Phil Huang

Competitive Strategy Game

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.

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Comments

2 responses to “Competitive Strategy Game”

  1. Cool

    Dear Philip,

    Your “Lemon” theory is interesting. I am a student studying management in Hong Kong and have to participate the Competitive Strategy Game this week. I wonder if you can share your experiences as my teammates try to go Market D with hugh borrowings.

    Thanks a lot.

    Reply
  2. Philip

    Market D has the largest cash flow/profit potential however the entry costs and capacity costs are very high and requires you to borrow heavily initially. In our game, 2 firms joined Market D and built way too much capacity. Then one of them priced at marginal cost trying to force the other competitor out. This went on for much of the game, until near the end when both of them started raising prices, but at that point, I think it was too late to recoup their losses.

    My advice would be to use the public statements to try and make your competitors do something favorable to you. Although Market D is price sensitive, you don’t want to end up competing on price because of the substantial costs involved. For example, if your competitors are pricing low to force you out, make it known that you have absolutely no intention of leaving the market and pricing low will only hurt everyone. In our game, we were not allowed to explicitly collude but we could make general statements that would elicit some cooperation like “The current price levels cannot sustain the market, we believe an appropriate price level should be at approximately 400.”

    There are various strategies which depend on your costs and your competitors actions which you’ll have to figure out which is the point of the game. Good luck.

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