Econ RAT

Cost of Capital:

A firm specific rate of return, specified by the market's view of a firm's riskiness, which determines the cost of raising capital. If the firm is unable to exceed this expected return, they will be unable to attract investor's capital.

Exit:

Incumbent ceases productions all together. Either by leaving a particular market or segment or geographic market.

Isolating Mechanisms:

Mechanisms that limit the extent to which a firm's competitive advantage can be duplicated or neutralized by competitors. They are to companies what barriers to entry are to an industry.

Flexibility Analysis:

This analysis incorporates uncertainty into positioning and sustaining strategic commitments.

Competitive Advantage:

a firm has a competitive advantage when it outperforms (i.e. earns higher rates of profitability than) competitors who sell in the same market.

"Soft" Strategy:

a firm's strategy that involves no change in capacity.

Broad Coverage Strategy:

a strategy that is aimed at serving all of the segments in the market by offering a full line of related products.

Focus Strategy:

a strategy whereby a firm concentrates on either offering a single product or serving a single market segment or both.

Limit Pricing:

an incumbent sets prices very low to discourage new entrants from entering the market. Two types- Contested and Strategic.

Predatory Acts:

are entry deterring strategies by an incumbent that appear to reduce its profits, until one accounts for the additional profits that it earns because the acts deter entry or promote exit by competitors.

Capabilities:

clusters of activities that a firm does especially well in comparison with other firms.

Tactical Decision:

decision by a firm that can easily be reversed and whose impact persists only in the short run.

Strategic Commitment:

decision by a firm that has a long-term impact and is difficult to reverse.

Perfectly Contestable:

describes the condition when a monopolist cannot raise prices above competitive levels. In theory, the threat of entry can constrain a monopolist from raising prices.

Blockaded Entry:

exists if incumbents need not undertake any entry-deterring strategies to deter entry.

Accommodated Entry:

exists if structural entry barriers are low and either (a) entry-deterring strategies would be ineffective; or (b) the cost to incumbents of trying to deter entry exceeds the potential benefits from keeping entrants out.

Strategic Entry Barriers:

exists when incumbent firms take explicit actions aimed at deterring entry. Entry-deterring strategies include capacity expansion, limit pricing, and predatory pricing.

Deterred Entry:

exits when incumbents can keep entrants out using entry-deterring strategies.

Incumbent:

firm that is already in operation in a market.

Resources:

firm-specific assets, such as patents and trademarks, brand name reputation, installed base, organizational culture, and workers with firm-specific expertise or know-how.

Imperfect mobility:

generally means that the superior resource cannot be traded (or if the resource can be traded, there are reasons it wouldn't be as productive in the hands of another producer). If a resource could be used just as effectively or more effectively by a competitor, the opportunity cost of utilizing the resource offsets the profits generated by the resource. Imperfect mobility implies the existence of cospecialization.

Competitive advantage is

in a competitive market is not sustainable indefinitely. The resource-based theory of the firm demonstrates how profits are reduced through competition, new market entrants and imitation among other reasons.

Ex-post barriers to competition:

insure that the competitive advantage associated with heterogeneity is preserved. Subsequent to a firm gaining a superior position and earning rents, there must be forces that limit the competition for those rents. If another firm can obtain the same resources, there is no ex post limit. Examples include patents, experience curves, and ownership of scarce inputs.

Direct Effect:

is the commitment's impact on the present value of the firms profits, assuming that the firm adjusts it own tactical decisions in light of this commitment, but that its competitors behavior does not change.

Post-entry Competition:

the conduct and performance of firms after entry has occurred.

Value Created:

the difference between the value that resides in the finished good and the value that is sacrificed to convert raw inputs into finished products.

Consumer Surplus:

the difference between what a consumer is willing to pay for a good and what she actually pays.

Perceived Benefit:

the highest price a consumer is willing to pay for a good.

Resource heterogeneity:

the resources and capabilities underlying firm production are heterogeneous across firms. In a particular industry, since firms are all different, there must be some whose resources are superior to other firms for competing in the industry.

Co-Specialized Assets:

Assets that are more valuable and derive more rents, when used together.

Indifference Curve:

a curve that illustrates price-quality combinations that yield a constant level of consumer utility. Consumers are indifferent among the different price-quality combinations offered along this curve.

Causal Ambiguity:

Exists if the cause of a firm's ability to create value is obscured and only imperfectly understood. External observers, competitors, find it difficult to know why one firm can create an advantage and therefore cannot duplicate the company's ability to extract rents.

Strategic Substitutes:

Occurs when reaction functions of firms are downward sloping.

Imperfectly Mobile:

Resources are imperfectly mobile when they are cospecialized and therefore derive higher rents for the firm with ownership of cospecialized assets, since these assets will be worth less to any other firm. The owning firm will have these quasi-rents. (Current rents less the next best option.)

Social Complexity:

Source of a firm's competitive advantage may lie in its interpersonal capability (such as trust with suppliers, relationships with clients). The ability to create or manage this advantage may be too complex and expensive to replicate easily, thereby leading to increase sustainability of their competitive advantage.

Competitive Advantage:

The ability of a firm to outperform its industry average and earn higher rents than the norm. A firm's competitive advantage is subject to issues of sustainability, otherwise the firm's exceptional performance will be vulnerable to a regression to the mean.

Judgment Analysis:

The analysis involves taking stock of the organizational and managerial factors that might distort the firm's incentive to choose an optimal strategy.

Resource-Based Theory of the Firm:

Theory that sustainable competitive advantage exists only if resources and capabilities are scarce and imperfectly mobile. In a well-functioning market, where resources are plentiful, competitively priced, and not specific to a company, competitive advantages do not exist.

Positioning Analysis:

This analysis determines the direct effect of the strategic commitment. It involves the analysis of whether the firm's commitment is likely to result in a product market position in which the firm delivers superior consumer benefits or operates with lower costs than competitors.

Sustainability Analysis:

This analysis determines the strategic effect of the commitment, which could involve a formal analysis of the net present value of alternative strategic commitments.

Entry:

occurs as new firms begin production and sales in a market. Entry can occur under two different situations: (a) by new firms, that were previously not in the industry, or (b) diversifying firms, which are firms that were in business, but were not previously doing business in that market.

Strategic Complements:

occurs when reaction functions of firms are upward sloping.

Option Value:

of a delay is the difference between the expected net present value if the firm invests today and the expected net present value if the firm waits until the uncertainty resolves itself. Option value is the outcome of preserving flexibility or future options open after a commitment has been made.

Cost Advantage:

one approach to achieving competitive advantage. A firm that pursues a cost advantage strategy seeks to attain a lower C, while maintaining a B that is comparable to competitors.

Differentiation Advantage:

one approach to achieving competitive advantage. A firm that pursues a differentiation advantage strategy seeks to offer a higher B, while maintaining a C that is comparable to competitors.

Ex-ante barriers to competition:

other firms cannot recognize the value that the resource creates up front

Predatory Pricing:

refers to the practice of setting price with the objective of driving new entrants or existing firms out of business.

Structural Entry Barriers:

result when incumbents have natural cost or marketing advantages, or benefits from favorable regulations. Low demand, high-capital requirements, and limited access to resources are all examples of structural entry barriers.

Cost Driver:

source of cost advantage.

"Aggressive" Strategy:

strategy that involves a large and rapid increase in capacity and is aimed at increasing the firm's market share.

Strategic Effect:

takes into account the competitive side effects of the commitment; i.e. how does the commitment alter the tactical decisions of the rival and ultimately, the Cournot or Bertrand equilibrium.

The resource-based theory states

that for a firm to maintain long run excess profits, its resources must meet four conditions: