Competitive Market Game: A Narrative Approach
Uber Surge Pricing Economics Sharing Economy 2

Blog / Competitive Market Game: A Narrative Approach

Anonymous

Recent events can be mapped into the Competitive Market game to form a meaningful narrative for students. For example, this past Saturday a bomb went off in New York City's crowded Chelsea neighborhood. The blast and shrapnel injured numerous people and the masses wanted out—quickly. Where did they turn? Many went to their wireless devices and accessed Uber. But, during times of peak demand Uber charges higher prices for fares. In fact, the price of rides increased by 80 percent.Of course, economics tells us that this higher price entices drivers to get off their couches and into their cars. If drivers knew about the bomb a higher price might encourage them to take on the risk of driving into a dangerous situation. Nevertheless, with cases like this there is always moral apprehension and often these sentiments turn to interventions like price ceilings. But, what would the effect of a price ceiling be?You can bring this narrative to life with our Competitive Market game by using the following sequence game parameters and discussion tips.

Game 1: Competitive Market Baseline

In the basic market treatment, a key learning objective is to show how prices and quantity converge. A few factors to consider in execution are as follows.
  • Repetition: Markets are excellent teachers, but without profit-loss feedback the students cannot learn from their mistakes and discover price. Having multiple periods with a break between each period for students to reflect is helpful.
  • Group Size: For large lectures, increasing group size not only condenses the market and therefore makes convergence more stable, it also keeps the number of group graphs on the summary panel manageable.
  • Valuation Schedule: Backward induct from the demand-surge and price ceiling manipulations. Each of those manipulations should show a noticeable difference in total transactions. That means think carefully about the baseline valuation schedule, or follow our lead.
Parameter Recommendation: Consider students participating in a 16-24 person market across 2-3 trading periods of 120 seconds each and 10 seconds between each period. Holding the default parameters on the supply curve constant change the baseline parameters to 70 (min) and 120 (max). This will yield an equilibrium price of $.92 and 15 units. You will see that this allows for a noticeable difference in total transactions when there is a demand surge.Across periods the transaction prices tighten more quickly around the equilibrium price. This is a good opportunity to ask your students, "Why?" Why did the transaction prices tighten across periods? What were you thinking? Did you change your strategy? All good questions! Ask students to record how many units they were personally able to buy or sell at the end of each trading period. Having this information on hand will facilitate the conversations about the units sold in a demand surge and the demand surge with a price ceiling.

Game 2: Competitive Market - Demand Surge

With the demand surge, drivers that previously were reluctant to be on the road because of cost concerns would now all of sudden be willing to provide rides again. You can create that kind of effect by simply increasing the value range for demands while keeping supply side constant.Building on the recommendation, if group size is 16 (and each buyer/seller has three units to buy/sell) you can recruit all the additional supply (24 compared to 15 in the baseline) by setting the minimum value of the demand curve to the maximum cost on the supply curve. With the default supply parameters this mean changing the demand curve to 120 (min) and 170 (max).Given the selected parameters there should be a noticeable difference in how many were able to buy/sell their third unit in the demand-surge in the Demand-Surge games. This opens up conversations about how additional units were supplied to the market because demanders started to bid more for each unit. Of course, it is also useful to focus on the transaction prices and how behavior adjusts to converge to a new equilibrium price when there is a shift in demand.

Game 3: Competitive Market - Demand Surge with Price Ceiling

With our recommendations, after the demand surge the new equilibrium price is 33 percent higher than in the baseline. Large deviations in price like this inspire moral concern. But, what should be done about it? Some might suggest setting the price back to what it was before at $.92. Introducing this binding price-ceiling and allowing the students to feel its effects is powerful.If you set the price ceiling equal to 92 cents (the equilibrium price in the baseline condition) then you have an equilibrium of 92 cents and 15 units. If 15 units are sold that ensures that many consumers won't be able to purchase a third unit and some won't even be able to purchase a second unit.Focusing on the price ceiling ask the students, "How many of you found this last game frustrating?" If you get no reaction ask them, "How many of you found this game boring?" Students tend to react to price ceilings either with frustration and/or boredom. I've had consumers yell at producers to submit an "ask" and producers yell back that they would lose money if they sold at that price. I've also had the life drain from student's faces as they stare at a screen where they were unable to make transactions. Either way the experience is palpable.You can also ask students to raise their hand if they were able to buy/sell all their units in the second game with the demand surge. Ask them to keep their hands up if they were able to buy/sell all their units in the game with the price ceiling.
I hope that this blog helps illustrate by systematically altering one parameter at a time, we could create a simple and yet immersive environment for our students to live through a narrative and learn and appreciate to think like an economist.Our brains are wired for narrative. The stories we tell ourselves, others, and that others have told us create a framework for how we understand the way the world works. MobLab games are immersive and interactive but if you are able to pair them with a contemporary story that will no doubt give the extra oomph! to the economic lessons.
Published 21 Sep 2016