Wednesday, November 19, 2008

Collusion

We've been talking about oligopolies and collusive agreements in Micro. How an individual firm in a cartel always has an incentive to cheat and, almost always, finds that incentive difficult to resist. For example, say some producers (like OPEC) get together and agree to reduce output and fix a high price to increase their revenues. After the agreement is reached, each producer faces a highly elastic demand curve for his product. If he reduces price just a little bit, he can win customers from the other producers and make even more revenue. The other firms, learning of his cheating, will have to follow suit and competition will ensue.
The outcome is a Nash Equilibrium, and I've talked about this subject before-- specifically why companies threaten to match prices of their competitors. Back to the OPEC example, if you're Argentina, you know Russia has the same incentive to cheat that you do, so you expect him to cheat and so you do the same to beat him to it.

So, I posed my classes the following challenge:
If NO ONE shows up for Thursday's exam, then they will all get a 90%. But, if any one student shows up, then they will be awarded a grade based on their exam performance and anyone not showing up will get a ZERO.

(I'm pretty confident of the outcome--that all will come. Although, a 90% provided a very high incentive to maintain the collusive agreement as few students are likely to get an A. Had I set the bar to 85%, I'd be more confident right now).

On Tuesday, they behaved like a perfect cartel. Plotting, imploring, begging, bribing, threatening to punish (which will lead to a great opportunity to integrate faith into the lesson). Sounds like there might be a couple of holdouts in the morning section, but the afternoon (which is smaller) reached their collusive agreement rather quickly. My department chair expressed some concern since she was copied on some of the mass emails of negotiating students. We'll see.

*Update 1*- It's 9:40am and no one from the class has yet shown. Looks like they have succeeded in their quest. We'll see if anyone gets curious to know if anyone is cheating.
They formulated a plan to all meet in the Student Union at 9:30 and take attendance there. If anyone didn't show, they'd know someone was taking the exam. I half expected some of the holdouts just to not go to the Student Union but not come to class, either. That would create panic among the group as they run across campus to take the exam.


*Update 2*- Both the 9:30 and 2:00 classes succeeded in their collusion. The 2:00 class even sent an unknown spy to make sure I was the only one in the classroom. All nervously dropped by my office later in the day to see if they had succeeded. They spent most of the day in a paranoid state. Many of them learned the lesson of the difficulties of collusion, even if it didn't work out quite as I had intended.

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