This module takes between 30 and 35 minutes. It assumes students have been introduced to equilibrium in perfectly
competitive markets and profit-maximizing pricing under monopoly. It has the following
learning objectives:
Understand how increasing the number of competitors in the market, from one to many, shifts the market from the monopoly outcome towards perfectly competitive outcome–
meaning higher aggregate quantities, lower prices, and greater total welfare, concentrated among consumers.
The Game: A Brief Summary
MobLab divides students into N-player markets, with N varying across the
activities, and students act as firms in a Cournot oligolopoly, simultaneously choosing their
level of production of a homogeneous good (scooters). The market price is determined
by a linear demand curve with intercept 30 and slope equal to -1, or P = 30-Q,
where Q is the the total quantity chosen by all firms. Marginal cost for all firms is zero
At the end of round, each firm learns the total market production and the resulting price and profits.
Students play three versions of this game, progressing from monopoly (N=1), to
duopoly (N=2), and finally a larger, more competitve market (N=14).
Students play up to three rounds of each type of game, which allows them to develop their
strategy and calibrate their beliefs about the aggregate production of other firms in the
market.
Module Procedures in Brief
Step 1 Run the Open Session for Students Survey. Have students login.
Step 2 Run the Open Session for Students Survey. Have students login.
Step 3 Instruction Comprehension. A great opportunity to correct misunderstandings.
Step 4 Run the Cournot (N=1) Game. Students have an opportunity to find the profit maximizing quantity under monopoly.
Step 5 Run the Cournot (N=2) Game. Students experience how the addition of another competitor affects their optimal decision.
Step 6 Run the Cournot (N=14) Game. Students experience how quantity responds to more competitors.
Step 7 Run the Final Reflection Survey. Much of the learning gains from experiments come from reflection on the game.
Step 8 Review results. Use the “Compare” feature to facilitate comparisons across market conditions.
Detailed Procedures
[Before Class] Log in to MobLab. In the left panel, create a Playlist,
giving it a name students will find informative. In the right panel, expand
this module and click Add.
Step 1 Run the Open Session for Students
Survey. While this survey has no actual questions (only a waiting message), running
it before class ensures that students logging into MobLab will be able to access this
session (playlist) immediately.
With the Open Session for Students survey expanded, click Run Survey followed by Begin!.
[As students are entering] Have all students log into MobLab, either with the app on
their mobile devices or in a browser (moblab.com/).
Step 2 Review the instructions with students. If you are having the students watch video instructions prior to class, and complete the warm-up questions in their student workbook, then students should already be familiar with the rules of the game. Run the Instruction Comprehension Survey.
The survey consists of 3 questions.
Question 1: Rules review (no answer)
Question 2: Determining the price Answer = 100 (choice A)
Question 3: Evaluating profits Answer = 105 (choice B)
Work through the questions with your students.
Ask if they have any questions.
Step 3 Run the 3-round monopoly (N=1) game. Each round will last
one minute.
Inform students they are in the market alone. There are no competitors for the next three rounds.
After pressing Run Game and then
Begin! in the resulting popup, the game will start on student screens, and your
screen will switch to the game monitor.
When the final group has finished all rounds, click Finish to end the game.
Step 4 Run the 3-round duopoly (N=2) game. Each round
will last one minute.
Inform students they are in the market with one other competitor. They will be matched with this same person for the next three rounds.
After pressing Run Game and then
Begin! in the resulting popup, the game will start
on student screens, and your screen will switch to the game monitor.
After approximately 20 seconds, click Add Robots (if the final group contains fewer
than 2 students).
When the final group has finished both rounds, click Finish to end the game.
Step 5 Run the 3-round competitive market (N=14) game. Each round
will last one minute.
Inform students there are fourteen total firms in each market. They will be matched with the same thirteen other people (or robots) for the next three rounds.
After pressing Run Game and then
Begin! in the resulting popup, the game will start
on student screens, and your screen will switch to the game monitor.
After approximately 20 seconds, click Add Robots (if the final group contains fewer
than 14 students).
When the final group has finished both rounds, click Finish to end the game.
Step 6 Run the Reflection Survey
.
Discuss the premise of the questions:
Because firms don't take into account how their behavior will affect the profits
of other firms, Cournot competitors find themselves in a tragedy-of-the-commons
situation. The purpose of this question is to get students to consider collusion as
a way for firms to maintain higher profits in the face of competition and whether
or not collusive behavior is individually rational.
Question:
Firms in a competitive market end up producing more than a
monopoly would, driving down the price, forcing them to split a smaller pool of profits.
What could they do to avoid this tragedy and why don't they do it?
If you award participation marks for MobLab performance, we recommend awarding full
credit for any thoughtful response.
Step 7 Discuss Results. For a video demonstration on presenting the results of the Cournot Competition module see the Cournot Competition Results
Click Results for the Monopoly Game.
When the results screen loads click the “Compare” button in the top right of the summary screen and choose the duopoly condition.
You will see a group profit table and production graphs. Show the group profit table. Typical results are shown in Table 1 below:
(Table 1: Typical Results for the monopoly game. Click to enlarge)
Using the checkboxes in the legends for these two graphs, hide all of the lines and data on median quantity choice.
Reveal the market demand line and probe students on what it represents. Probe students on what additional piece of information is needed to know the quantity under perfect competition.
Reveal the marginal cost curve. Note that the intersection of demand and marginal cost reveals the equilibrium price and quantity under perfect competition. The marginal cost curve rests on the x-axis because MC=0 in the module.
Reveal the Nash prediction. This equals the the monopoly prediction because there is only one firm. Probe students about the reason for the difference in quantity between perfect competition and monopoly
Reveal the group quantities and the median quantity decision across all markets for monopoly condition. You may want to toggle between rounds to show students how they learn optimal decisions across time.
(Figure 1: Typical Graphical Results for the monopoly game. Click to enlarge)
Ask students for a price-quantity prediction to the duopoly game. Reveal the same information in the duopoly condition and note that the only thing different between conditions is the number of competitors. Median market quantity should be higher and price lower.
Direct student attention to the tables that show median quantity, price, and consumer welfare in each condition.
Ask students for a price-quantity prediction in the competitive market game with N=14. Toggle from the duopoly condition to the competitive market condition. Note that the only thing different between this condition and others is the number of competitors.
Point out to students that the equilibrium predictions of the Cournot model encompass both monopoly and perfect competition as the limiting cases, as N goes to 1 and infinity, respectively.
Notes
Theoretical Predictions:
Given demand P = a-Q, MC=c, and N firms, firm i's best response function is
given by: $q_i(Q_{-i}) = (a-c-Q_{-i})/2$, where $Q_{-i}$ represents the aggregate
production of all firms except firm i, a is the
intercept parameter, and c is the marginal cost. In these games,
a=30 and c=0.
This yields the following equilibrium predictions: $q_i = (a-c)/(n+1)$,
$Q = N/(N+1)*(a-c)$, $p=(a+Nc)/(N+1)$
When N=1 this means q=Q=15, p = 15, profit/firm = 225, industry profit = 225
When N=2 this means q=10, Q=20, p=10, profit/firm = 100, industry profit = 200
When N=14 this means q = 30/15 = 2, Q = 28, p = 2, profit/firm = 4, industry profit = 56
Actual Results vs. Theoretical Prediction
Nash equilibrium is a useful tool for predicting behavior, but it hinges on the
correctness of players' beliefs and their responding optimally to those beliefs. To
the extent that players have not had a chance to learn about others' behavior
or have not fully comprehended how their choices combine to determine profits, we
should not be surprised if actual behavior to deviates from equilibrium
predictions.
To improve the accracy of beliefs and thus, the likelihood that actual behavior
resembles predicted behavior, you could have students play more rounds. Do this by clicking on the configure tab
and under the repetition heading, changing Minimum Rounds.
The best-response function, given above, takes as an input the total production of all
other firms. To help students optimize, you could derive or at least show them this
function and give them practice applying a best-response function before they play any
of the games.