Jim Whitney Economics 101

The Oligopoly Game

"Oligopoly" means "few sellers" and refers to a situation in which the number of sellers is sufficiently that the actions of each seller affect not only the seller's own profits but the profits of the seller's rival firms too. So the firms are "mutually interdependent."

The purpose of this game is to illustrate the problem of price coordination under oligopoly.

Instructions:
1. No talking (except for questions you may have about the rules of the game).
2. For each round of this game, you must decide whether to "compete" or "collude" with your rival classmates. When I ask you to raise your hand, indicate "compete" by an OPEN HAND; indicate "collude" by a FIST (for solidarity?).
3. The industry behavior will be determined by the majority of all votes in the class.
4. The following table indicates the producer surplus (profits) you can earn during each round of competition:
 

Your payoff table
(producer surplus--profits)

 Your firm's behavior
a. Compete b. Collude
Industry behavior
(class majority vote)		 1. Compete  10 6
2. Collude  40 20
 
5. The object of the game is to maximize your own producer surplus (profits).
6. We will play the game for six rounds. Record the points you earn for each round or Game 1. For example: Suppose the majority decides to "compete" in Round 1. You record 10 points if you raised an OPEN HAND ("compete") and 6 points if you raised a FIST ("collude"). Suppose then that the majority votes to collude in Round 2. You record 40 points if you voted to compete and 20 points if you voted to collude.
7. Your grade on this exercise will be determined as follows:
    A: 120 or more; B: 100-119; C: 80-99; D: 60-79; F: below 60.
 

After six rounds, we will vote to determine if you want to play the game for another grade. However, before we vote, you will be allowed a communication session, where you will be able to discuss strategy with your classmates. If you play the game again, record your points for each round of  Game·2.

Round Game 1 points Game 2 points
1    
2    
3    
4    
5    
6    
Total    

For more information, see Hemenway, Moore and Whitney. "The Oligopoly Game." Economic Inquiry, October 1987, 727-730.