Pricing experiment This is a pricing experiment in which you will work with a team using cost accounting information in pricing decisions. Each team rep¬ resents one firm in a market. Each market is completely independent of other markets. Your market has four firms that use similar production technology to produce two types of hiking boots: a lightweight model (LT) and a moun¬ taineering model (A4T). Each firm faces the same demand curves where P is your price and PI, P2, and P3 are the other three firms' prices:

Notice that if you increase your price, your demand will fall. If, however, your competitors raise their prices, you will gain some of the market share they lose.
Your instructor will provide you a confidential cost report that you should use in your pricing decisions. No cost data should be shared with other teams.
There will be five periods in this pricing experiment. For each period, your firm must submit the prices at which you are prepared to sell each type of boot. Your firm operates on a just-in-time basis and produces to order. Hence, there are no inventory or production-quantity decisions to be made.
The market share you obtain or the profit you make in any one period will not in any form affect your performance in subsequent periods. Your parent company has committed to remain in this market for all five periods. How¬ ever, your parent company expects you to maximize profits in each period.
You should come to the experiment session with your first set of prices. The prices should be specified in whole dollars only (no cents). Once you have decided on prices, enter the prices on the pricing sheet below and sub¬ mit it to the instructor. The instructor will determine the quantities sold for each firm and return the pricing sheet to you with a market report (next page) containing the following information: what each firm sold, what prices each

firm charged, and what the actual net income was for each firm. Then you will need to decide on prices for the next period.
Prior to the experiment session, your team should spend two to three hours understanding the cost and demand structure and thinking about how to set prices. You should also devise a strategy to adjust prices if necessary based on what you observe about your competitors' decisions and about your own and your competitors' performance in each period. Remember the pur¬ pose of this experiment is to learn about pricing in a competitive setting.
After participating in the experiment you are required to prepare a report of no more than four typed and double-spaced pages that describe how you determined your costs and pricing rules and how competition affected your pricing. Your report must also include a statement of budget versus actual in the format shown below, together with detailed calculations of the costs of your two products.(LO 2, 3)

Transcribed Image Text:

Demand for LT = 19,919 500 x P+ 84 X (P1 + P2 + P3) Demand for MT 6,632-109 x P+ 18 X (P1 + P2 + P3)