Simulation At the beginning of the simulation, the Neutron was a unique product in the computer world. The company could view itself as a differentiated player in the competition PC market, or it could view itself as having a monopoly on the new product. To enjoy the full benefits of monopoly pricing, there needs to be inherent demand for the product. The Neutron, however, is new. Increasing the price moves the product up the demand curve. A higher price also signals to the market that the product is unique and valuable.

At the outset, with a new product and no competitors, there are two reasonable strategies. The first is penetration pricing, which would seek to maximize demand. This does not, however, maximize profit. The finance department may not approve of this strategy because it does not offer the best return to the shareholders. Likewise, the marketing department does not want to see this because it does not support the premium nature of the product. Instead, the price should be set at $2,550, which is the point where profit is maximized (at $1.29 billion). This is the result that is best for the shareholders, and it also supports the premium positioning of the product.

In the second year of the production process, the Neutron has exited the introductory stage of the product life cycle and has entered the growth phase. It is still a differentiated product, with its technological competitive advantages allowing the product to be priced at a high level. However, at this...

The level of advertising needs to be set to encourage the growth that the product is expected to have. This means increasing spending to $600m. With respect to the product, upgrading the manufacturing is recommended for two reasons. The first is that the product is a premium product, and this should be supported with upgrades. The second is that in the long run, a profitable product in a market characterized by monopolistic competition (as the PC market is) can expect to have competitors. When the competitors arrive, the product will lose its pricing power. Efficient production that lowers the per unit cost of producing the Neutron will position the company for the eventual shift from its high initial price point. The production process should be upgraded, and the cost savings passed along to the customers. Remember at this part of the business cycle, market penetration is also important, especially since competitors can be expected to enter the market soon.
As predicted, the market moved into oligopoly status with the arrival of a new competitor. The Neutron is still a differentiated product in the growth phase of the product life cycle, but now pricing decisions will be different. The competitor will respond directly to any pricing decision the company makes. In the long run, it is expected that the two firms will have identical prices. Because of this, the company needs to accept that it will split market share (although…