Market Survival Market Structure Simulation

Transcription

1 Market Survival Market Structure Simulation The Profit Maximization Assumption: This is the assumption in business and economics that firms are motivated to maximize profit. Step #1: Distribution of Roles Students receive sealed envelopes with various materials inside. These envelopes indicate whether a student is i) a consumer, ii) a seller, or iii) an agent for the Competition Bureau. Two students are given cards indicating that they are wholesalers. They sell firms the goods and services that are resold to consumers. They also sell the firms the utilities and insurance that they need in order to stay in business Approximately four students are given an envelope that says they are a consumer. They are also provided $ in play money. Each round, they will go to the bank to get more money for the next round. (The teacher is the bank.) Twelve members of the class are given a card indicating that they are a firm and what good or service they are offering. They are also provided with a certain amount of money: 1 student is given $20.00 and told that they are a Beer Store monopoly. 2 students are given $20.00 and told that they are a cellular provider. 3 students are given $10.00 and told that they are a restaurant. 6 students are given $5.00 and told that they are a perfectly competitive farmer. These students then go to the input market (a role played by the teacher) to buy their inputs. There they will find: Product Cards Price Basket of fruits and vegetables $10.00 Restaurant (McDonalds, Starbucks, Pizza Pizza) $15.00 Cellphone Service (Rogers, Bell) $20.00 Beer $20.00 The firms then return to their seats, and consider what price they will charge consumers for their good or service. The students acting as firms will displays their product to the market, right beside a laptop screen displaying their price.

2 Step #2: Selling Products in the Consumer Market Three rounds of sales will ensue. During each round, each student displays his product in the market, right beside a laptop screen displaying the price. All students (sellers) can plainly see the price that the other businesses are offering. During each round, the students playing consumers will go around the class with $ to spend. They must buy one of each of the four goods and services offered for sale during each round. Once they have done this, they return to their homes. During each round, firms cannot run out of inventory. If they sell their good or service, they must go to the wholesaler to replace their inventory. During each round, firms incur $5.00 in overhead costs (utilities, insurance, etc.). Firms cannot violate the Competition Act. Students acting as undercover Competition Bureau Agents will monitor the market to ensure that no firm engages in price collusion (several firms colluding to set their prices) or predatory pricing (setting their prices below their wholesale price in order to drive competitors out of business). Goal of the consumers: o The consumers must try to buy one of each product during each of the three rounds of play. o o The consumers must try to use as little of their money as possible. The consumer who buys three of each goods/services for as little money as possible, wins the Best Consumer Award. Goal of the firms: o Each firm must try to survive throughout the entire three rounds of play, and survival is ensured if each business manages to cover their overhead costs during each of the three rounds, while also ending up with enough money to replace any sold goods or services. o The firm that manages to both survive, and increase its total assets of cash and inventory, wins the Best Producer Award. Step #3: Debriefing Students will discuss the following points: 1. Which products represented which market structure (perfect competition, monopolistic competition, oligopoly, and monopoly)? 2. How did price become determined for each market structure? Why? 3. What different strategies did some students contemplate in order to win?

3 Type of Business: Restaurant Operation Business Name: McDonald s Type of Business: Restaurant Operation Business Name: Starbucks Type of Business: Restaurant Operation Business Name: Pizza Pizza

4 Type of Business: Cellular Service Provider Business Name: Bell Cellular Type of Business: Cellular Service Provider Business Name: Rogers Cellular Type of Business: Beer Retail Operation Business Name: The Beer Store

5 Undercover Agent for the Competition Bureau You are an undercover agent for the Competition Bureau, and you enforce the Competition Act. Canada's Competition Act prohibits cartel activity in its various forms. A cartel is a formal or informal group of otherwise independent businesses whose concerted goal is to lessen or prevent competition among its participants. Typically, cartel members enter into an agreement or arrangement to engage in one or more anti-competitive activities, such as to: fix prices, allocate markets or customers, limit production or supply, or rig bids (arrange to not bid on a particular contract, leaving only one bidder). Cartels are harmful because they typically result in higher prices for consumers and reduce the incentive for companies to cut costs and be innovative. For that reason, cartel behaviour is unlawful under the competition laws of most countries. Section 45 is the cornerstone cartel provision of the Competition Act. It makes it a criminal offence when two or more competitors or potential competitors: conspire, agree or arrange to fix prices, allocate customers or markets, or restrict output of a product. This offence is known as a conspiracy, and is punishable by a fine of up to $25 million, or imprisonment for a term of up to 14 years, or both. If you find any firms engaging in this type of behaviour, you must: show the suspect your agent identification, state that the suspect is being charged under Section 45 of the Competition Act, identify the specific behaviour that lead to the charge, and issue an Appearance Notice to the suspect and check off any boxes that apply.

6 Competition Bureau Field Agent Badge No. 8723H Appearance Notice Charge: Section 45 of the Competition Act Date: Business: Business Representative: The above named parties are charged for (check all that apply): q fixing prices q allocating markets or customers q limiting production or supply q rigging bids Appearance Notice Charge: Section 45 of the Competition Act Date: Business: Business Representative: The above named parties are charged for (check all that apply): q fixing prices q allocating markets or customers q limiting production or supply q rigging bids

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