Unit 1 Economic Problems & Principles
GAME 2 Can We Trust Each Other?
STRATEGY 2 — Low Price
1. As a Team Develop a Strategy (15 min.) DEVELOP -- Take your time to discuss and decide on the pricing strategy you will make for your company. You MUST keep this decision confidential from ALL OTHER TEAMS be it an Apple or Samsung team.
Hint 1 -- Discuss what decision is most rational and what decision maximizes
your company's interests. You may need to discuss
what your company's interests actually are and articulate them clearly to make your decision.
Hint 2 -- Try and deconstruct your competitor. Discuss what decision is most likely from your competitor given your own
2. Test Your Strategy
(15 min.) REVEAL --- your team will be paired with another who is representing your
competitor. Join together and each group will write out the name of the
pricing strategy (either High Price or Low Price) they chose on a yellow ballot, fold it over and exchange
it with your competitor. Each company will open the other company's
paper at the same time and see how much each company will profit given
your strategy choices. DISCUSS --- which company won market share/profited and why each
company chose the strategy they did. Did non-price information factor into your decision? If so, what types of non-price information did you consider? Do you notice any patterns or
necessary assumptions in your strategy? How does cooperation and
competition play into this activity? Can you place the 4 profit scenarios in a decision matrix (Hint -- think quadrants)? Can you relate your outcome to any
economic principles you know about or we discussed in Game 1? What is the bottom line statement that Game 2 teaches us about price competition, self-interest, the common good, profit motive or individual behaviour in a competitive market?
3. Large Group Debrief -- MAKING LINKS to economic principles, assumptions, and the dominant economic models.
♦ The simulation can be described as a competitive approach to the condition of scarcity where self-interest went unchecked.
♦ A re-think of the simulation and the hypothetical "second chance" could be described as a collective approach to the condition
of scarcity where self-interest is restrained by cooperation, or "implicit collusion" (i.e., a High High vs. Low Low strategy ... think about the lessons of GAME 2 ... counteraction ... allow your game partners to profit too).
♦ Unrestrained self-interest coupled with distrust versus restrained, rational self-interest coupled with a trust in the agreed upon
♦ The schematics and all available resources represent a market.
♦ Distribution of wealth problematic / MAJORITY MARGINALIZATION evident.
♦ No formal system of exchange or currency.
♦ No formal price signals or demand and supply economics in operation (other than non-price signals of participant behaviour).
♦ An oversimplified economy in-play.
♦ Illegal markets in effect.
♦ Unrealistic moral hazard (when a party takes on more risk because someone else bears the cost of those risks ... it arises when
the parties have incomplete information about each other).
♦ Disproportionate # of participants idle (i.e., waste), even when specialization and economic interdependence operated.
♦ System of trade and specialization not "internationalized".
♦ No capacity to expand resource base by trade or exploration.
♦ Production / Consumption parity.
♦ No formal markers of status or wealth.
♦ Universal ability to participate / contribute.
♦ 3 economic questions predetermined (What, How, & For Whom to produce). Innovation deficit.
♦ The ordering/ranking of the 3 economic goals of Equity, Stability, & Efficiency not clear.
♦ Anti-competitive behaviour operated.
♦ High High strategy, implicit collusion, and counteraction quickly & easily transformed in a Low Low strategy ... the F*#k You Buddy Effect ...).
♦ Opportunity cost skewed.
A DOMINANT DESIGN of the Game prevailed (the design that all/most competitors emulate).
NETWORK EFFECTS in play ... the more competitors that use the dominant design the stronger the pay-off / incentive to use it by all competitors.
Listen to Jeff Rubin, former Chief Economist at CIBC, discuss the links between the economic growth imperative, oil and the 2008 global financial crisis (click on the audio on the left → minute 3:00 to 13:47).
Subprime Mortgage Market and Risk Backgrounder to Jeff Rubin's Audio Comments
Why did banks hold these toxic assets? Why were these subprime mortgages created in the first place?
In the early years of the new millennium, ever increasing housing prices were outstripping the increases in incomes. Fewer and fewer could afford new homes so banks needed a new way to entice buyers with ever more attractive mortgage conditions. These loans became known as NINJA loans (meaning, No Income, no Job, and no Assets).
The dangerous assumption these new subprime mortgages were predicated on was that housing prices always go up, thus, despite the low interest payments the banks (and others who bought the assets once they were turned into securities traded on a market) would collect on these mortgages, they assumed they could sell these houses financed by subprime mortgages for an attractive profit in the future.
Since banks must hold a reserve of funds available in cash relative to the size of their assets, banks used financial wizards to design ways to keep these subprime mortgages off their balance sheets. Anything that has a predictable steady stream of income can be packaged and sold as a security (called securitization), thus subprime mortgages were bundled into securities and sold to other banks and financial institutions as an investment. This kept these mortgages off the books, while the banks still enjoyed the monthly interest payments as a revenue stream.
Suddenly banks and other financial institutions that held billions in these toxic assets witnessed their value evaporate into huge losses. The financial crisis began to unfold as institutions "too big to fail" folded in bankruptcy, confidence in the markets faltered, and bailouts became reality.
TRUTH / FALLACY 2 → An Economic System Based on the Belief That We Are Rational, Self-Interested
Beings Maximizes Freedom
The fallacy of self-interest as rational, simplified human behaviour.
CENTRAL QUESTION IN THE TRAP DOCUMENTARY → Can stable economic order be created in a modern and complex world simply by unleashing individual freedom and self-interest?
The Trap Part 1 "F**k You Buddy" (2007 BBC Documentary)
The Free Market Claim → Individual freedom allows for self-directing individuals to maximize personal advantage by acting in their own self-interest according to market incentives and performance targets all the while balancing one's self-interest against all others.
STEPS TO STUDENT--LED DESCRIPTIVE FEEDBACK ON CAUSAL MODELS
TRUTH / FALLACY 3 → Economic Modelling is Values--Free