Chapter 7: Economics of Strategy (Besanko, et al)

What is a grim trigger strategy in a two firm repeated game?

A strategy in which a firm initially cooperates and then aggresses for the rest of the game as soon as the opponent aggresses.

What should a manager disregard when seeking pricing stability that is least likely to suffer from anti-trust legislation?

All pricing decisions should be made unilaterally. Avoid direct contacts with competitors about price

What term refers to situations in which firms can sustain prices in excess of those that would arise in a non-cooperative single-shot price or quantity setting game?

Cooperative pricing

Suppose a firm has $50 million to invest in a new market. Given market uncertainties, the firm forecasts a high scenario where the PV of the investment is $200 million & a low scenario where the present value of the investment is $20 million. Supposed that by WAITING a year, the firm can learn with certainty which scenario will arise. Assume a 10% annual discount rate. If the firm WAITS ONE YEAR and learns the high scenario will happen, then it can still invest and make a NPV of $150 million. If the firm maximizes its expected NPV, then what is the firm's expected NPV of the investment?

Cost of Investment $50,000,000.00 p High 50.00%; pv High $50,000,000 p Low 50.00%; pv Low 0 i=10.00% ; 1 + i=1.10 NPV (waiting)= (p high * pv high + p low * pv low) / (1+i) =$68,181,818.18 NPV (NOT waiting)= P(high) x PV(high) +P(low) x PV(low) - Cost Invested = $60,000,000 (previous problem) Firm should wait 1 year

What statement is TRUE about how the volatility of demand conditions affects the sustainability of cooperative pricing?

Demand volatility is an especially serious problem when the production involves substantial fixed costs

What type of effect describes how a commitment impacts the present value of the firm's profits, assuming the firm adjusts it own tactical decisions in light of this commitment and that its competitor's behavior does not change?

Direct effect

What type of cooperation inducing strategy is defined as one so compelling that a firm would expect all other firms to adopt it?

Focal point

What is considered true about tough commitment?

It is bad for competitors

What is considered true about soft commitment?

It is good for competitors

What term refers to the situation in the used car market where owners are more anxious to sell low-quality cars than high-quality cars?

Lemons market

What type of clause is a provision in a sales contract that promises a buyer that it will pay the lowest price the seller charges?

Most favored customer clause

Suppose a firm has $50 million to invest in a new market. Given market uncertainties, the firm forecasts a high scenario where the PV of the investment is $200 million & a low scenario where the PV of the investment is $20 million. If the firm believes each scenarios is equally likely and invests today, what is the NPV of the investment?

NPV= P(high) x PV(high) +P(low) x PV(low) - Cost Invested plug in numbers $60 million

What practice does NOT help firms facilitate cooperative pricing?

Price following

What term describes the situation created by a large dominant firm where smaller firms can find buyers as long as they sustain a lower price?

Price umbrella

What type of option exists when a decision maker has the opportunity to tailor a decision to information that will be received in the future?

Real option

What term best describes a decision that has a long-term impact and is difficult to reverse?

Strategic commitment

What tactical term best describes the capacity relationship between Toyota & Honda such that Toyota's response is to reduce production output of the Rav 4 if Honda were to first announce a large increase in the production of the CR-V that drove down prices?

Strategic substitute

How much revenue a firm brings in by improving the quality of a product such that more consumers want to buy it depends on what two factors?

The increase in DEMAND caused by the increase in QUALITY and the INCREMENTAL PROFIT earned on each additional unit sold

Why do price sensitive buyers tend to harm cooperative pricing in a market?

There is an increase in temptation to cut price, even if competitors are expected to match

What term describes a policy in which a firm is prepared to match whatever change in strategy a competitor makes?

Tit-for-Tat strategy

What type of pricing involves a firm quoting a single delivered price for all buyers with the firm absorbing any freight charges itself?

Uniform delivered pricing

What process involves using computer simulations to track the likely competitive implications of pricing and investment decisions over many years?

War gaming

What strategy involves soft commitment postures, strategic complements for the Stage 2 tactical variables, a refrain commitment action and an acceptance of the status quo out of fear thus waiting to follow the leader?

Weak-Kitten Effect