ECON 5315 Homework 3 Chapters 8 & 9

Value Creation Equation

(B-P)+(P-C)

Value Net

A concept developed by Brandenburger and Nalebuff as a counterpart to Porter's five forces consisting of suppliers, customers, competitors, and complementors

Generic Strategy

A concept developed by Michael Porter that describes, in broad terms, how it positions itself to compete in the market it serves.

Indifference Curve

A curve that can be used to describe the set of price-quality combinations that yields the same consumer surplus to an individual

Search Good

A good whose quality is relatively easy to evaluate before purchase

Competitive Advantage

A situation in which a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market.

Share Strategy

A strategy in which a firm exploits its benefit or cost advantage through a higher market share rather than through higher price-cost margins

Broad-Coverage Strategy

A targeting strategy that is aimed at serving all customer groups in the market by offering a full line of related products

Stuck in the Middle

A term coined by Michael Porter that describes a firm that pursues elements of cost leadership and benefit leadership at the same time and in the process fails to achieve either a cost advantage or a benefit advantage

Consumer Surplus Equation

B-P

How can entry erode incumbents' profits?

Entrants decrease market concentration

The five parts of the Five-Forces Framework

Internal rivalry; entry; substitutes and complements; supplier power; buyer power

Producer Surplus Equation

P-C

Seller Power

The ability of firms to negotiate prices that extract higher profits from buyers

Consumer Surplus

The perceived benefit of a product per unit consumed minus the product's monetary price

Maximum Willingness-to-Pay

The price at which a customer is indifferent between buying a product and going without it

Value-Added Analysis

The process of using market prices of unfinished and semi-finished goods to estimate the incremental value created by distinctive parts of the value chain

Consumer Surplus Parity

The situation in which multiple firm's price-quality positions line up along the same indifference curve offering a consumer the same amount of consumer surplus

What does the steepness (slope) of an indifference curve indicate?

The tradeoff a consumer is willing to make between price and quality

Focus Strategy

When a firm either offers a narrow set of varieties, serves a narrow set of customers, or does both