Pricing Strategy Under Monopoly Conditions: An Experiment for the Classroom

Abstract

This classroom experiment allows students to explore pricing strategies available to the monopolist. Students are given full information about their costs but know nothing about demand except that it is simulated by the instructor. They submit their price-asked and quantity-offered records on one day and receive the quantity-sold response from the instructor on the next day, continuing this routine until they discover the profit-maximizing price and quantity. One of the objectives is to demonstrate that search strategies based on economic principles (MC=MR) can be more efficient than trial-and-error.

Monopoly Profit Maximization: Success and Economic Principles

“…We use the basic framework of Nelson and Beil [21] in our experiment but provide some relevant and important enhancements. Their article and ours demonstrate to students the effectiveness of the economic principle of an optimal profit maximizing monopoly (MC = MR approach).…”

“…Underproduction and overproduction are possible and unsold units cannot be carried over as inventory. Also similar to the experiment of Nelson and Beil [21] is that bonus points are awarded for successful playing and based on profits.…”

“…The classroom experiment described in this paper is based on a game developed by Nelson and Beil [21], which demonstrates to undergraduate economic students what it is like to be a monopolist and enables them to investigate and consider pricing strategies first-hand.…”

“…The paper begins with theoretical background on the basic concept and learning goals. We explain the experimental design and the similarities, differences and enhancements with respect to Nelson and Beil [21]. To demonstrate the feasibility of concepts and to provide teachers with examples of results, we show the results of our classroom experiment, which was conducted in 2012 during a seminar at the University of Kassel, Germany.…”

“It's for Teaching, not Believing”: Comments on Teaching, Learning, and Problem Solving Through Economic Experiments

“…Market environments of graduated complexity could range from a simple monopoly setting with a single seller facing a computersimulated buyer population with a fixed demand curve (Nelson and Beil 1994), to an oligopoly setting with two to four sellers (Nelson and Beil 1995), to a market with four buyers and four sellers, each with multiple units, trading in either forward or spot markets with random supply and demand shocks (Menkhaus et al). Figure 1 is adapted from Davis and Holt to illustrate these relationships by positioning various research approaches in the two dimensions of institutional and environmental complexity.…”