So I’m taking this class called Management Strategy and we’re playing a simulation game played by business school students. It was created by a professor in UC Berkeley and basically each period your team or “firm” can build capacity and specify price and quantity for 4 different markets. Each team has different cost structures and each market has different characteristics.
But it seems like a lot of the teams my team is competing against are making irrational decisions. I’d like to see how they’re going to justify their decisions in their memos. It seems like their only response is to price lower and lower. Some are pricing very close to marginal cost even though capacity costs are extremely high. It makes no sense because they’re never going to recoup their costs and we have made no indication that we want a price war. They think by pricing low, they can force us out. But we’re in markets with relatively low capacity costs! We’re not going to just pick up and leave once we’ve put up the entry costs!
But it sort of works out because a lot of these firms are building way too much capacity and pricing way too low. That means they’re all in the red and paying out interest on their debt every period. Even if my firm earns relatively low profits on top of our starting cash ($1,000,000) we’d probably earn more than most of the teams.