Teaching Strategic Thinking on Oligopoly: Classroom Activity and Theoretic Analysis

Abstract This paper examines the use of a simple classroom activity, in which students are asked to take action representing either collusion or competition for extra credit to teach strategic thinking required in an oligopolistic market. We suggest that the classroom activity is first initiated prior to the teaching of oligopoly and then the instructor teaches oligopoly together with more enhanced classroom activities in accordance with a dynamics of the oligopolistic market. With this approach, the instructor can guide students toward strategic thinking by demonstrating how a student's incentives lead to specific actions within the experiment, which approximates a core trait of Cournot competition. Keywords: Experiment; pedagogy; non-cooperative games; group behaviour. JEL Classification: A22, D43, C72 PsycINFO Classification: 3550 FoR Code:1301; 1402 ERA Journal ID#: 35696 Introduction As oligopoly is one of the most significant market structures in free market economies, it is crucial to understand how firms operate in this type of market. The importance of understanding oligopoly is not limited to business people and consumers, but also to economics students and business majors, most of whom will be involved in the future decision-making processes of firms as found in the survey of employers made by Hellier et al. (2004). To equip the students with relevant knowledge, various economics courses teach oligopoly and other market structures. In an effort to provide students with market-like simulations, classroom activities date back to Chamberlin (1948) as Holt and McDaniel (1998) noted. Other examples of more recent classroom activities are found in Miller (1971), Nelson and Beil (1995), Meister (1999), Grobelnik et al. (1999), Brouhle (2011), Ryan and Doyle-Portillo (2014), and Elbeck and DeLong (2015) to name only a few. This paper analyses the use of a simple classroom activity to teach oligopolistic behaviour, targeting the principles of microeconomics student (but not limited to that level). Using this classroom activity, an economics instructor enables the students to experience the interdependent actions of oligopolistic firms as well as the nature of their interaction. With the results of the activity revealed, an economics instructor can provide a theoretical analysis of the classroom activity when the topic of strategic behaviour for oligopolistic firms is studied. When providing the theoretical analysis of the classroom activity, the instructor can explain how the results of the activity would be different if some market characteristics change, e.g., market size, potential entrants in a market, or cost of production. Anticipating the possible outcomes as market characteristics change is crucial, as major decisions on price and production are often made on those expectations. This paper provides an economics instructor with theoretic predictions on competition versus collusion based on characteristics. With these predictions, an economics instructor can train students to think strategically about the behaviour of competing firms. For this purpose, this paper is divided as follows. Learning objectives are listed in Section 2, and the implementation of this classroom activity is detailed in Section 3. The activity is theoretically analysed in Section 4, and then comparative analysis in which some key factors to the activity are changed is provided in Section 5. In Section 6, we present our own results to illustrate how to implement such classroom activities and to compare the theoretical predictions with the actual outcomes. In Section 7, we provide a framework on how to assess successful implementation of this activity as a teaching tool. Learning Objectives In contrast to equilibria associated with perfect competition, monopoly, or monopolistic competition, firms operating in an oligopolistic market may choose to follow different strategies leading to different expected results. …