Oligopoly in Action

Finding a way to illustrate to teenagers in the summertime how oligopolies work may seem a daunting task. But James “Hutch” Hutchison is up to it. In economics, oligopoly is a type of market, such as the airplane industry, dominated by a few major competitors—in this case, Boeing and Airbus. Reminding students of Adam Smith’s metaphor of the invisible hand (the theory that every one operates out of self-interest, and that this benefits the community as a whole), Hutchison lays the groundwork to convey that companies in oligopolies have to take both their own self-interest and their competitor’s interest into account, eventually finding a way to compete that benefits them both, using a little game theory.

With a purple marker, he creates a two-row, two-column graph—a rectangle bisected across and down. Hutchison then names the axes: “you” and “random other person.” By plotting two kids’ hypothetical choices to either “go big” or “play it safe,” he generates a score for each when matched with a classmate (think paper, scissor, rock) If you go big but your partner plays it safe, you get zero and your partner gets 22 points. If both go big, both earn 18 points. If both play it safe, both earn 14 points. Each student silently writes either “go big” or “play it safe” on an index card and tucks it into a bag.

Dmitry writes, “go big.” Jackson writes, “play it safe.” So Dmitry earns a zero and Jackson earns 22 points. Hutchison pulls out each student’s index card, reads the strategy, and pairs it with another student’s, earning a score from zero to 22.

Next, students are allowed to strategize together before making their choices, but write their decision in private. They say they will all “go big,” thus earning a decent score (18), but not the powerhouse score they could earn if they “play it safe” and others “go big” (22). Suspense builds as Hutchison pulls out the cards one at a time. Does everyone “go big” as they said they would? Of course not! Some “play it safe,” burning their comrades and raking in the big play money. Hutchison notes that this is exactly what happens in an oligopoly: “You are not the only one who decides how well you do,” he says. Cartels such as OPEC decide to band together to “go big” but there’s incentive to cheat. Eventually, all parties are tired of getting burned, so they “play it safe” for decent, but not blockbuster, returns--a state called Nash equilibrium, after John Nash, the mathematician who shared a Nobel prize in economics for pioneering the theory, and who was the subject of the film, A Beautiful Mind.

After the game ends, Jackson, with 44 points, asks hopefully, “Does that really count toward our grade?”

“No,” replies Hutchison with a smile. “I made that up.”

During the school year, James Hutchison teaches AP economics at Boston College High School, where his students averaged 4.59 out of 5 on the AP Microeconomics test and 4.44 on the AP Macroeconomics test (the national averages are 2.8 and 3.1, respectively). The class he teaches at NMH is the equivalent of Introduction to Macroeconomics and Introduction to Microeconomics at the college level.