Behavioural Economics - Games for the

Classroom
1. Tacit Coordination Game - Van Huyck, Battalio and Beil, 1990
A)
Your
7
Choice
of
5
X
4
3
2
1

Smallest Value of X
7
6
5
4
3
2
1.30 1.10 0.90 0.70 0.50 0.30
6
1.20 1.00 0.80 0.60
1.10 0.90 0.70 0.50
1.00 0.80 0.60
0.90 0.70
0.80
-

1
0.10
0.40 0.20
0.30
0.40
0.50
0.60
0.70

In this game your payoff is Your Choice of X and the smallest value of
X selected by another player in the game. Therefore if you chose 7 and
the smallest number selected by the rest of the players is 2 then you
receive 0.30. If you chose 4 and the smallest number of the group is 3
you receive 0.80. So the most efficient choice is for everyone to chose
7 as all will receive 1.30 and the most secure or prudent option is 1 as
this payoff (0.70) is guaranteed. The initial procedure will be, everyone
writes down his or her choice on a piece of paper. Choices will be
collected, and the minimum choice reported on the board. Everyone
can then keep their own account of how much they earned, based on
their choice and the minimum that anyone chose. This game can be
played over as many rounds as you like but the interesting aspect of
the it is how many rounds does it take for the group to coordinate their
efforts where everyone is going to benefit the most i.e. everyone
choosing 7. However in some instances some groups might have a lack
of trust so select the most prudent option 1. You can cut out the
following to assist you playing the game:

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2. The Ultimatum Game Werner Goth 1982

In this game somebody offers John 100 under the condition that he
shares it with Sarah. The two of them cannot exchange information
and John can make a single offer of how to split the sum. Sarah, who is
aware of the amount at stake, can say yes or no. If her answer is yes,
the deal goes ahead. If her answer is no, neither John or Sarah gets
anything. In both cases, the game is over and will not be repeated. You
may not be surprised to learn that two thirds of offers are between 40
and 50 percent.
From research carried out (Karl Sigmund et al.) only four in 100 people
offer less than 20 percent. Proposing such a small amount is risky,
because it might be rejected. More than half of all responders reject
offers that are less than 20 percent.
However, why should anyone reject an offer as too small? The only
rational option for a selfish individual is to accept any offer, as 1 is
better than nothing. A selfish proposer who is sure that the responder
is also selfish will therefore make the smallest possible offer and keep
the rest.
This game-theory analysis, which assumes that people are selfish and
rational, tells you that the proposer should offer the smallest possible
share and the responder should accept it. But this is not how most
people play the game. Below is a sheet that you can use to play the
game.

PROPOSER

RESPONDER

Player # ____

Player # ____

Offer $ _____

Accept

PROPOSER

RESPONDER

Player # ____

Player # ____

Offer $ _____

Accept

PROPOSER

RESPONDER

Player # ____

Player # ____

Offer $ _____

Accept

PROPOSER

RESPONDER

Player # ____

Player # ____

Offer $ _____

Accept

PROPOSER

RESPONDER

Player # ____

Player # ____

Offer $ _____

Accept

Reject

Reject

Reject

Reject

Reject

3. Oligopoly Game
In an oligopolistic market the total output is produced by a few large firms who are
interdependent and recognize this fact. Each individual firm must make their own pricing
decisions by, for example firm X will not only affect the sales of firm X, but also the
sales of other firms in the market. Similarly, the pricing and output decisions of other
firms will affect the sales and profitability of firm X. The result of this is that firms are
sensitive to the pricing policies of other firms in the market, and continuous interaction
takes place.
Play
Each student acts as an individual firm. Each group of three students represents an
industry consisting of three firms in oligopolistic competition.
Study the profit possibilities resulting from alternative pricing policies. The range options
are High (H) or Low (L).
Record your individual firms option for the first month having regard to what other firms
in the market may do.
The decisions must be concealed until all in the group have been recorded.
When all the firms in the group have recorded a price, reveal your decisions and calculate
the monthly profit/loss of each firm as revealed by the profit outcome chart.
Objective
The objective of the game is to maximize profit. The winner of the game is the student
who most successfully achieved this objective.
NB Collusion is allowed but is NOT binding

Game 1
Fixed Costs
= $1,000
Variable Costs = $0.20
Price High (H) = $0.80
Price Low (L) = $0.60

Price
Combination
HHH
HHL

Price
Decisions
H
H

Firms Sales

Firms profit ($)

3,000
2000

800
200

HLL

L
H

6,000
1000

1,400
-400

LLL

L
L

5,000
4,000

1,000
600

Game 2
In the second game the original conditions apply, but a further price option,
very low (VL) is available.

Price
Combination
HHH
HHL
HLL
LLL
HHVL
HLVL

HVLVL
LLVL
LVLVL
VLVLVL

Price
Decisions
H
H
L
H
L
L
H
VL
H
L
VL

Firms Sales

Firms profit ($)

3,000
2000
6,000
1000
5,000
4,000
0
13,000
0
2,100
11,000

800
200
1,400
-400
1,000
600
-1000
1,600
-1,000
-160
1200

H
VL
L
VL
L
VL
VL

0
6,600
2,000
9,300
400
6,500
4500

-1000
320
-200
860
-840
300
-100

Game 1 - Scorecard
Month

Your Price
Decision

Market Price
Combination
(e.g. HHL)

Your Profit (+)

Or
Loss (-)

1
2
3
4
5
6
7
8
9
10
11
12
Year end

Total Profit =

Game 2 Scorecard
Month

Your Price
Decision

Market Price
Combination
(e.g. HHVL)

Your Profit (+)

Or
Loss (-)

1
2
3
4
5
6
7
8
9
10
11
12
Year end

Total Profit =