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Using Context in Classroom Experiments: A Public Goods Example

John C. Bernard and Daria J. Bernard
International Review of Economics Education, volume 4, issue 2 (2005), pp. 9-22

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Abstract

The public good experiment has been used as both a teaching and research tool. In almost all instances it has been designed without reference to a specific public good or real-world application. This is done so that participants' feelings or experiences involving the public good do not affect their behaviour. In a teaching environment, however, the addition of context can further student understanding of the public good experiment and its applications to real-world issues. This paper shows how two farm marketing problems can be illustrated through the use of the public good experiment by adding context. The experiment also incorporates the idea of a communication period, with students being encouraged to find a solution to free riding as a lesson in the difficulties inherent with collusive agreements.

JEL Classification: A22

Introduction

This paper presents two examples of farm marketing problems, controlling supply and funding generic advertising, in a public good experiment framework that additionally demonstrates the inherent difficulties with forming collusive agreements. Specifically, the paper has two goals. The first is to show the ease and effectiveness with which farm marketing problems can be presented through a public good experiment. This will hopefully inspire others to design more context focused experiments as part of their teaching. A second goal is to show that allowing for communication and possible participant monitoring of decisions extends the traditional public good experiment to incorporate the topic of collusion and its associated problems.

The use of experiments as teaching tools in the classroom has been steadily increasing over the past two decades, particularly as the pedagogical advantages have become more apparent. The primary of these is their ability to get the students to be actively involved in the class and the learning process itself. Becker (2000) especially noted this benefit in suggesting that experiments should be one of the main pedagogies to improve the future teaching of economics. Bergstrom and Miller (2000) also note experiments' abilities to get students to consider questions on their own (before being given answers), take advantage of their curiosity, and get them thinking of things from an economic viewpoint.

As will be related here, the addition of context can increase substantially the pedagogical benefits of experiments, in this case involving public goods, by expanding the lesson and discussion afterwards. Further, adding interaction that may lead to a deviation from anonymity can also increase the scope of benefits to the students.Unfortunately, the public good experiment, in common with most economic experiments used in teaching, is typically used without context to a specific problem and preserves participant anonymity in the decision-making process (Holt and Laury, 1997; Leuthold, 1987, 1993; Marwell and Ames, 1981; Nelson and Beil, Jr, 1994; Williams and Walker, 1993).

While the details of the public good problem can be found in any good introductory economics textbook, a reminder is useful to understanding it better in the context of farm marketing problems. A public good is one for which consumption is non-rival, meaning that consumption by one does not preclude consumption by others, and non-excludable, meaning that it would be impossible or extremely costly to prevent others from enjoying the good. The difficulty with such goods is that they encourage what is known as free riding. People know they can get the benefits without contributing towards the public good, and therefore the socially optimum amount of the good is difficult to provide.

Farmers face problems that easily match the requirements of the public good framework. They must deal with marketing problems unlike those at other levels in the food system due to several nearly perfectly competitive conditions. In particular, the public good aspect stems from their large number and the homogeneous nature of the products they produce. This makes it difficult for any to stand apart and benefit from marketing activities without others also benefiting from their efforts. For instance, an apple farmer engaging in advertising could increase demand for apples, but all apple farmers would benefit from the increase. Similarly, the farmer could choose to limit supply in the hope of driving up prices, but again, all would share in the results. In both of these instances, the nonexcludability aspect of the public good problem is readily apparent. While the socially optimal outcome in this context would have the entire group of farmers of some commodity cooperating, this public good aspect makes that goal difficult.

To allow opportunities to organise to overcome the public good difficulties, a communication period is added to the experiment. This occurs halfway through the experiment, with students given the opportunity to discuss amongst themselves the results of the earlier rounds. During this time, students are also encouraged to discuss decision strategies for the remaining rounds of the experiment.

The idea of a communication period has been used in several forms as a variation on the traditional design (Hoaas and Drouillard, 1993; Hoaas and Madigan, 1996; Holt and Laury, 1997; Nelson and Beil, Jr, 1994; Netusil, 2000). However, as suggested by Nelson and Beil, Jr (1994), the typical design has been to keep the voting or decision-making process anonymous after any communication periods. Here, student solutions to free riding were allowed to include some degree of monitoring, removing the anonymity constraint. In this setup, the extent to which participants free ride will be affected by the degree to which their decisions are monitored. This allows for the illustration of both the difficulties and possible methods of forming binding collusive agreements.

Experiment framework

The experiment has been designed for and conducted in both an introductory microeconomics course (prior to explaining public goods) and an upper-level food marketing course. Enrolment in the courses typically ranged from the high teens to mid-twenties, making it easy enough to conduct the experiment by hand, with the instructor using a computer to enter student responses and calculate results. The experiment had been conducted with a class size of 30 students; however, due to time constraints, it would be difficult to use this experiment in classes larger than 30 students.

The experiment design consisted of multiple rounds of a one-shot game to be conducted as part of either a 50- or 75-minute class, allowing time before to explain the instructions and time after to present and discuss the results. The recommended minimum number of rounds is four, which can be completed in approximately 20 minutes. More rounds can be completed, however, during a 50- minute class, with the discussion following the experiment probably being carried over to the next class meeting. Materials needed for the experiment consisted of several handouts and a computer with a spreadsheet program for entering the data and calculating results each round. The handouts, provided at the end of this section, consisted of an instruction sheet for the context chosen (either supply control or funding generic advertising), a student decision sheet for each round, and a student profit calculation sheet.

One continuing issue in classroom experiments has been deciding on the incentive or reward structure to use (Holt, 1999; Stodder, 1998). Some options have been to give extra credit, grades or cash payments, but this experiment has been conducted without any reward structure. While the aforementioned methods may be useful for other experiments, no such incentive has proven necessary here for results to come out as anticipated.The primary benefit in not having a reward structure is that it speeds the processing of student decisions in a manual setting, as the order of entry into a spreadsheet does not matter.

Although no monetary, or other, incentive has been used when conducting this experiment, real payoffs can be incorporated into the experiment design. It is recommended that the following conversion scale be used: one experiment US dollar profit earned is equal to 1/100 real payoff unit. The payoff unit may be actual dollars or possibly extra credit points. The conversion scale was calculated based on running four rounds of the experiment. If every student withheld all 50 acres for all four rounds, then each student's total profit earned would be $400. Using the conversion of 1 experiment dollar equals 1/100 payoff unit, the student would earn a maximum of $4 or 4 extra credit points.

Supply control: instructions

In today's experiment we will examine the potential for farmers to exercise control over commodity prices. Everybody is in the same group of farmers, planting the identical commodity. There will be four rounds representing planting seasons, and at the start of each round, each of you has already planted 100 acres and has 50 acres left that you need to decide what to do with. For each acre of your remaining 50 that you plant, you will earn $1. However, you know that if acreage is withheld, supply will be lower and the price of the commodity will increase. For every acre withheld from production, the price will increase enough so that $2 are added to the entire group's income. In other words, the value of a withheld acre is double that of a planted acre.

Since the commodity is identical for everyone, any extra income from withheld acres is divided equally among every member of the group, regardless of whether or not they withheld any acreage. So, no matter how many acres you withhold, 18, 50 or none, you will still get an equal share. The money you earn in each round is equal to $1 for each of your remaining 50 acres that you planted plus your share of the income increase from withheld acres.

Generic advertising: instructions

In today's experiment we will examine the potential for farmers to fund generic advertising programs. Everybody is in the same group of farmers, planting the identical commodity. There will be four rounds representing years, and at the start of each round, each of you has already allocated $100 of your budget to cover the operations of the farm and has $50 left that you need to decide what to do with. For each dollar of your remaining $50 that you save, you will earn $1. However, you know that if a generic advertising campaign is funded, demand will be higher and the price of the commodity will increase. For every dollar spent on generic advertising, the price will increase enough so that $2 are added to the entire group's income. In other words, the value of a dollar spent on advertising is double a saved dollar.

Since the commodity is identical for everyone, any extra income from generic advertising is divided equally among every member of the group, regardless of whether or not they spent any money towards the campaign. So, no matter how many dollars you saved, $18, $50 or none, you will still get an equal share. The money you earn in each round is equal to $1 for each of your remaining $50 that you save plus your share of the income increase from the generic advertising campaign.

Sample student decision sheet (supply control version)

Round 1

I have decided to plant ______ of my 50 remaining acres.

Student profit calculation sheet (supply control version)

Round Extra acres planted Profits from acres Profits from group Total profits
1
2
3
4
Total

Running the experiment

At the beginning of class, introduce the idea that farmers will be faced with several marketing problems and will find themselves in a difficult situation in the food marketing system. Most of the problems stem from the nature of their products. To help students appreciate this, first ask them about their preferences for different brands of some food product at the retail level. This will generate many opinions. Next, ask them if they care which farms the ingredients initially came from. Students will not have considered this and will find the question puzzling. Simply posing the question is enough to get across the notion that most farm products are viewed as homogeneous, but it does not fully explain the marketing problems of farmers.

Next ask students what farmers could do to have more market power. Students will typically respond that farmers need to act together, perhaps to try and bargain as a unit with processors or to exert control over supply. Another option suggested to help farmers might be to increase demand, with advertising the obvious solution. Once the students agree that acting together is the best strategy for the farmers, the final question to ask them is how easy that is to do. That question can be left unanswered at the start of the experiment.

Continue by handing out the instructions for the context chosen, and the profit calculation and decision sheets, examples of which have been previously included. The general steps for running the experiment are identical, regardless of which context is chosen. Note that in both versions, the instructions stress the context and do not explicitly mention the public good problem. Go over the instructions carefully after allowing students enough time to read them.

After answering any questions, have them make their decisions for the first round, fold their papers and pass them forward. Enter the numbers into your spreadsheet and report back to the students the level of cooperation (for example, the percentage of acres withheld from production) and the extra income each person receives as a result. As given in the instructions, the calculation of the extra income that each person receives is determined by doubling the total acres withheld, or funds contributed, and distributing that amount equally regardless of the amount of individual contributions. Optionally, the high profit and low profit for each round could also be reported.

When the experiment is halfway through, after two rounds in the suggested setting, stop the group. At this point, the class should be encouraged to discuss what has been happening so far.(note 1) Some students will be anxious to talk, with some chastising their classmates for not cooperating. The term 'free riding' may come up, or perhaps an allegation that some are 'cheating'. The free riders may be surprised that anyone is acting in the interest of the group as a whole, and express this opinion. Once this initial discussion has settled down, it is time to bring the students back to focus on the problem. Remind them that they are all farmers facing the same marketing problem and need to decide how to deal with the issue at hand.

As part of the discussion, students will usually determine the socially optimal strategy whereby the group as a whole would be better off if all of them cooperated. The problem that is encountered in the discussion is how to get 100% agreement and assurance that the strategy will be followed. During the discussion, leave it open for them to see if they can convince each other to do so, or if they can create a method to get everyone to cooperate (for example, one person completes the decision sheets for everyone; switching seats and completing the decision sheet for someone else; one person is assigned to monitor and report what others are entering on their decision sheets). The only limit placed here was that physical threats were not allowed. The instructor should stay out of the discussion as much as possible and allow the class to be creative. Discussion may last approximately 5 minutes but will vary with the class dynamics.

When the class has reached some type of consensus, including potentially no agreement, have them complete and submit their decisions for the third round. Depending on the agreement and results of the third round, some verbal response from the students may be inevitable. However, discussion again after the third round is optional. The experiment has typically been performed without another chance to organise, but depending on the individual class dynamics, another attempt may be useful to learning. Finally, collect and process decisions for the fourth round.

Expected results

This experiment has been run a number of times over the past 5 years, and results have been highly consistent. It can be expected that students will withhold acres or contribute advertising funds at the level of 40–60% of their extra acres or budget funds in the first round. This result dates back to Marwell and Ames (1981) and has been quite robust. In general, this total will decrease in the second round, although not substantially. In some instances, the percentages will increase, although not substantially, in the second round.

The third round outcome will depend on the results from the class discussion. For an extreme, on the first running of this experiment, two students were adamant about not trusting others to cooperate and no agreement was reached. Normally, there will be an agreement for all students to cooperate, with some expressing various degrees of confidence that it will succeed. The class may also settle on a method that guarantees full cooperation. The most common way to guarantee compliance was to have different students fill out each other's decision sheets. The second most common method was to have an appointed monitor watch others fill out their sheets. As no threats are allowed, however, failure to cooperate while being watched can only mean being reported to the rest of the class, still allowing deviation from the agreement.

If the class agrees on a method that guarantees compliance then the remaining round results are set. In the absence of such an agreement, cooperation will increase, but typically will not reach 100%.(note 2) The amount of cooperation can vary substantially depending on the size, dynamics and composition of the class. It will not be uncommon to have cooperation in the 90% range, while around 60–70% is also possible. In either event, students will be disappointed, and this will affect the results in the last round.Contributions in the final round will be the lowest, perhaps by a large margin.

Post-experiment discussion

As noted by Hoaas and Drouillard (1993), the classroom discussion afterwards is crucial to achieving the full pedagogical benefit of the experiment. The best way to start the post-experiment discussion is by showing the results graphically. As an example, Figure 1 shows the results from two of the most recent sessions of the experiment, both in the supply control context. Both class results, for the most part, follow the typical pattern, although for Class 1, round 3 withholding of acreage was lower than expected. This was the result of class concerns over the sincerity of a vocal classmate. For Class 2, although the round 3 withholding was higher than in Class 1, it reflects a lack of method to guarantee full withholding even though the class agreed to fully withhold.

In the event that no guaranteed method of cooperation is attained, the primary point of interest is the round 3 results. Students in upper-level courses might not be surprised at the lack of full cooperation, since they may have remembered the public goods and free riding problems. The important aspect here is to bring the context of the farmers' problems back into focus. Compare the difficulty of getting a relatively small group of classmates, not faced with any financial incentives, to cooperate with that of a perhaps large and diverse group of farmers. Also point out that in the experiment all farmers of the particular commodity were sitting together whereas in reality farmers are located in many regions as well as in other countries.

At this point in the discussion, it is useful to ask students if they can give a real world example of a group who attempt to restrict output and thus influence price in the market. In most cases, students will respond with OPEC.(note 3) Although OPEC is quite often in the news for setting output levels, the group is not without its problems. With the experience of the experiment, ask students what problems OPEC faces when attempting to set output levels for its members. By identifying why it is so difficult to achieve cooperation, students are in fact identifying the elements needed for successful cooperation.

The two main elements of successful collusive agreements are (1) the ability to detect cheating and (2) the ability to enforce the agreement. In the event that students all agreed to contribute 100% but no monitoring mechanism was in place, it would be very difficult for those in the group to detect who among them cheated if in fact the group did not achieve full cooperation. Depending on the method of monitoring, it would be possible to detect cheaters. However, even in the event that the group detected any cheaters, does it have any ability to punish those who cheated and enforce the terms of the agreement? These two elements together are thus important to be able to achieve a successful collusive agreement, otherwise members of the group will always face the incentive to cheat on the agreement. This is also a good moment to see if the context would make a difference to the students. Ask if their contributions would have been different, and how, if they had been instructed that they were members of OPEC instead of a group of farmers.

Figure 1. Proportion of acreage withheld per round for two typical experiment sessions

Would they be more or less willing to cooperate fully as a member of OPEC rather than as an individual farmer? Do they feel differently about one group cooperating than the other? These questions will expand their views of both groups and reveal similarities that they would not have noticed. This can extend to comparisons with any other examples that the class proposes.

Another major lesson can be seen in the drastic decrease in cooperation in withholding acres in the final round. It can usually be assumed that the class would not have reached levels that low so quickly if it had not been for the break and the discussion on organising at the midway point. This enforces how quickly and drastically a non-binding agreement can deteriorate. It can show how even a single free-riding farmer could lead to a rapid unravelling of any voluntary cooperation programme.

This situation is of particular interest in the context of funding generic advertising, which is currently handled in the USA through mandatory check-off programmes. These programmes engage in research and promotion and are authorised by state and/or federal law. Specific industry members, such as producers, importers and handlers, pay for the programmes through mandatory assessments. Several recent US court cases have challenged the constitutionality of these programmes, leaving their future in doubt.

The best-known US commodity check-off programmes are beef, pork and milk.(note 4) As an example, the beef check-off programme was legislated in the Beef Promotion and Research Act and Order of 1985. The check-off assesses $1 per head on the sale of live domestic and imported cattle, in addition to a comparable assessment on imported beef and beef products. States retain up to 50 cents on the dollar and forward the other 50 cents per head to the Cattlemen's Beef Promotion and Research Board, which administers the national check-off programme, subject to US Department of Agriculture approval. The check-off assessment became mandatory when the programme was approved by 79% of producers in a 1988 referendum vote. Check-off revenues may be used for promotion, education and research programmes to improve the marketing climate for beef (Texas and Southwestern Cattle Raisers Association, 2005).

If current US mandatory check-off programmes were to be removed, it is likely that a voluntary system would be put in their place, with farmers having discussions and making agreements similar to those that the class held at the experiment's midpoint. Some farmers will not even wish to make any agreements – a situation again probably mirrored by the students. Continuing a voluntary system after a guaranteed system, and the inevitable withholding of funds by some, may have a similar psychological effect to the response to round 3 results. In this sense, the experiment clearly shows how farm marketing problems could become more serious. In this context, see if the lesson has altered any student's views on mandatory programs.

Continuing with the discussion of the experiment, results can also be displayed as in Table 1. This gives additional information on individual actions while remaining anonymous. Examining the high and low profits by round reveals that at least one person fully participated and at least one person did not participate at all each time in both of the two classes. This is a typical result and an opportunity for further discussion on differences in cooperation levels. Remember, of course, that there is no way to know if it is consistently the same person.

Table 1 Acreage withholding and student profits for two typical experiment sessions

Round 1 Round 2 Round 3 Round 4
Share of acreage withheld (%)
Class 1 58.57 45.52 69.81 22.67
Class 2 50.53 29.33 79.33 26.67
Income from withheld acres ($)
Class 1 1230.00 956.00 1466.00 476.00
Class 2 758.00 440.00 1190.00 400.00
Highest student profit ($)
Class 1 108.57 95.52 119.81 72.67
Class 2 100.53 79.33 129.33 76.67
Lowest student profit ($)
Class 1 58.57 45.52 69.81 22.67
Class 2 50.53 29.33 79.33 26.67

To end the discussion, return to the question of how easy it would be for farmers to act together to help overcome some of their marketing problems. The difficulties will now be clear to the students. Review the special characteristics of farm markets that leave them in this situation. If the terms had somehow not come up, be sure to relate to the public good problem and free riding, and perhaps provide other examples where similar problems occur.

Conclusion

In using experiments, care has often been taken to remove context to prevent subjects' feelings towards a specific issue from influencing their behaviour. Following such considerations in the classroom may reduce the scope of lessons and the discussion possible afterwards, and hinder the use of experiments in classes, especially beyond the introductory level. The pair of farm marketing problem examples given here are just two possibilities for covering specific lessons with context added to a public good experiment. Numerous other lessons are possible.(note 5) It is hoped that in the future many other uses will be designed for the public good experiment and similar experiments. This should not only increase the usage of experiments as important teaching tools in the classroom, but also increase the pedagogical benefits of those experiments.

Additionally, the use of a communication period halfway through the experiment allowed students an opportunity to discuss the previous round results, optimal strategy and ways to achieve this result. Solutions to the free-riding problem may include monitoring, which could guarantee 100% cooperation in the following rounds. This possibility further extended the traditional public good experiment and provided opportunities for additional lessons on the topic of collusion.

As a last note, although all the parts of the lessons above could have been achieved through a standard lecture format, it is believed that the use of the experiment yielded several pedagogical benefits. The main advantage is in getting the students involved and interested in the topic. The context helps here by allowing students easily to consider and grasp real-world examples. Often, even students who typically do not contribute in class will become active participants in discussions. This can have a strong carry-over effect where students become more motivated about class material as a whole. Students who take part in the experiment rarely miss exam questions on public goods or free riding, suggesting that the engagement leads to good retention of these topics. Finally, it has been evident that students enjoy the experience and look forward to later class experiments.

References

Becker, W. E. (2000) 'Teaching economics in the 21st century', Journal of Economic Perspectives, vol. 14, no. 1, pp. 109–19.

Bergstrom, T. C. and Miller, J. H. (2000) Experiments with Economic Principles: Microeconomics, 2nd edn, New York: McGraw-Hill.

Hoaas, D. J. and Drouillard, L. R. (1993) 'Variations on the public goods experiment', Classroom Expernomics, vol. 2, no. 1, pp. 2–3; online at http://www.marietta.edu/~delemeeg/expernom/s93.html#hoaas1 .

Hoaas, D. J. and Madigan, L. J. (1996) 'The alleviation of free-riding: a research program progress report', Classroom Expernomics, vol. 5, no. 2, pp. 1–5; online at http://www.marietta.edu/~delemeeg/expernom/f96.html#hoaas [last accessed 8 June 2005].

Holt, C. A. (1999) 'Teaching economics with classroom experiments', Southern Economic Journal, vol. 65, no. 1, pp. 603–10.

Holt, C. A. and Laury, S. K. (1997) 'Classroom games: voluntary provision of a public good', Journal of Economic Perspectives, vol. 11, no. 4, pp. 209–15.

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Leuthold, J. H. (1993) 'A free rider experiment for the large class', Journal of Economic Education, vol. 24, no. 4, pp. 353–62.

Marwell, G. and Ames, R. E. (1981) 'Economists free ride: does anyone else? Experiments on the provision of public goods, IV', Journal of Public Economics, vol. 15, no. 6, pp. 295–310.

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Stodder, J. (1998) 'Experimental moralities: ethics in classroom experiments', Journal of Economic Education, vol. 29, no. 2, pp. 127–38.

Texas and Southwestern Cattle Raisers Association (2005) 'Supreme Court rules beef checkoff constitutional', TSCRA-22-2005; online at http://www.texascattleraisers.org/newsDesk/Supreme_Court_checkoff_TSCRA_2005_Texas_cattle.asp [last accessed 8 June 2005].

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Notes

[1] We learned this idea from William Schulze, whose help we gratefully acknowledge.

[2] In personal experiences conducting the public goods experiment involving approximately 1000 students there has only been one instance of a group reaching 100% cooperation after a discussion without some method of guarantee. Again, though, different groups have been shown to behave differently in public good experiments.

[3] Information about the Organisation of Petroleum Exporting Countries (OPEC) can be found online at: http://www.opec.org/home [last accessed 9 June 2005].

[4] Information about farm marketing boards and generic commodity advertising can be found at the following commodity websites: beef – http://www.beef.org [last accessed 9 June 2005] or http://www.beefitswhatsfordinner.com [last accessed 9 June 2005]; pork – http://www.porkboard.org [last accessed 9 June 2005] or http://www.otherwhitemeat.com [last accessed 9 June 2005]; milk – http://www.ams.usda.gov/dairy/dairyrp.htm [last accessed 9 June 2005] or http://www.whymilk.com [last accessed 9 June 2005].

[5] While not yet tested in the classroom, a public good experiment has been designed for a technology course to explain why patents are necessary for innovation. In each round, participants may either keep money as profits or invest in research and development. Without any protection system, all benefits of research go to all the firms in the industry.

Contact details

John C. Bernard (corresponding author)
Associate Professor
229 Townsend Hall
Department of Food and Resource Economics
University of Delaware
Newark, DE 19716
USA

Tel: (302) 831 1380
Email: jbernard@udel.edu

Daria J. Bernard
Assistant Professor
Department of Business Administration
Wesley College
120 North State Street
Dover, DE 19901
USA

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