Discussion:

The Competition Simulator Exercise (CSE) presents you with a series of very simplified competitive settings where you have to make decisions such as choose price or choose capacity. The goal is to find the best choice through trial and error. Below is the first set of choices that you need to make using Excel worksheet 1:

a. Scenario 1: Positioning with fixed price
i. What is your optimal position when your competitor is positioned at 90?
ii. Why is that the optimal position?
iii. If you were the first mover in this market (with fixed prices), where would you position your motor?
iv. iv. How would your optimal response (to MM choosing 90) and your optimal first mover position differ if no customer accepted a "distance" of more than 30?

b. Scenario 2: positioning and price

i. How does this compare to the outcome with fixed (and equal) price? What explains the difference?
ii. If you were the first mover in this market (with prices determined after positions are chosen) where
would you position yourself?
c. Have you seen some examples or applications of these ideas?

a. Second Mover

As CMC is more aggressive by building more capacity, do you become more or less aggressive, i.e. do you build more or less capacity? Why?
b. First Mover

What is your optimal position when you are the first-mover?
Do you prefer to be first-mover when choosing capacity or second-mover? Why?
What is the effect of capacity pre-emption?
What would be the effect of adding capacity in secret?
c. Have you seen some examples or applications of these ideas?

Competition Simulator Exercise: Instructions

The Competition Simulator Exercise (CSE) lets you explore some important competitive mechanisms. To that purpose, the CSE presents you with simplified competitive settings where you have to make some choices, such as price or capacity. The computer will make your competitors' choices, when necessary. The pattern of your and your competitor's choices in response to changing conditions will be used to explore some of the fundamental competitive mechanisms in a market setting.

Assignment & Instructions

To start the simulator, just open the Excel workbook (HBS 9-713-804). The different competitive scenarios that will be explored are on consecutive worksheets of the workbook. Your goal is to find in each setting the best choice, through trial and error. 1 Throughout, the fields to fill out are always marked in GREEN. The fields in ORANGE are significant for interpreting the results. The hints below can be helpful to speed up the trial-and-error process. For each scenario (or worksheet), the document ‘Competition Simulator Exercise: Questions' lists some questions, which are the assignment questions that will be discussed in class.

Hints for Trial-and-Error Optimization in CSE

The following hints may speed up the trial-and-error process to find the optimal decisions.

1. For any of the choices, the optimal value will always be between 0 and 100. This is true whether the choice is price, capacity, or some other decision choice. Except otherwise noted, it suffices to consider integer values.2

2. The market settings in the CSE are all very ‘regular' in the sense that there is a unique global optimum and no local ‘peaks'. Graphically, the profit functions thus looks like Figure A below. As a consequence, if you follow the direction that leads to a higher payoff, you will always end up at the overall optimal payoff (though you may sometimes overshoot).

3. If you have never done such optimization search, the most effective process is to move a bit away from the starting point to see in which direction profits increase, then to take big steps in that direction until you overshoot, and finally to go back and forth with smaller and smaller steps to converge on the optimum.

4. When the same decision, say a price choice, must be made across a series of different settings, the first instance will usually already be set at its approximate optimum. This gives some indication of the range of values you should be considering.

Figure A Behavior of Profit (or other objective) in function of price (or other decision variable).

Attachment:- Competition Simulator Exercise.rar