A Classroom Entry and Exit Game of Supply with Price-Taking Firms

The author describes a classroom game demonstrating the process of adjustment to long-run equilibrium in a market consisting of price-taking firms. This game unites and extends key insights from several simpler games in a framework more consistent with the standard textbook model of a competitive industry. Because firms have increasing marginal costs and can offer multiple units for sale, they face a nontrivial supply decision. This is nested in an entry and exit game with price adjustment to capture long-run aspects of the standard model. Finally, by introducing heterogeneity in firms’ fixed costs, the game demonstrates how the price mechanism not only establishes the equilibrium number of firms and the output of each but also the identities of the most efficient sellers.