prices and production in an oligopoly market. Lastly this lesson will introduce or can be referenced when discussing game theory and a prisoners dilemma.

Context for Use

This lesson was created to be used in a Principles of Microeconomics course but with some small changes can be used in an Intermediate Microeconomics, Applied Microeconomics, or Managerial Economics course.

This could be used in a class as large as 35 students. In a large lecture hall it may be difficult for this type of demonstration to work.

This activity may take from as little as 15 minutes of class time to as much as an hour.

Usually the students would have already learned about profit maximization and how to calculate profits in given a model.

This activity can be used when covering cartels. Usually cartels are covered when discussing Oligopoly's

This activity was designed for a Principles of Microeconomics course but could rather easily be adapted to fit into a higher level course like Intermediate or Applied Microeconomics.

Description and Teaching Materials

Materials: Markers, Projector, Students,
Optional: Access to internet. Specifically to https://www.desmos.com/calculator

Directions:
1. Breaking the class down into groups.
a. Start with a small number of groups maybe three or four.
2. Draw a Demand curve, marginal revenue curve, marginal cost curve, and an average total cost curve on the Desmos graphing calculator. (If the projector or the Desmos calculator is not working just draw it on the board)
a. Example of formulas for curves
i. Demand=-2Q+10
ii. Marginal Revenue=-4Q+10
iii. MC=ATC=2

Note: In an advanced course students could be given the Demand and cost function and asked to find Average total cost, Marginal cost, Marginal revenue functions.
3. Ask students to submit the amount of output there specific group would produce, allow the groups to collude.
a. Have each group submit a paper with the amount of output.
b. Write the amount of output that each group produced and have students calculate the total profit for all group and the profit that their group and the profit that there group made
i. Note: Do not allow each group to see how much output each group submitted. If they know who submitted each amount there is more of an incentive to cooperate.
ii. Note: To speed the process up, the instructor can add the quantities up and show on the Desmos graph the price at that level of production.
4. Play the game a couple of rounds to see the total profits the group makes and how much each individual firm makes.
5. Entice students by offering extra credit and/or offer additional extra credit to the group that makes the most profit. This will give students an incentive to "cheat".
6. Have a discussion about what is the "best" strategy
a. Ask students to assume every other group is producing the amount decided upon that will reach the profit maximizing quantity. Could their group make more by choosing another amount?
b. Make the connection to OPEC
c. Discuss the instability in the Oligopoly market structure.




Teaching Notes and Tips

1. Give students extra credit that corresponds to the amount of profit the group makes. This will give them more of an incentive to play the game seriously. Give additional extra credit to the group who makes the most profit (This should really incentivize students to "cheat:").
2. The instructor could break up the groups to try to show how it is more difficult to collude when there are more groups
3. This game can be referenced when discussing prisoners dilemma.
4. In more advanced courses this game can be used to discuss repeated games.
5. At the end of the activity regardless of whether any group "cheated" the instructor can show an example of all groups producing an amount that adds up to the profit maximizing quantity. Then they can show an example of the group that cheated producing more than the agreed upon amount and showing what happened to the total profit and the profits of the group that "cheated".

Assessment

1. When students begin to collude out loud the instructor will know if they understand what the profit maximizing amount is.
2. The instructor should be able to guide the discussion to think about what would happen if one of the groups "cheats"
3. The instructor could ask each group to calculate the profits for their group given the total amount produced by all groups.
4. The instructor can ask the students to graphical illustrate the loss to all groups from one group producing more than the agreed upon amount and the gain by the one group.

References and Resources