Brigid Quigley

Econ 12

Extra Credit Story Assignment

Tic and Tac Learn a Valuable Lesson

 

            Tic and Tac have been best friends their entire lives.  They were born only one day apart from each other in the same small town of Plushland, Montana.  Their friendship began in first grade, soon after Tic’s family bought the large cottage next to Tac’s.  Now neighbors, the boys began to play together each day after school.  For hours and hours they would pretend to be pirates or great explorers or medieval knights in the acres of land that surrounded their two houses.  While they certainly enjoyed these games, their very favorite pastime was chasing the geese that lived in the lake between the two families’ properties.  They loved to see the birds flap their beautiful wings when they were caught and pet the extraordinary, soft feathers that covered their bodies.  Over time, even the geese began to enjoy this game, creating a special kind of friendship between the boys and the birds.

            As all kids do, the boys grew up.  While their friendship with each other grew stronger and stronger with time, they eventually grew tired of their childhood game of chase and forgot about the geese.  They new the geese were special, a unique breed that could be found only their lake, but as the boys became more interested in girls, school, and basketball, the birds became less and less important in their lives. 

Tic and Tac graduated high school and began thinking about the future.  Although neither boy could imagine his future without the other, they decided that each needed to decide independently of the other what the best path was for him.  Needing some time to reflect, Tic decided to go lay in the sun in his backyard.  Tac also wanted some to relax and think.  He decided to lie down on his bed and let his mind wander. 

            Reclining peacefully in the sun outside, Tic looked around him and began thinking about how much time he and Tac had spent playing here.  He started thinking about the geese and how much fun they had had with them.  It was then that he thought of a brilliant idea.  If there was one thing that could make him even more relaxed and comfortable lounging around on such a beautiful day, it was a pillow-a wondrously soft and fluffy place to rest his head.  The feathers of the special geese living in the pond behind his house for would provide the perfect material just such pillow.

            Amazingly, back in his room Tic had come up with the exact same idea.  Lying on his bed, thinking about how much needed a new pillow, he heard the geese begin to quack and squabble outside.  “What an ingenuous idea!” he thought.  “I will start a new company, a company that makes pillows made from the softest feathers around.”  Excited, he got up to go tell Tic he had made a plan for his future.  Walking out the door, he ran into Tic, who was already on his way in to tell Tac his own plan.

            Sharing their identical, brilliant plans, the boys laughed and smiled at how much they thought alike.  Before long, however, they got into a heated dispute.  Both boys wanted to be the owner of the new pillow company and run the firm as he saw fit.  Neither was willing to give up any control of the proposed company.  Thinking of the best way to resolve their conflict, Tic and Tac decided that the best option was to start two new pillowing-making companies, one which would belong to Tic and one which would belong to Tac.  They would produce the same luxurious pillows, but at two independently run companies.

            Ten years later, Tic and Tac both had established successful pillow-making firms.  They operated within their own market, a duopoly, as no one else had access to the heavenly feathers of their special geese.  Working together to establish how many pillows to produce between the two firms and how much to charge for each one, the boys had established a cartel and each made a sizeable profit.  They had seen that their profits were maximized when 6000 pillows were made and sold for $60 each.  A price of $60 was higher than the marginal cost to produce each pillow, accounting for the profits that were made by the boys.  To ensure that only 6000 pillows would be produced and maximization of profits would occur, Tic and Tac had been operating their respective companies for the past five years under the agreement that each would only produce 3000 pillows.  Such an agreement had worked well…until Tac got greedy.

            Tac decided that because his family had lived near the lake for a longer period of time he had a bigger claim on the geese and their feathers and deserved a bigger share of the market.  Thinking this, he increased his company’s pillow production to 3500 breaking the agreement with Tic that had kept pillow production at the profit maximizing quantity and price.  With a greater number of pillows in the market, their price was lowered to $50 per pillow.  Being a smart man and recognizing the effects of his decision on his own profits and on his best friend Tic’s profits, Tac was overcome by a wave of confusing emotions and turned to the two angels sitting on his right and left shoulders for support and guidance. 

            One the left side was the angel of greed, whispering “Money!  Money!  Money!” in his ear.  By increasing his production, Tac had raised his profits from 180,000 to 192,500-a plethora of extra money for him to use on whatever he desired.  At the same time, however, the profits of Tic have decreased to 165,000, a reduction that has caused the angel of friendship, sitting on his right shoulder, to shout “Cooperation!” at the top of her lungs.

            Before Tac was able to sort through the different messages of the angels on his shoulders, Tic grew angry with Tac and decided to retaliate by increasing his own company’s production to 3500 pillows; a decision that lowers pillow price to $50 per pillow.  The result of Tic’s action is that both boys now only earn $175,000 in profit, $5000 less than their profits under the original agreement. 

            More confused and distraught then ever, having angered his friend and made a poor business decision, Tac felt hopeless…until an angel named Nash descended upon him.  An odd profession for an angel, Nash is an economist, and just what Tic and Tac needed.  Nash explained to Tac that breaking the agreement with Tic, motivated by his own self interest, was a poor decision because it resulted in a violation of a Nash Equilibrium point.  At this equilibrium, no player can benefit by changing his or strategy when the others players are keeping them constant.  As Tac had come to learn, his best strategy, while Tic was producing 3000 pillows would have been to continue producing 3000 pillows as well.  Choosing to produce more and act in his own self interest, the price was brought down closer to the competitive price, which simultaneously lowered profits.  In a duopoly, the angel Nash explained, cooperation to maintain the monopoly price is always the key.

            Realizing the foolishness of their greed and missing one another’s friendship, Tic and Tac decided to re-institute their original agreement on price and production level.  Their companies are maximizing profits once again and their friendship is strong.  Having taught a valuable lesson, Nash returned to the heavens where he smiles down on those who understand his wisdom.