Thursday, February 28, 2013

A Fun Exercise on Tacit Collusion

I handed two students mock price displays ranging from $3.50 to $4.50 in $0.25 increments and asked them to pretend to be rival gas station proprietors.  We ran through about 20 iterations.  Each time one student priced first; the second responded; and the first could respond in turn.  They took turns going first (and thereby being the last to set a price for that iteration.)

The first time prices matched at about $4.00.  The second time the first mover (who is also the last mover) undercut.  The third time the other student, in this iteration the first mover, undercut back.  I may have polluted this as an experiment by explaining that this was precisely the definition of disciplining conduct.  Every time after that -- for 17 more iterations -- the prices ended up matching.  They were not always at the top price (I had one student who was an altruistic seller) but they most certainly were not competing prices down to $3.50, the lowest available.

There are surely flaws in this as an experiment, but as a class exercise before discussing Theater Enterprises and Twombly it was much fun.  (I forgot to trot out the example of abnormally slow packs in distance track races -- e.g., the 5000 at the 1972 Olympics -- as another example of the same thing.)

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