Behavioural Economics - Games for the Classroom



Behavioural Economics - Games for the Classroom

1. Tacit Coordination Game - Van Huyck, Battalio and Beil, 1990

A) Smallest Value of X

7 6 5 4 3 2 1

Your 7 1.30 1.10 0.90 0.70 0.50 0.30 0.10

Choice 6 - 1.20 1.00 0.80 0.60 0.40 0.20

of 5 - - 1.10 0.90 0.70 0.50 0.30

X 4 - - - 1.00 0.80 0.60 0.40

3 - - - - 0.90 0.70 0.50

2 - - - - - 0.80 0.60

1 - - - - - - 0.70

In this game your payoff is – Your Choice of X and the smallest value of X selected by another player in the game. Therefore if you chose 7 and the smallest number selected by the rest of the players is 2 then you receive 0.30. If you chose 4 and the smallest number of the group is 3 you receive 0.80. So the most efficient choice is for everyone to chose 7 as all will receive 1.30 and the most secure or prudent option is 1 as this payoff (0.70) is guaranteed. The initial procedure will be, everyone writes down his or her choice on a piece of paper. Choices will be collected, and the minimum choice reported on the board. Everyone can then keep their own account of how much they earned, based on their choice and the minimum that anyone chose. This game can be played over as many rounds as you like but the interesting aspect of the it is how many rounds does it take for the group to coordinate their efforts where everyone is going to benefit the most – i.e. everyone choosing 7. However in some instances some groups might have a lack of trust so select the most prudent option 1. You can cut out the following to assist you playing the game:

1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7 1 2 3 4 5 6 7

2. The Ultimatum Game – Werner Goth 1982

In this game somebody offers John £100 under the condition that he shares it with Sarah. The two of them cannot exchange information and John can make a single offer of how to split the sum. Sarah, who is aware of the amount at stake, can say yes or no. If her answer is yes, the deal goes ahead. If her answer is no, neither John or Sarah gets anything. In both cases, the game is over and will not be repeated. You may not be surprised to learn that two thirds of offers are between 40 and 50 percent.

From research carried out (Karl Sigmund et al.) only four in 100 people offer less than 20 percent. Proposing such a small amount is risky, because it might be rejected. More than half of all responders reject offers that are less than 20 percent.

However, why should anyone reject an offer as “too small”? The only rational option for a selfish individual is to accept any offer, as £1 is better than nothing. A selfish proposer who is sure that the responder is also selfish will therefore make the smallest possible offer and keep the rest.

This game-theory analysis, which assumes that people are selfish and rational, tells you that the proposer should offer the smallest possible share and the responder should accept it. But this is not how most people play the game. Below is a sheet that you can use to play the game.

PROPOSER RESPONDER

Player # ____ Player # ____

Offer $ _____ Accept Reject

PROPOSER RESPONDER

Player # ____ Player # ____

Offer $ _____ Accept Reject

PROPOSER RESPONDER

Player # ____ Player # ____

Offer $ _____ Accept Reject

PROPOSER RESPONDER

Player # ____ Player # ____

Offer $ _____ Accept Reject

PROPOSER RESPONDER

Player # ____ Player # ____

Offer $ _____ Accept Reject

3. Oligopoly Game

In an oligopolistic market the total output is produced by a few large firms who are interdependent and recognize this fact. Each individual firm must make their own pricing decisions by, for example firm X will not only affect the sales of firm X, but also the sales of other firms in the market. Similarly, the pricing and output decisions of other firms will affect the sales and profitability of firm X. The result of this is that firms are sensitive to the pricing policies of other firms in the market, and continuous interaction takes place.

Play

Each student acts as an individual firm. Each group of three students represents an industry consisting of three firms in oligopolistic competition.

Study the profit possibilities resulting from alternative pricing policies. The range options are High (H) or Low (L).

Record your individual firm’s option for the first month having regard to what other firms in the market may do.

The decisions must be concealed until all in the group have been recorded.

When all the firms in the group have recorded a price, reveal your decisions and calculate the monthly profit/loss of each firm as revealed by the profit outcome chart.

Objective

The objective of the game is to maximize profit. The winner of the game is the student who most successfully achieved this objective.

NB Collusion is allowed but is NOT binding

Game 1

Fixed Costs = $1,000

Variable Costs = $0.20

Price High (H) = $0.80

Price Low (L) = $0.60

|Price Combination |Price Decisions |Firm’s Sales |Firm’s profit ($) |

|HHH |H |3,000 |800 |

|HHL |H |2000 |200 |

| | | | |

| |L |6,000 |1,400 |

|HLL |H |1000 |-400 |

| | | | |

| |L |5,000 |1,000 |

|LLL |L |4,000 |600 |

Game 2

In the second game the original conditions apply, but a further price option, very low (VL) is available.

|Price Combination |Price Decisions |Firm’s Sales |Firm’s profit ($) |

|HHH |H |3,000 |800 |

|HHL |H |2000 |200 |

| |L |6,000 |1,400 |

|HLL |H |1000 |-400 |

| |L |5,000 |1,000 |

|LLL |L |4,000 |600 |

|HHVL |H |0 |-1000 |

| |VL |13,000 |1,600 |

|HLVL |H |0 |-1,000 |

| |L |2,100 |-160 |

| |VL |11,000 |1200 |

|HVLVL |H |0 |-1000 |

| |VL |6,600 |320 |

|LLVL |L |2,000 |-200 |

| |VL |9,300 |860 |

|LVLVL |L |400 |-840 |

| |VL |6,500 |300 |

|VLVLVL |VL |4500 |-100 |

Game 1 - Scorecard

|Month |Your Price Decision |Market Price Combination |Your Profit (+) Or |

| | |(e.g. HHL) |Loss (-) |

|1 | | | |

|2 | | | |

|3 | | | |

|4 | | | |

|5 | | | |

|6 | | | |

|7 | | | |

|8 | | | |

|9 | | | |

|10 | | | |

|11 | | | |

|12 | | | |

|Year end | | |Total Profit = |

| | | | |

Game 2 – Scorecard

|Month |Your Price Decision |Market Price Combination |Your Profit (+) Or |

| | |(e.g. HHVL) |Loss (-) |

|1 | | | |

|2 | | | |

|3 | | | |

|4 | | | |

|5 | | | |

|6 | | | |

|7 | | | |

|8 | | | |

|9 | | | |

|10 | | | |

|11 | | | |

|12 | | | |

|Year end | | |Total Profit = |

| | | | |

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