Comp Strat Final

"Monopolists are more likely to be innovative" True or false? Explain.

True They are more likely to be innovative because they can capture some of the benefits of successful innovation

describe some features of monopolists

A monopolist faces little or no competition in the product mkt Monpolist can act in an unconstrained way in setting prices or not but... May not abuse of its monoply power Monopolist sets the price or a quantity to be sold so that marginal revenue = marginal cost The monopolist's price is above the marginal cost and its output below the competitive level A monopolist often succeeds in becoming one by either producing more efficiently than others in the industry or meeting the consumers' needs better than other Consumers may be net beneficiaries in situations where a firm succeeds in becoming a monpolist Monpolists are more likely to be innovative than firms facing perfect competition since they can capture some of the benefits of successful innovation

Analyze the costs/benefits of entry

A potential entrant compares the sunk cost of entry with the present value of the post entry profit stream Sunk costs of entry range from investment in specialized assets to government licenses Post entry profits will depend on demand and cost conditions as well as the nature of post entry competition

What is a relevant market?

A relevant market is the specific segment of the overall market that a product or service competes in. It includes products that are considered substitutes and are part of the same consumer choice set. Determining the relevant market is essential for analyzing competition and assessing market power. 2 products tend to be close substitutes when They have similar performance characteristics They have similar occasion for use Sold in the same geographic area

what are 2 reactive strategies to price competition

Tit for tat Start cooperating, if your opponent undercuts the price, you retaliate: an eye for an eye Grim trigger Start cooperating, if your opponent undercuts the price, you retaliate FOREVER

what is Marlboro friday

An example of a small undermining pricing discipline occurred in the US cigarette industry from 1980s-90s 4 firms control 93% of the industry in the american economy - twice a year, the dominant firms would announce their intention to raise the list prices of their cigarettes and within days the other cig manufacturers would follow suit - this helped the industry raise prices by 14% per year for 5 years The firm Liggett had little to gain by raising prices as it was not very profitable, and so went against the other firms and undercut them in price (introduced discount cigs into the mkt) - soon their sales tripled In response, B&W (another cig manufacturer) used the tit for tat strategy and introduced its own line of discount cigarettes More and more manufacturers introduced discount cigs and Ligett had less and ess mkt share - this created a segmented mkt: premium and discounted cigs which then makes price coordination very hard Marlboro Friday was when Marlboro reduced the price of its cigs by 20% because it was losing mkt share...very drastic decrease and aggressively cut into the sales of the firm itself and its rivals as well. Soon after marlboro friday the cig manufacturers began cooperating with each other again

What should firm managers think about in terms of entry/exit

As part of planning for the future, managers should account for the unknown future competitors Diversifying firms pose a greater threat to the incumbents since they tend to build bigger plants than other entrants Managers of new firms need to find capital for growth since survival and growth go hand in hand Managers should be aware of the entry and exit conditions of the industry and how these conditions change over time due to technological changes, regulation and other factors

what are barriers to entry? what are structural barriers and what are strategic barriers?

Barriers to entry Barriers to entry are factors that allow the incumbents to earn economic profit while it is unprofitable for the new firms to enter the industry Can be classified into structural or strategic barriers Structural barriers Exist when the incumbent has cost advantages or marketing advantages over the entrants Incumbents are protected by favorable government policy and regulations 4 main types Control of essential resources Nature may limit the sources of certain inputs and the incumbents may be in control of these limited sources Patents can prevent rivals from imitation Special know how can be hard for rivals to replicate Economies of scale and scope If economies of scale are significant then the incumbent will face a high threshold of mkt share to be profitable Incumbent's strategic reaction to entry may lower price and cut into entrant's profits Intense price competition might occur Strategic reaction Marketing advantage Incumbent can exploit the brand umbrella to introduce new products more easily than new entrants Brand umbrella can make it easier for incumbent to negotiate the vertical channel (i.e. get shelf space) Favorable gov't policy Strategic barriers Barriers created and maintained by the incumbents Can erect strategic barriers by expanding capacity/resorting to limit pricing

what is the Bertrand model

Bertrand model Any company engaged in price competition has a best (profit maximizing response to competitor price changes) Coke vs. Pepsi They are substitutes but customers have preferences If coke lowers prices, some customers would swithc to coke and other would prefer to pay fthe higher price for pepsi. Pepsi does best to lower its price also but it may not match coke's decrease in full because by lowering its price it lowers its margin Shows that the best response is to imitate the original move of your rival Strategic complements mkt because industry prices and profits move in the same direction...everyone in the same boat

describe the 3 types of entry conditions

Blockaded Incumbent does not need to take any action to deter entry - pre existing structural barriers Accommodated Incumbents should not bother to deter entry, entry will happen no matter what incumbents do Typical of mkts with growing demand/rapid technological change Deterred Entry is not blockaded but we do not observe it Entry deterring strategies in place...discouraging potential rivals and if they are credible Situation under which the incumbents should engage in predatory acts

What is the influence of the discount (e.g. interest) rate on cooperative pricing?

Competitors are impatient and often times do not care about the future if the discount rate (i) is high in the present term - they will prioritize short term gains over long run benefits Makes future payoffs less valuable and so reduces the incentive to cooperate The vice versa is true for a low discount rate

what is consumer surplus

Consumer surplus is the difference between the maximum the consumer is willing to pay or B (the monetary value of the perceived benefit) and the price paid P If value created is not positive, the product will not be viable A firm can increase consumer surplus by Increasing the perceived benefit Selling at a lower price Reducing the cost of using the product and the transaction costs that the consumer incurs to buy (i.e. amazon reduces transaction costs)

Andorra and gasoline pricing: Why do you think the presence of "cooperative" pricing represents a puzzling phenomenon in this small country?

Cooperative pricing is the same thing as implicit collusion...firms would rather have their prices set at monopoly levels than what is achieved under cournot (quantity game where you do opposite of competitor) or bertrand (price competition) competition. Puzzling because it suggests collusion which is illegal due to its negative impact on consumer surplus The dominance of a small number of firms in the gasoline market may lead to coordinated pricing strategies, where competitors find it mutually beneficial to set prices jointly rather than engage in aggressive competition. Also raises questions about the effectiveness of competition regulation

what are 2 approached to strategic positioning

Cost leadership A cost leader can create more value than its competitors by offering the same benefits as the competitors do (benefit parity) or offer slighty lower benefits (benefit proximity) at a substantially lower cost If the cost leader attains consumer surplus parity with the rest of the firms in the industry it earns a higher profit margin Conditions suitable for seeking a cost advantage When the nature of the product does not allow benefit enhancement No room for quality improvements When the consumers are relatively price sensitive When the product is a search good (a product whose quality is evident under a simple inspection) rather than an experienced good (with asymmetric information about quality, which is not evident under inspection) When economies of scale, scope, learning are present Benefit leadership A benefit leader can create superior values by offering cost parity or cost proximity but with substantially higher benefit Conditions suitable for seeking a benefit advantage When consumers are willing to pay a premium for benefit enhancements Consumers are very sensible to quality When economies of scale, scope, learning have been already exploited When the product is an experience good A product whose quality is not observed before a during purchase but after some time

what is the cournot model

Cournot model In a quantity game you should do the opposite of what your competitor does Ex. if your rival decreases quantity you should increase your because the rival's decrease drives up the common mkt price which raises your margin on every unit If your rival increases output, your profits fall (increased capacity = lower mkt prices = lower the return), so you should lower your output but this goes hand in hand with falling profits...this is the best response because it improves your situation but you are still worse off on balance Not very common, usually in commodity mkts

how can you define a market

Defining a mkt - geographic area identical products in 2 different geographic mkts may not be substitutes due to transportation costs Bulky products like cement cannot be transported over long distances to benefit from geographic price difference When a firm sells in different geographical areas, it is important to be able to identify the competitor in each area With the technological innovations, some products like books and drugs are sold over the internet bringing in virtual competitors

What is the difference between differentiation and segmentation?

Differentiation concerns choices of how a firm distinguishes its offerings from those of its competitors (mostly related to how the firm competes) showcasing specific features, qualities, or aspects that make the offering stand out and appeal to a particular target audience. Differentiation is essential for creating a competitive advantage in the market, fostering customer loyalty, and driving brand preference. Example - apple focuses on a unique product with certain design aesthetics that sets itself apart from other smartphones Segmentation concerns choices of which customers, needs, localities, market niches that a firm targets (where the firm competes) the categorization of a diverse market into smaller, more homogenous segments. The purpose of segmentation is to enhance the precision of marketing efforts by tailoring strategies and messages to specific groups with shared characteristics or needs. By recognizing and understanding the distinct preferences and behaviors within these segments, businesses can more effectively target their marketing resources, allocate budgets efficiently, and tailor products or services to meet the specific demands of each identified segment. Example - coca cola offers a range of products (classic, diet coke, coke zero, cherry coke,....) that cater to all different types of customers Differentiation does not imply segmentation Example of both - nike differentiates itself through its strong brand image and product innovation but also segments itself by offering a diverse product range that carters to various different sports

what is a dominated strategy?

Dominated - an action that always yields lower payoffs, no matter other players' strategies

what is a Nash equilibrium

Nash equilibrium strategies Every player must play rationally, maximizing her utility Subject to a conjecture about (anticipating) other players rational behavior (i.e. they also play a 'best response') and...This conjecture is right (nash assumes that you correctly anticipate otherplayers behavior or best response)

Explain the business strategy of Estrella Damm. (Remember that Damm produces 20+ different varieties of beer.)

Estrella Damm uses spatial approach to product differentiation where the firm offers many products with similar quality and characteristics but caters to idiosyncratic customer tastes and preferences. Estrella damm may offer various beer options with distinct flavors, colors, or brewing methods while ensuring the overall quality is high

Estrella Damm dominates the beer market in Catalonia, with a market share of roughly 80%. Even though in this geographical market the other firms (or breweries) are almost irrelevant in terms of market share, Estrella Damm is extremely worried about the craft beer phenomenon in Spain and around the world. Provide a possible explanation.

Estrella Damm's concern about the craft beer phenomenon suggests that even with a dominant market share, it recognizes the threat of changing consumer preferences. Craft beer, known for its unique and artisanal qualities, may appeal to consumers seeking variety and authenticity. Estrella Damm's worry may stem from the potential erosion of its market share if consumers shift toward craft beers, indicating the importance of staying attuned to evolving consumer tastes.

"Perfect competition is incompatible with rents (or positive economic profits) in the long run." True or false? Explain.

False Normally there are no profits in the long run because of free entry and exit but if there is a firm with a specific factor that cannot be replicated then positive profits are feasible - abnormal rent

what is the zero profit condition

The zero profit condition With perfect competition economic profits go to 0 in the long run - no rents because of free entry and exit If there is a firm with a specific factor that cannot be replicated then positive profits are feasible We call this abnormal profit 'rent'

What is a tit for tat strategy? What is a grim trigger strategy?

Tit for tat - Start cooperating, if your opponent undercuts the price, you retaliate against them Grim trigger - start cooperating, if your opponent undercuts the price, you retaliate forever Imposes severe penalties for non cooperation

What condition must be met to determine a Nash equilibrium in a repeated game?

For a Nash equilibrium in a repeated game, players must have a credible and mutual strategy of reciprocation or retaliation. Tit for tat and grim trigger strategies are examples where players respond in kind to each other's previous actions, leading to a stable Nash equilibrium in repeated interactions.

price fixing

Formal collusion are written or explicit price fixing agreements Even a small number of firms are sufficient to produce intense competition Explicit collusion: communication among players in order to avoid coordination failures to reduce competition Firms create a cartel in order to increase their profits by coordinating their activities rather than acting independently Anti cartel laws prohibit firms from explicitly agreeing to take actions that reduce competition - sherman antitrust act, federal trade commission act Cooperative pricing - implicit collusion Firms would rather have their prices set at monopoly levels than what is achieved under Cournot or bertrand competition Price fixing - in most countries explicit collusion to maintain prices at monopoly levels is illegal Cooperative pricing occurs if prices persist above competitive levels without explicit cooperative behavior from the firms

What is the difference between horizontal and vertical differentiation?

Horizontal product differentiation is offering products with different characteristics but same quality Example - apple offers several different iPhones, iPads, computers with sim Vertical product differentiation is offering products with similar characteristics but different quality Example - starbucks reserve has much higher quality beans and regular starbucks sells lower quality, both are distributing essential the same product with similar characteristics (coffee beans) but of very different qualities

what is a spatial approach to product differentiation? how does it relate to horizontal/vertical product differentiation

Idiosyncratic tastes, consumers differ in their tastes A firm must decide how to best serve different types of consumers The firm offers products with different characteristics but similar quality (same product and same quality but diff colors) This is horizontal product differentiation Offering products with different characteristics but same quality Vertical product differentiation Offering products with similar characteristics but different quality Spatial model (hotelling) is useful to consider 3 relevant strategic decisions position/Location Location is a metaphor and can be thought of in terms of space/location/geography, time (departure times of planes, buses), product characteristics (design, variety) Variety Pricing

what is a competitor

If one firm's strategic choice affects the performance of another these 2 are competitors A firm may have competitors in several input markets and output markets at the same time Competitors can be complementors and/or substitutors Competition can be either direct or indirect Identifying competitors - finding the relevant mkt Under US DOJ competitors are defined as if merger with these other firms should lead to a small but significant non transitory increase in price (SSNIP) Small price increment = at least 5% Potential competitors must be considered like those who may enter the market SSNIP criterion suggests that 2 firms directly compete if a price increase by one causes many of its customers to do business with the other This is the essence of the economic concept of substitute goods 2 products tend to be close substitutes when They have similar performance characteristics They have similar occasion for use Sold in the same geographic area Direct and indirect competitors When firms are direct competitors the strategic choices of one directly affects the performance of the other When firms are indirect competitors the strategic choices of one also affects the performance of the other but only through the strategic choices of a 3rd firm Ex. Mercedes sedans and Jeep Grand Cherokees. If Mercedes reduces the prices on its sedans, Volvo may lower the price on its sedans. The latter price reduction might affect the sales of Jeep Grand Cherokees, because Volvos and Jeeps are substitutes, even though Mercedes and Jeeps are not. Thus, Mercedes and Jeep may be indirect competitors

The Marlboro Friday case in the U.S. cigarette industry: What was Marlboro's strategy in response to Liggett & Myers? (Remember, L&M had successfully introduced low cost or discount tobacco a few years earlier.) Can you extrapolate Marlboro Friday's strategy to other industries? Under what circumstances?

Liggett undercut its competitors and introduced discount cigarettes to increase their market share After this event, more and more cigarette manufacturers introduced their own line of budget friendly cigarettes which cut into the profits of all the firms Marlboro Friday occurred when Marlboro slashed its prices by 20% (for its regular cigarettes, not discount) in order to gain back some market share Marlboro has premium cigarettes so it could be that they were using a benefit leadership strategy...the premium Marlboro cigarettes were better quality than the discount cigarettes but because the discount cigarettes were so cheap in quality and Marlboro still needed to maintain some sort of cost proximity i.e. reduce its prices dramatically in order to gain back customers who were fairly price sensitive

What is a competitor? Do you think Red Bull and Coca-Cola are competitors? Why?

If one firm's strategic choice affects the performance of another, these two firms are competitors. Under the US DOJ competitors are defined as if a merger with two firms should lead to a small but significant non transitory increase in price (i.e. 5%), then these two firms are competitors. In the case of Red Bull and Coca-Cola, they can be considered competitors, even though their primary product offerings are different. Both companies operate in the beverage industry and offer a range of non-alcoholic beverages. While Coca-Cola is known for its diverse portfolio of soft drinks, Red Bull is famous for its energy drinks. Beverage Industry: Both Red Bull and Coca-Cola operate in the broader beverage industry, targeting consumers looking for refreshing and energizing drink options. Market Overlap: There is some overlap in their target markets. While Red Bull has a strong association with the energy drink market, Coca-Cola's diverse product range includes energy drinks (e.g., Monster, which Coca-Cola owns), making them direct competitors in this segment. Consumer Choice: Consumers often have choices between different types of beverages, and the decision to purchase a Red Bull or a Coca-Cola product can depend on factors such as taste preferences, nutritional considerations, and the specific need for energy or refreshment. Strategic Competition: Both companies engage in strategic competition, vying for consumer attention, loyalty, and market share. They invest in marketing, branding, and product innovation to differentiate themselves and attract consumers.

problems of cooperative pricing

Impatience Competitors don't care about the future if discount rate (i) is high High n (number of firms) Many equilibria Which price to cooperate at Imperfect observability

What is the impact of the imperfect observability of your opponents` behaviour in a repeated game?

Imperfect observability makes it difficult to engage in cooperative pricing with other firms With players lacking complete information about their counterparts' actions in previous rounds, strategic uncertainty becomes inherent, influencing decision-making processes. This imperfection can foster opportunistic behavior as players may exploit the ambiguity to gain short-term advantages. Reciprocal strategies, such as tit-for-tat, face challenges in execution, as players struggle to discern intentional deviations from cooperative actions. Trust-building becomes intricate, given the difficulty in ascertaining opponents' true intentions or adherence to past agreements. Misinterpretation of actions is a potential risk, leading to unintended conflicts based on perceived defections. Adaptation to opponents' strategies over time becomes a challenging endeavor due to the incomplete nature of observed behavior. Consequently, sustaining long-term cooperation becomes more demanding, and the potential for suboptimal outcomes increases as decisions are made based on incomplete and potentially inaccurate information.

Explain the following statement: "When consumers differ in their willingness to pay for product attributes in a market, different strategic positions can coexist." Give real world example of this case.

In markets where consumers have varying preferences and willingness to pay for different product attributes, businesses can adopt different strategic positions to cater to diverse segments. Diverse Consumer Preferences: Consumers in a market may have different priorities and preferences when it comes to product attributes. For example, some may prioritize high quality, others may prioritize affordability, and some may value certain features over others. Willingness to Pay: Consumers also differ in their willingness to pay for these various attributes. Some may be willing to pay a premium for certain features, while others may seek more budget-friendly options. Strategic Positioning: Businesses can respond to this diversity by strategically positioning themselves to target specific segments of the market. Each strategic position is designed to appeal to a particular set of consumer preferences and willingness to pay. Coexistence of Different Positions: Since consumers vary in what they find valuable and how much they are willing to pay for it, different strategic positions can coexist within the same market. One company may target the high-end luxury segment, another may focus on the mid-range with a balance of features and price, and yet another may target the budget-conscious consumers. For example, in the smartphone market, companies like Apple target the high-end segment with premium features, while brands like Xiaomi focus on the mid-range segment, and others like Realme capture the budget segment. This diversity in strategic positioning allows businesses to meet the specific needs and price points of different consumer groups, coexisting within the same market while maximizing their market share.

What is intangible differentiation? Give a real world example.

Intangible differentiation is unobservable and subjective characteristics that appeal to the customer's image, status, identity, and desire for exclusivity Example Hermès exemplifies intangible differentiation through its emphasis on artisanal craftsmanship, limited availability, and brand prestige. The brand's commitment to traditional techniques and heritage craftsmanship adds a unique quality to its products, creating a perception of exclusivity and luxury. Limited production runs contribute to the rarity of Hermès items, enhancing their desirability and prestige. Beyond physical products, the brand's intangible differentiation is heightened by the overall customer experience, reflecting sophistication and a lifestyle associated with luxury.

what is cost benefit leadership

It can be argued that firms should either pursue a cost advantage or benefit advantage but not both Firms that pursue both could, according to this argument, get stuck in the middle and have neither advantage In reality oly a few successful firms appear to have both types of advantages simultaneously Ex. kmart

What type of commitment (i.e. nice or strong) is launching a GM credit card that when used, generates "savings" that are redeemable towards the future purchase of a GM car? Under what circumstances is this commitment a good idea?

Launching a GM credit card with redeemable savings represents a strong commitment. It aligns the consumer's future purchasing incentive with the same brand, creating brand loyalty. This commitment is beneficial when customers have high switching costs, as they are more likely to stick with GM to utilize the accumulated savings. It's effective in industries where customer retention is crucial and where repeat business is significant.

describe 2 entry deterring strategies

Limit pricing An incumbent using the limit pricing strategy will set the price sufficiently low to discourage entrants Predatory: similar to limit pricing but to encourage exit To deter entry incumbent has to establish a reputation for toughness → if he does not slash price other challengers might consider him easy Excess capacity By holding excess capacity, the incumbent can credibly threaten to lower the price if entry occurs Since incumbent with excess capacity can expand output at low cost, entry deterrence will occur even when the entrant is completely informed about the incumbent's intentions

Draw an indifference curve in a value map that displays a high level of price sensitivity. Explain its shape.

Price Sensitivity: On the "Price" axis, place lower prices to the left and higher prices to the right. Consumers are generally more sensitive to changes in price, so as you move to the right along the "Price" axis, the prices increase. Product Quality: On the "Product Quality" axis, place lower quality or perceived value to the bottom and higher quality to the top. As you move upward along the "Product Quality" axis, the quality or perceived value of the product increases. Shape of the Indifference Curve: Given a high level of price sensitivity, the indifference curve would likely be relatively steep, indicating that consumers are very responsive to changes in price. The curve might slope more steeply to the left, suggesting that even small decreases in price are highly valued by consumers. Since consumers are price-sensitive, they might be willing to accept lower product quality as long as the price is lower, resulting in a curve that does not rise as quickly on the "Product Quality" axis.

switching costs

Switching costs are also a transportation cost (t) Switching costs are an additional source of differentiation: often consumers must incur in a switch cost when they switch products Search costs to identify alternative suppliers Transaction costs to initiate new contractural relationships Learning costs to use a new product Ex. professional services, software applications, discount coupons Due to switching costs consumer might prefer to purchase the same product she consumed in the past even in the presence of substitute offered at a lower price

Consider a monopoly in a linear city like the one that was discussed in class using a location experiment. What is the impact on prices when reducing the number of shops(i.e. new product varieties)?

The closer you are to a competitor the more intense price competition is, so when reducing the number of shops you will be able to increase your price and therefore profit margin

"Apple Inc. is updating its entry-level iPad with capabilities designed to appeal to students and new software for teachers, as the company tries to recharge sales of the tablet and shore up its dwindling share of the U.S. education market. The company said its new 9.7-inch iPad includes a faster processor and works with the Apple pencil stylus, which previously worked only with higher-end iPad Pro models. The entry-level iPad's price remains at $329, the lowest-priced tablet available from the company. Schools, which receive discounts on pricing, can buy the device for $299." Do you think that the new iPad in this price range make sense? Explain (please, think in terms of positioning). Do you think that this case can be extrapolated to a "low price iPhone"?

The lower priced iPad allows apple to cater to consumers who were previously unable to afford their products. When thinking in terms of positioning, firms can approach products with either a lens towards cost or benefit leadership. Most of apple's products have a benefit advantage where they are very high quality but also more expensive. The new iPad with a lower price but still containing most of the high end features from the old iPads allows the firm to take advantage of cost leadership, where they are now similarly priced as other firms' tablets but with the same high quality as other apple products. I think this price range makes sense because more people can afford it However, this is very similar to the iPhone 5C where the 'low price' phone was not discounted enough and did not have enough advantages for consumers to buy it which led to price cuts. Experts show that in order to truly cater to lower income consumers, the firm would have to further discount products like the 5C even more. But this could also create a negative strategic effect where competitors might reduce their prices even more. And, in models of vertical integration (like apple) dominating the high quality mkt is more profitable anyway

what is tangible differentiation? intangible differentiation?

The nature of differentiation Definition - providing something unique that is valuable to the buyer beyond simply offering a low price Key issue - increasing value for each customer Tangible differentiation Observable product characteristics Size, color, materials, etc Performance Packaging Complementary services Intangible differentiation Unobservable and subjective characteristics that appeal to the customer's image, status, identity, and desire for exclusivity

explain the shrimp game and the coke pepsi

The shrimp game experiment Best response function is downward sloping If my rival floods the market with shrimp, the best response by me is to reduce the quantity of shrimp This is a strategic substitutes game The coke pepsi game The best response function if upward sloping If pepsi sets a higher price, coke's best response is to increase the price and vice versa This is a strategic complementaries game since it is a good idea to imitate the actions of your rival

Two firms, X and Y, are competing in a market in which consumer preferences are identical. X offers a product whose benefit BX is equal to $5 per unit. Y offers a product whose benefit BY is equal to $5,5 per unit. X's average cost CX is equal to $4 per unit, while Y's average cost CY is equal to $1 per unit. Which firm's product adds the greatest value? How can you define the strategic position of Y?

Value = B - C Value added by X = 5-4 = 1 Value added by Y = 5.5-1=4.5 Y adds the most value, the strategic postion of Y is that it is able to offer a product with a high benefit at a much lower avg cost than X Y has a benefit advantage - this means that Ycan create superior values by offering cost proximity but with substantially higher benefit than X Y has a competitive advantage over X because of the value added Consumers are most likely willing to pay for premium enhancements in this mkt

exploiting a competitive advantage through pricing

When the product differentiation is weak or not possible (i.e. when there is high demand elasticity) the firm should follow a strategy that maximizes mkt share With a cost advantage the firm should underprice its rivals to build or increase mkt share (i.e. economies of scale, scope, learning) With a benefit advantage, the firm should maintain price parity and let the benefit build the share When the product differentiation is possible and strong (low demand elasticity) the firm should follow a profit margin strategy With a cost advantage, the firm should maintain price parity with its rivals With a benefit advantage the firm should charge a price premium over the competitors

Could a company create more value and reduce consumer surplus at the same time? Explain in terms of benefits, prices and costs.

Yes, Value Creation: Value is created when a product or service provides benefits to consumers. These benefits can be in the form of quality, features, convenience, innovation, or other factors that enhance the consumer experience. A company can create more value by improving the features, quality, or overall utility of its products or services. Consumer Surplus: Consumer surplus is the economic measure of the benefit consumers receive when they are able to purchase a good or service for less than the maximum price they are willing to pay. Reducing consumer surplus occurs when a company increases prices or decreases the benefits provided without a corresponding decrease in price. Benefits: If a company enhances the benefits of its products or services, it can create more value for consumers. This could include improvements in functionality, performance, durability, or other desirable features. Prices: Increasing prices without a corresponding increase in benefits can reduce consumer surplus. This means consumers may have to pay more for a product or service without receiving additional value in return. Costs: From the company's perspective, managing costs is crucial. If a company can increase prices without significantly increasing production or operational costs, it may increase its profit margin. Now, to create a situation where a company creates more value and reduces consumer surplus at the same time: The company could improve the quality or features of its product, creating more value for consumers. Simultaneously, the company could increase the price disproportionately or implement pricing strategies that capture more consumer surplus. An example of this would be iPhones-Apple frequently releases new models and increases prices without providing corresponing improvements/benefits

what is an experience good

You don't know the quality before buying Asymmetric information Firms who have a strong brand would have a competitive advantage