Monday, July 7, 2008

Unpredictability of prices

I recently played the classic "$5 auction" game in class to introduce game theory to my students. I like doing this game in two rounds; One round without collusion and one with collusion.

Round 1: First I tell the students that I will give the $5 bill to the highest bid which is submitted on a piece of scrap paper with their name on it. Students are not allowed to talk (collude) during the bidding process. Next I read the bids to the class and give the $5 away to the highest bidder.

Round 2: Then I tell the class I want to give away more money. I tell the students to write down their bids, but that I also have to talk to some teacher down the hall, leaving the room for a few minutes (hopefully the class sees this signal to collude/cheat at this point.) When I come back I read the bids then give away the money to the highest bidder. Finally, class discussion of what happened during the game springs us into game theory.

I played this game in three different AP Microeconomics classes this year and ended up with bizarre outcomes. I actually made 4 cents in the first class, $6 in the second class, and lost $4 in the third class. After the game, we discussed what the logical outcomes to the game should have been. One class was too tired to realize that when I left the room, they should have cheated.

Even though the game had some irrational outcomes, it did show the unpredictability of behavior within a cartel or colluding oligopoly.

In the end, this teacher made $2.04 (Sweet!)

Entry from the Best of 'Just Enjoy the Show'

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