Duopoly Game

We are going to play a card game in which everybody will be randomly matched with someone else in the class. I will give each of you a pair of playing cards, one red card (hearts or diamonds) and one black card (clubs or spades). The numbers or faces on the cards do not matter, just the color. You will be asked to play one of these cards by holding it to your chest (so we can see that you have made your decision but not what that decision is).

You and your partner are competing firms operating in a market with only two firms -- a duopoly. You can choose to engage in price competition or you can cooperate and charge high prices. If you want to charge a low price then you should play the red card. If you want to charge a high price then you should play the black card.

Your profits are determined by the card that you play and by the card played by the person matched with you. There are three possible outcomes:

• Both firms play the black card (i.e., charge a high price), split the market and earn positive profits.
• Both firms play the red card (i.e., charge a low price), split the market and earn positive profits.
• One firm plays the red card (i.e., charges a low price) when the other firm plays a black card (i.e., charges a high price). This increases the market share of the firm with the low price and increases profits. The firm that plays the black card loses market share and loses profits.

All profits are hypothetical, except as noted below.

After you choose which card to play, hold it to your chest. We then tell you who you are matched with, and you can each reveal the card that you played. Record your earnings on the record sheet. Please note that in round 2 you will be matched with a different person, and payoffs will change. In round 3, you will be matched with a different person and payoffs change again, but you get to play with him/her in the remaining periods.

After we finish all periods, I will pick one person randomly and pay that person either (a) X% of his or her total profits, in cash (or an IOU that pays the 10-year t-note daily market interest rate) or (b) a fabulous prize. All earnings for everyone else are hypothetical.

Payoffs:

Source: Charles A. Holt and Monica Capra, "Classroom Games: A Prisoner's Dilemma" Journal of Economic Education, 31, 3, 229-236, Summer 2000.