Oligopoly-An In-Class Economic Game

Abstract

In teaching principles of economics, I have found that a number of otherwise high-quality textbooks do not cover oligopoly theory in a modern, yet accessible way. For instance, the workhorse model for some chapters on oligopoly is the kinked demand curve, even though it is not really a focal point of any higherlevel presentation of oligopoly theory. Partially to deal with this problem,I decided to let students have an opportunity to learn about oligopoly in a hands-on manner. I have them participate in an in-class simulation based on a quantitycompetition oligopoly game (see Carlton and Perloff 1994 for a detailed discussion of quantity-competition oligopoly) in which firms’products are perfect substitutes.1 (For other oligopoly games, see Joseph 1965, and Hemenway, Moore, and Whitney 1987.) I typically start this game after introducing the topic of oligopoly in class and showing students some basic game theory. I divide students into industries of five firms (I discuss later how I handle different sizes of industries), and each person is the manager of one firm.2 To give students incentive to maximize profit, each player earns extra credit on the basis of individual, average profit over the course of the game. The game has several rounds. Students learn that the attempt to have the greatest market share can be damaging to profits. Students perform calculations to see if, during the course of the game, they are producing anywhere near a one-period, profit-maximizing level of output. This can help them determine if they are producing too much or too little. Students have reported that such cal-