Games Economists Play: Games 101 - 113

Game: #101  
Course: Micro
Level: Principles and up
Subject(s): Bargaining 
Objective: To learn how to solve simple sequential games through backward induction.
Reference and contact: Bergstrom, Theodore and John H. Miller. Experiments with Economic Principles. McGraw Hill, 1997 (Experiment #13)
Abstract: Class is divided into buyers and sellers of bicycles in a bilateral bargaining environment. Buyers are willing to pay up to $150 and sellers are willing to accept down to $100. The experiment is divided into three sessions. Session 1 is an ultimatum game in which buyers write down their bids and sellers either accept or reject the bids. Session 2 is a two-stage game in which sellers can either accept or reject a buyer’s initial offer or write a counteroffer to the buyer. Buyers who receive counteroffers can accept or reject the counteroffers. Session 3 is a three-stage game in which buyers can make a second offer after rejecting the seller’s counteroffer
Class size: 15 to 60 work smoothly; larger class sizes can be accommodated.
Time: One class period
Variations: None indicated
See also: Bargaining games


Game: #102  
Course: Micro
Level: Principles and up
Subject(s): Privatization in the former Soviet Union
Objective: To illustrate how incentives influence the choice of investment opportunities.
Reference and contact: Gay, David E.R. "Teaching Privatization in the Soviet Union: An Experimental Economics Approach." Classroom Expernomics, 1(1), Spring 1992, pp. 5-6;
Abstract: This game is based on a 1990 Soviet proposal to privatize elements of the Soviet economy by creating a ‘USSR stock’ indexed to the overall economy. Students are endowed with 100 rubles of which they must invest all or some in either a private savings account or a group USSR stock. The private savings account pays a guaranteed 10% return along with a claim on the principal. The USSR stock pays an uncertain return and the investor has no claim on the principal; that is, the asset can not be sold once invested in. Students make their investment choices over a series of decision-making periods. At the end of each period, each student determines how the sum of their return from the private savings account, their return from the USSR stock, and new rubles will be split among the private savings account and the USSR stock in the next period. Typical results indicate that most students allocate over 75% of their available funds into the private savings account.
Class size: Any number.
Time: One class period
Variations: None indicated
See also: Public goods and institutions games


Game: #103  
Course: Micro
Level: Principles and up
Subject(s): Demand
Objective: To construct and identify the demand curves for a set of everyday commodities.
Reference and contact: Ortmann, Andreas and Mary McAteer Kennedy. "The Construction and Identification of Demand Curves: A Concerted Experiment for Principles Instructor and Dining Services." Classroom Expernomics, 6(1), Spring 1997, pp. 6-10.
Abstract: In concert with the director of dining services, the instructor led his class through a semester-long project designed to construct and identify the demand curve for a set of eight items commonly available in the college’s student center store. The store would vary the prices on the eight items on a weekly basis. Each week students were informed of the prices for the coming week and asked to forecast (and justify) the quantities sold. Students were then asked to plot the price/quantity combinations and interpret the results. Interpretations focused on violations of ceteris paribus conditions and on shifting curves.
Class size: Any number.
Time: Semester long project.
Variations: None indicated
See also: Demand games


Game: #104  
Course: Micro, Industrial Organization, Regulation, Law and Economics
Level: Principles and up
Subject(s): Asymmetric information and adverse selection. 
Objective: To illustrate the lemons problem associated with imperfect information regarding product quality.
Reference and contact: Holt, Charles A. and Roger Sherman. "A Market for Lemons." Journal of Economic Perspectives, 13(1), Winter 1999, pp 205-214;
Abstract: Class is divided into buyers and sellers and participate in a posted price market. The experiment is divided into two sessions. In the first session, sellers must choose and publicly post a product quality ‘grade’ and price. There are three product quality levels to choose from. Sellers may sell up to two units per period where the second unit is more costly than the first. Buyers are randomly chosen to shop among the sellers and can buy only one unit per period. Buyer values are higher for higher quality products. If a buyer wishes to buy a seller’s second unit, the seller has the right to refuse the sale since they are required to sell the unit at the same price and quality grade as the first unit, even though the marginal cost is $1 higher. Repeat session 1 until prices converge to an equilibrium grade. The second session represents imperfect information in that sellers only post prices and not product quality grades. Invariably, prices tend to drop as sellers try to take advantage of the asymmetric information in session 2. Discussion can focus on potential solutions to the ‘lemon’ problem, viz., warranties and regulations.
Class size: 10 to 15 students, with larger classes divided into teams of buyers and sellers.
Time: One class period
Variations: None indicated
See also: Information games


Game: #105  
Course: Micro, money and banking, financial management
Level: Principles and up
Subject(s): Asset valuation theory
Objective: To illustrate the functioning of asset markets.
Reference and contact: Bell, Christopher R. "A Noncomputerized Version of the William and Walker Stock Market Experiment in a Finance Course." Journal of Economic Education, 24(4), Fall 1993, pp. 317-324;
Abstract: Students take on the role of asset traders in a double-sealed auction market. Each student receives a cash endowment and 12 asset shares at the start of each trading session. The asset pays an uncertain dividend at regular intervals. The per share dividends are determined using a random draw from a uniform distribution. Traders submit written bids to buy or sell a given number of shares at a limit price. The instructor sorts the bids to buy and sell into demand and supply curves, thereby determining the market-clearing price and quantity. All trades occur at the same price. Student instructions explain two common investment strategies: ‘fundamental analysis’ whereby an asset’s value is equal to the present value of its expected dividend flow, and ‘technical analysis’ where traders rely on past patterns in prices and trading activity to predict future price changes. Post-game discussion can focus on whether trading prices converge toward intrinsic values or if a speculative bubble emerges.
Class size: Any number, with large classes broken into teams.
Time: The trading is stretched out over the latter part of the course with one trading round per class period
Variations: Stock splits and shifts in the dividend probability distribution can be used to add some realism.
See also: Asset market games


Game: #106  
Course: Micro, environmental economics, law & economics, public economics
Level: Principles and up
Subject(s): Externalities
Objective: To illustrate the generation of a negative externality and the application of the Coase Theorem.
Reference and contact: Hoyt, Gail M., Patricia L. Ryan, and Robert G. Houston, Jr. "The Paper River: A Demonstration of Externalities and Coase’s Theorem." Journal of Economic Education. 30(2), Spring 1999, pp. 141-147.
Abstract: The class is divided into groups of firms engaged in an upstream/downstream production relationship. In upstream Firm A, students produce answers to 10 simple multiplication problems using a pencil and 5 small pieces of paper. In downstream Firm B, students produce paper airplanes using the same small pieces of paper. Firm A students earn one bonus point for each solved math problem. Firm B students earn two bonus points for each cleanly (no writing on it) produced airplane. The experiment is divided into two rounds. Round one involves no communication between firms and represents a situation in which Firm A students ignore the cost (pencil markings on the pieces of paper) imposed on Firm B students. At the end of round one, the instructor leads the class through a discussion in which he tries to elicit from the students a Coasian solution to the externality. Round two introduces a clearly defined property rights allocation and compensation rules and repeats the production process all over again. Production totals from round two will typically be larger than round one as the parties now have an incentive to internalize the externalities. Follow up discussion can focus on the impact of income effects and transaction costs.
Class size: Any even number.
Time: One class period
Variations: None indicated
See also: Externality games


Game: #107  
Course: Micro
Level: Principles and up
Subject(s): Productivity and cost concepts
Objective: To illustrate a production process subject to diminishing returns and illustrate the construction of a production possibilities frontier 
Reference and contact: Neral, John and Margaret Ray. "Experiential Learning in the Undergraduate Classroom: Two Exercises." Economic Inquiry, 33, January 1995, pp. 170-174;
Abstract: Two production processes are explained. The first, a widget production process, is identical to Neral (1993) and is used to illustrate the concept of diminishing marginal returns. The second involves the generation of a production possibilities frontier between two goods, widgets and whajamas. A widget is simply a piece of paper folded twice and stapled at both ends. A whajama is a piece of paper folded three times and stapled twice. Five students are chosen to participate in a three-stage production process. In the first stage, all resources (paper, desk space, and stapler) are devoted to widget production. In the second stage, all resources are devoted to whajama production. In stage three, resources are allocated in various ways between widgets and whajamas. The data collected from each stage is used to plot a production possibilities frontier. Discussion may focus on ways to expand production through expanded resources and technological improvements.
Class size: Any number
Time: One class period
Variations: None indicated
See also: Supply games


Game: #108  
Course: Micro
Level: Principles and up
Subject(s): Rent-seeking and non-market allocations
Objective: Illustrates the social inefficiencies of non-market allocation mechanisms, such as lotteries, in situations involving a competition among several bidders for a single prize.
Reference and contact: Goeree, Jacob K. and Charles A. Holt. "Rent-Seeking and the Inefficiency of Non-Market Allocation." Journal of Economic Perspectives, 13(3), Summer 1999b, pp 217-226;
Abstract: Students are divided into four teams of ‘investors’ that compete against each other in a bidding contest for a monopoly license. Each team is given 13 cards of the same suit from a regular playing deck, an initial $100,000 endowment, and an envelope. The playing cards represent lottery tickets in a drawing for a license that is worth $16,000. Each lottery ticket costs $3,000 and represents the costs of filing an application for a license. The game is played under four treatments. In the first treatment, the lottery tickets cost $3,000 each. Each team privately decides on how many playing cards (lottery tickets) to place in their envelope. Each envelope is then collected and the cards are removed and shuffled. The total number of cards is announced and the top card is selected as the winning application. Team earnings are calculated and recorded. The playing cards are then returned to each team without revealing how many cards were played by each team. In the second treatment, the cost of a lottery ticket is reduced to $1,000, ostensibly reflecting a more cost-efficient lottery process. However the impact on total social costs is not obvious as the lower unit cost is likely to induce more applications. A third treatment involves assigning asymmetric license values to each team in order to simulate that some investors may be more efficient at providing the licensed service than others. A fourth treatment involves the instructor as an auctioneer using the English auction mechanism to allocate the license. The winner of the auction must pay the final bid and the losers do not pay anything.
Class size: Any number.
Time: One class period
Variations: None indicated
See also: Public choice games


Game: #109  
Course: Micro
Level: Principles and up
Subject(s): Public goods and free riding
Objective: Illustrates the conflict between private and social incentives in providing public goods.
Reference and contact: Holt, Charles A. and Susan K. Laury. "Classroom Games: Voluntary Provision of a Public Good." Journal of Economic Perspectives, 11(4), Fall 1997, pp. 209-215;
Abstract: Four playing cards (two red, two black) are distributed to each student. Each student must "play" two cards which the instructor collects. Each red card the student keeps generates four dollars in personal earnings. Students also earn one dollar for each red card that is played by the entire class. Thus, playing a red card is equivalent to contributing to the provision of a public good. The black cards are only used in order to mask the identity of the contributors (or non-contributors, as the case may be). After the instructor collects two cards from each student, the number of red cards is tallied and student earnings determined. The cards are returned to the students and a new decision round begins.
Class size: Any number. Large classes can simply use a subset of students. You will need one deck of playing cards for every 13 students.
Time: 30 minutes
Variations: Reduce the value of the kept red cards to two dollars after several decision rounds. Communication among students may be allowed in order to facilitate group decision making. Instructors may also want to vary the size of the group or allow students to revise contributions.
See also: Public goods games


Game: #110  
Course: Micro, environmental economics
Level: Principles and up
Subject(s): Tradable pollution permits
Objective: To illustrate the cost advantages of tradable pollution permits in achieving a given level of pollution abatement.
Reference and contact: Walbert, Mark S. and Thomas J. Bierma. "The Permits Game: Conveying the Logic of Marketable Pollution Permits." Journal of Economic Education, 19(4), Fall 1988, pp. 383-389;
Abstract: Students are divided into three groups representing industrial sources of pollution, such as steel mills or chemical plants. Each group receives information on its (unique) marginal cost of pollution abatement and a record sheet on which to record its calculations. Each group is then informed that the current pollution level in their area exceeds national standards and must be reduced. Four proposals to reduce pollution are to be considered: uniform emission limits, uniform percentage reductions, tradable permits in which all permits are auctioned off, and tradable permits in which all permits are initially given enough permits to cover half of their current emissions prior to the auction. Student groups must calculate and determine the least costly method of reducing pollution.
Class size: Any size. 
Time: Two class periods to cover all four options.
Variations: Expand the number of polluters or allow environmental groups to bid on permits.
See also: Externality games


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Games Economists Play

Copyright 2000 by Greg Delemeester and Jurgen Brauer
Last Updated: 02/20/2005