from the Economics Network

# Case study: Active Learning Instruments for Teaching Under-graduate Economics Concepts

## Experiment #2: Why Are Oligopolies Likely to Collaborate or Form a Cartel?

The second experiment is a simulation where the students have to “agree” on their favorite television program. The game runs in two cycles. The first cycle is representative of a market situation where there are many sellers, a case of perfect competition or monopolistic competition. The second cycle is representative of an oligopoly.

The game begins by each member of the class naming his/her favourite television program. Either a student or the teacher can act as scribe and write these programs up on a board as they are named. Each time a program is repeated the scribe can signal this with a tick next to the initial listing. The number of people who provide this information is dependent on class size and time available. A minimum of 20-25 students to run the experiment is required so the enough information is provided. This process usually generates a list of about 10-12 programs.

Stage two of cycle one then involves individual students negotiating in an attempt to reduce the number of programs on the list. For example, one member may have two close favourites (South park and The Simpson’s) and be quite happy to give up his first choice and vote for his/her second choice. No more than about 5 minutes should be allowed for this negotiation process. In most cases this will only reduce the initial list by 2-3 programs.

While retaining the results from cycle one it is now time to start the second cycle of the experiment. The students are put into groups of approximately three to four, based solely on their seating proximity to one another. There should be at least one group of two and one group of four students for variety. Each group now has to decide on its “single” favourite television program. No more than five minutes should be allowed for the groups to make their choices. Each group now provides its choice to the scribe. The results are summarized in the same way as in cycle one. The second stage of this cycle then runs the same way as cycle one but with the groups as the unit of negotiation rather than individuals.

### Results

The negotiation process of cycle one usually only slightly reduces the number of favorite programs listed. It is more important to focus on how entrenched and defensive the students become of their own choices rather than on the actual decisions made.

Cycle two, stage one will usually generate a shorter list than the final list of cycle one. The cycle two list is usually further reduced through the negotiation process. Discussion on why this has happened enables the students to identify important issues about market structures. The number of people negotiating (market structure) has a critical impact on how players approach the negotiation and the subsequent results. While it is rare to end up with a single program on the final list of cycle two, the very fact that the small groups could decide on any program highlights why oligopolies can often agree.

### Extensions

Discussion can be extended into the types of agreements the groups are likely to make and the incentives required keeping them. The students will often raise the issue of repeated games and the trade-offs that they are prepared to make in this time period if there is an expectation of a reciprocal agreement in a subsequent time period. This provides a useful introduction to repeated games in game theory.

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