Oligopolistic pricing policies found in the game-play of international operations simulation (INTOP)

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1971

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Management games offer the opportunity for in depth empirical study of traditional oligopoly price theory and the more recent behavioral theory of the firm. In the 19601s business games have been extensively utilized for teaching and training purposes but little utilized for economic research purposes. One such example in using games (simulations) in analyzing economic behavior are the experimental duopoly games, which have resulted in confirmation of Cournot's and Bertrand's duopoly results. With this precedent, INTOP, a computerized management game served as a research source for a study on oligopoly pricing strategies and oligopolistic firm behavior. INTOP (International Operations Simulation), developed by Hans B. Thorelli and Robert L. Graves at the University of Chicago, was played in Spring, 1971, by graduate and undergraduate students at the University of Houston. Using the traditional case study approach of unstructured interviews and questionnaires, a study was conducted on pricing policies, goals, collusion, demand estimation, information collection, oligopolistic characteristics (size, product differentiation, advertising, entry/exit barriers, and price leadership) of the INTOP teams, assuming their actions resemble actual firms. The study's foundation combined Cyert and March's behavioral theory of the firm with its emphasis on internal organizational features with the basic tenets of oligopoly theory: interdependence, price inflexibility, and the perchant to collusion as expressed by Fellner, Chamberlin, Shubik, and others. Ten firms (teams), each composed of five or seven members, operated within the appliance industry of INTOPIA. The firms produced two products, portable transistor radios and vacuum cleaners, in three areas, the USA, the EEC, and Brazil. The firms wsre operated as if they were actual oligopolistic firms, making pricing, production, research and development, financial, and marketing decisions quarterly for five simulated years (twenty periods). The game was played in a college course and game-play was supervised by an administrator, who acted as advisor, computer operator, rule interpreter, and the game's banker. The market structure definitely was an oligopoly: a small number of large firms producing two similar products with a recognition of interdependence. Substantial entry/ exit barriers did not exist. Nevertheless, the structure remained an oligopoly throughout the game-play. The pricing strategy that emerged from game-play was a quasi-cost plus method, which took an average cost as the base price that was adjusted for existing market conditions and what rival firms were charging. The major team goal was not profit maximization but was growth with satisfactory profits. All teams at least doubled total equity in five years with the largest team increasing its size by 6.7 times. Team organization was basically by function with the marketing vice-president constructing a pricing model and making pricing decisions. Demand was estimated with the formula provided by the players manual; one team did derive the traditional inverse relationship between quantity sold and price. Average cost, inventory levels, average market price, and rules-of-thumb were used as decision rules. Information collection and assimilation was difficult and inadequate due to lack of proper data, insufficient search, and the fears found in uncertainty. Application of Fellner's safety margin principles, Shubik's game theory, marginal reasoning, Spencer and Sieglman's imitatitive pricing method were prevelent in team behavior. Teams did realize that other teams existed but no strong drive towards agreements or collusive activities emerged in game-play. Two price leadership attempts failed due to the instability and immaturity of the three area markets. Product differentiation through R&D existed and advertising was utilized in expanding the runaway demand that blessed the INTOP firms. Merger attempts failed and inter-team communication was often limited, since no team saw the long run benefits in joint actions. The concern was in individual team growth and in learning the rules and regulations of the game. Only the short run benefits of joint R&D programs, industrial (inter-team) sales, and an ad hoc committee on labor negotiations were clearly recognized by the majority of the teams. Teams did purchase corporate shells and ran them as normal firms. Throughout the entire game-play prices generally rose along with a constant and gradual increase in unit sales and in inventory levels. The areas' market demand continually expanded during the five years; the appliance industry was blessed with growth, although instability and immaturity restricted collusion and allowed for independent action. With the proper controls and a thorough analysis of all aspects (economic, organizational, and human) of INTOP, the realistic game could generate valuable insights into the understanding of oligopoly behavior, both in pricing models and in the degree and intensity of mutual dependence of firms within an industry.

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