Teaching Market Structures with a Competitive Gum Market

This video is designed to help you structure and conduct the Teaching Market Structures with a Competitive Gum Market lesson. This is a condensed walkthrough of the lesson plan. The simulation portion of the activity is designed for a class size of around 20 people. For smaller classes, use only two students in groups two and three. Students participate in an activity that demonstrates a key economic idea.

The level of competition in an industry is a major determinant of product prices. There are active firms in each industry competing to sell their product to the teacher, who is acting as a consumer.

Materials needed. A stick of gum or other small item for each student. $4 in quarters and other coins.

The setup. Begin the lesson by asking your students these four questions.

How are prices determined? How does competition play a role in the markets? Do you think it matters how many sellers are selling the goods? Do you think sellers are mostly competing or mostly cooperating with each other?

Make sure each student has a piece of paper and the item and ask: Who would like to earn some money? And you will actually walk out of here with money today. I have money in my hand. Who wants to earn money?

Divide your students into four groups. Group one is a single student. Group two is three students who are allowed to talk amongst themselves. Group three is three students who are not allowed to talk to each other. Group four is everyone else. Explain the rules of the game.

Each of you, the students, has a valuable item for sale that I, the teacher, am interested in purchasing. I will only buy one item from each group. I am willing and able to pay up to $1 for each item, but I am looking for the best deal I can get. Basically, I will buy from the cheapest seller. You will have two minutes to think and talk. If you are in groups two and four, you should write down the minimum you would be willing to accept for your item.

After two minutes, I will buy from the person in each group who has the lowest bid. The rest of you will receive no money. Remember, you are only competing with the people in your group. If there is a tie, I will randomly choose which of the low bidders to buy from.

The result. After the two minutes have passed. Address each group, asking what they would have bid in this situation. Reveal the bids. Pay the winning bidder and take their gum. Record the bid on this sheet.

Group one. You're likely find that they put $1, emphasizing that person was the only seller in the market and you had no choice but to buy from them. Record the number of sellers, ability to communicate, and bidding results for each group in the table on slide two.

Group two. You might encounter these two common scenarios. Scenario one: They might all put down $1 and then split the earnings. Or scenario two: They might have all agreed on one price, but one or all the members tried to undercut the rest. It may be that the three students agreed to collude, but then when writing down the price one or more of them "cheated" and underbid to ensure they sold their item. For example, two students may have written a price of $1, but the third wrote a price of $0.75. This is not uncommon in cases of collusion in the actual economy.

Group three, unable to talk to each other, must act more competitively, and will likely have a range of prices, all under a dollar.

Group four, the largest and most competitive group, will have a range of prices, but most likely someone will have put down $0.01.

You'll fill out the chart with them. In an ideal situation, group one should have the highest price and group four should have the lowest price.

When reviewing the chart with students, you should highlight that a monopoly is a market for a good or service where there is only on supplier, or that is dominated by one supplier. The monopolist was probably the highest price because they did not have any competition when setting their price.

Our second group was an oligopoly that was allowed to communicate with each other, or a collusive oligopoly. An oligopoly is when the market is dominated by only a few firms. It is common in this simulation for one of the students to break the collusive agreement. Point out to students that this is part of what makes it so difficult for successful collusive behavior.

Group three, on the other hand, was a competitive oligopoly. In a competitive oligopoly, the market is still dominated by only a few firms, but since they were not allowed to communicate with each other about setting price, they had to behave more competitively, and this drove the price down.

Are you starting to see a pattern with competition? How does competition impact price?

Yes. You can show me with your thumbs. I see you all doing it.

Does it cause the price to go up or down? Competition makes the price fall, right? Because in order to make the sale, you have to make a trade-off, which is you have to lower the price.

Our fourth group represented a perfectly competitive market where the product is identical or nearly identical and there are many firms competing. Because there were so many firms competing to make the sale in this group, this price was the lowest in our simulation.

For more information or lesson plans, visit the teacher resource page on stlouisfed.org/education. For online resources, visit econlowdown.org. Econ Lowdown. Click. Teach. Engage.