EC 6300 Exam 1

Discuss the difference between a weak substitute and a strong substitute.

-Substitute goods are two goods that could be used for the same purpose. -If the price of one good increases, then demand for the substitute is likely to rise. -Therefore, substitutes have a positive cross elasticity of demand. Strong Substitute Goods -If two goods are close substitutes, there will be a high cross elasticity of demand. -Example, if price of Sainsburys flour increases 10%, demand for Hovis flour may increase 20%. Therefore, the cross elasticity of demand is +2.0 Weak Substitute Goods. -If goods are weak substitutes, there will be a low cross elasticity of demand. -Example, if price of Daily Mail increases 10%, demand for the Financial Times may only increase 1%. Therefore, the cross elasticity of demand is 0.1 -If price of margarine increases 10%, demand for butter may rise 2%. Perfect Substitutes Two goods are perfect substitutes if the utility consumers get from one good is the same as another. For example, a dollar from one FOREX company, is worth exactly the same as getting a dollar from a different FOREX company. A4 paper from Office World, gives same utility as A4 paper from WHSmiths. Therefore, in theory, if one good was more expensive, there would be no demand as people would buy the cheaper alternative

Be able to discuss (in detail) the five (or six) forces of industry analysis. Also discuss this in terms of the Porter article on the same subject.

1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are. 2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, then they are often able to dictate terms to you. 3. Competitive Rivalry: What is important here is the number and capability of your competitors. If you have many competitors, and they offer equally attractive products and services, then you'll most likely have little power in the situation, because suppliers and buyers will go elsewhere if they don't get a good deal from you. On the other hand, if no-one else can do what you do, then you can often have tremendous strength. The more rivalry the less profitability an industry. 4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do - for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power. 5.Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.

Discuss the concept and consequences of market power (whether it be buyer or supplier). Why is the concept of market power so important in competitive analysis?

A company's ability to manipulate price by influencing an item's supply, demand or both. A company with market power would be able to affect price to its benefit. Firms with market power are said to be "price makers" as they are able to set the price for an item while maintaining market share. Generally, market power refers to the amount of influence that a firm has on the industry in which it operates. Powerful suppliers capture more of the value for themselves by charging higher prices, limiting quality or services, or shifting costs to industry participants. Powerful suppliers, including suppliers of labor, can squeeze profitability out of an industry that is unable to pass on cost increases in its own prices. Microsoft, for instance, has contributed to the erosion of profitability among personal computer makers by raising prices on operating systems. PC makers, competing fiercely for customers who can easily switch among them, have limited freedom to raise their prices accordingly. Companies depend on a wide range of different supplier groups for inputs. A supplier group is powerful if: --The supplier group does not depend heavily on the industry for its revenues. Suppliers serving many industries will not hesitate to extract maximum profits from each one. If a particular industry accounts for a large portion of a supplier group's volume or profit, however, suppliers will want to protect the industry through reasonable pricing and assist in activities such as R&D and lobbying. --There is no substitute for what the supplier group provides. Pilots' unions, for example, exercise considerable supplier power over airlines partly because there is no good alternative to a well-trained pilot in the cockpit. The supplier group can credibly threaten to integrate forward into the industry. In that case, if industry participants make too much money relative to suppliers, they will induce suppliers to enter the market. Powerful customers—the flip side of powerful suppliers—can capture more value by forcing down prices, demanding better quality or more service (thereby driving up costs), and generally playing industry participants off against one another, all at the expense of industry profitability. Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions. As with suppliers, there may be distinct groups of customers who differ in bargaining power. A customer group has negotiating leverage if: --There are few buyers, or each one purchases in volumes that are large relative to the size of a single vendor. Large-volume buyers are particularly powerful in industries with high fixed costs, such as telecommunications equipment, offshore drilling, and bulk chemicals. High fixed costs and low marginal costs amplify the pressure on rivals to keep capacity filled through discounting. Market Power is important because it could be abused and the company could: --Setting higher prices. Firms with a degree of monopoly power are able to set higher prices to consumers. --Offering less choice. --Restricting competition. For example, firms may enter into vertical competition fixing agreements. E.g. an ice-cream firm may give a shop a free freezer as long as it promises to only sell its ice-creams. Walmart has power over suppliers e.g. Rubbermaid

What are the main characteristics of a perfectly competitive market

A market structure in which the following five criteria are met: 1) All firms sell an identical product 2) All firms are price takers - they cannot control the market price of their product (price is determined by supply and demand) 3) All firms have a relatively small market share 4) Buyers have complete information about the product being sold and the prices charged by each firm 5) The industry is characterized by freedom of entry and exit. Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other, real-life market structures are compared. The industry that most closely resembles perfect competition in real life is agriculture. Perfect competition is the opposite of a monopoly, in which only a single firm supplies a particular good or service, and that firm can charge whatever price it wants because consumers have no alternatives and it is difficult for would-be competitors to enter the marketplace. Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand. Also, consumers have many substitutes if the good or service they wish to buy becomes too expensive or its quality begins to fall short. New firms can easily enter the market, generating additional competition. Companies earn just enough profit to stay in business and no more, because if they were to earn excess profits, other companies would enter the market and drive profits back down to the bare minimum. Real-world competition differs from the textbook model of perfect competition in many ways. Real companies try to make their products different from those of their competitors. They advertise to try to gain market share. They cut prices to try to take customers away from other firms. They raise prices in the hope of increasing profits. And some firms are large enough to affect market prices. But the perfect competition model is not an ideal that we should try to achieve in the real world. An example: Agriculture: In some cases, there are several farmers selling identical products to the market, and many buyers. At the market, it is easy to compare prices. Therefore, agricultural markets often get close to perfect competition. If for instance the milk farmers all raise their prices to make more money soon other farmers would enter the market and sell at lower prices pushing the profitability back down.

What are the main characteristics of an oligopoly?

A situation in which a particular market is controlled by a small group of firms. An oligopoly is much like a monopoly but there is at least two sellers. ○ Few sellers that control the market ○ Very common market structure -Firms usually do not try to steal market share by entering into price wars (Coke/Pepsi do not lower their prices to gain a competitive advantage). -Because they are usually the few largest firms in the market, the decisions of one firm always influence the decisions of the other. Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. Ex: The retail gas market because a small number of firms control a large majority of the market. Cable/Internet providers. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer like Texaco wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may reduce their price in retaliation. Oligopolies are common in the airline industry, banking, brewing, soft-drinks, supermarkets and music. For example, the manufacture, distribution and publication of music products in the UK, as in the EU and USA, is highly concentrated, with a 4-firm concentration ratio of around 75%, and is usually identified as an oligopoly.

What are the main characteristics of a monopoly market

A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products. ○ High barriers to entry (patents, raw material capture, government grants etc) ○ One supplier who owns most of the market usually over 60% or greater ○ Lot of control over their price but still face a demand curve ○ Highest profitability A monopoly potentially allows a company to become powerful enough to prevent competitors from entering the marketplace. Usually result in Limited consumer choice, higher prices, limited response to consumer concerns. Monopoly is the extreme case in capitalism. Most believe that, with few exceptions, the system just doesn't work when there is only one provider of a good or service because there is no incentive to improve it to meet the demands of consumers. Governments attempt to prevent monopolies from arising through the use of antitrust laws. Of course, there are gray areas; take for example the granting of patents on new inventions. These give, in effect, a monopoly on a product for a set period of time. The reasoning behind patents is to give innovators some time to recoup what are often large research and development costs. In theory, they are a way of using monopolies to promote innovation. Another example are public monopolies set up by governments to provide essential services. Some believe that utilities should offer public goods and services such as water and electricity at a price that is affordable to everyone. Example: In 1982, AT&T was found to be in violation of U.S. antitrust law while acting as the sole supplier of telephone services to the country. As a result, it was forced to split into six subsidiaries, known as Baby Bells. Power Utilities are regulated monopolies.

Discuss these pricing strategies: strategic commitments, two-stage setting, cooperative pricing, tit-for-tat.

A strategic commitment alters the strategic decisions of rivals. As such, it must involve an irreversible decision that is visible, understandable, and credible. The commitment must be irreversible or it carries no commitment weight: the firm can back down if the commitment does not have the desired strategic effect. It must be visible and understandable or rivals will have nothing to react to. It must be credible so that rivals believe the firm will actually carry out the commitment. Example:(1) CVS made it very public that they will not be selling tobacco products in the their pharmacies any longer. (2) Loblaw committing to launch to Real Canadian Superstores in an effort to keep Walmart from launching their Superstores in canada In a two-stage competition, firms first choose capacities and then choose prices and is identical to the Cournot equilibrium in quantities.The notion that a firm's capacity choice is based on conjectures about the capacity choices of other firms is directly analogous to the idea in the Cournot model that each firm bases its output choice on conjectures of the output choices of other firms. The notion that capacity decisions then determine a market price is also analogous to the Cournot model. Market structure affects the sustainability of cooperative pricing. High market concentration facilitates cooperative pricing. Asymmetries among firms, lumpy orders, high buyer concentration, secret sales transactions, volatile demand, and price-sensitive buyers make pricing cooperation more difficult. Practices that can facilitate cooperative pricing include price leadership, advance announcements of price changes, most favored customer clauses, and uniform delivered pricing. Cooperative pricing strategy involves the collaboration of two or more market suppliers that collectively decide a product's sale price. In a supply chain, a manufacturer, wholesaler and retailer may work together to determine pricing at each stage of distribution. The goal may be to maximize profits or leverage group buying power. For example, retail supply cooperatives band individual businesses together to secure volume discounts usually only available to large chains that tend to purchase more products. Example: The most powerful example of a cartel is the Organization of Petroleum-Exporting Countries, or OPEC. OPEC's 12-member nations coordinate the production and export of oil to control its price. In another, recent, example, Unilever and Proctor & Gamble were recently fined a total of $465 million after the European Commission investigated them for colluding to fix the prices of laundry detergent in Europe. When you use a tit-for-tat strategy, you start by assuming players cooperate. In any subsequent round, you do whatever your rival did in the previous round. Thus, if your rival cheated on an understanding in the last round, you cheat this round. If your rival cooperated in the last round, you cooperate this round. A tit-for-tat strategy tends to lead to cooperation because it punishes cheaters in the next round. In addition, it forgives cheaters if they subsequently decide to cooperate. One requirement of the tit-for-tat strategy is that the players are stable. The players remember how the game was played in the previous period. New players can upset the necessary balance by not having the required memory of past behavior. In this example, there are two railroads you may recognize from the board game Monopoly — the Pennsylvania Railroad and the B & O Railroad. Here, they're competing for traffic between the same cities. The railroads can either cheat on one another and charge low prices for freight, or they can cooperate and charge high prices. The illustration shows the resulting payoff table of annual profits.

What are the main characteristics of a monopolistic competitive market?

A type of competition within an industry where: 1. All firms produce similar yet not perfectly substitutable products. There must be Differentiation between products. If you are slightly different it gives you a monopoly advantage on your product. 2. All firms are able to enter the industry if the profits are attractive. 3. All firms are profit maximizers. 4. All firms have some market power, which means none are price takers. 5. Many competitors Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Firms use advertising and other methods to differentiate themselves from their competitors. Because of this, firms are left with excess production capacity. ex: Toothbrushes, Fine Dining, Branded Computers, Name Brand Clothing, Hotels

Cross Price Elasticity

An economic concept that measures the responsiveness in the quantity demand of one good when a change in price takes place in another good. The measure is calculated by taking the percentage change in the quantity demanded of one good, divided by the percentage change in price of the substitute good: The cross elasticity of demand for substitute goods will always be positive, because the demand for one good will increase if the price for the other good increases. For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for tea (a substitute beverage) will increase as consumers switch to an alternative. On the other hand, the coefficient for compliments will be negative. For example, if the price of coffee increases (but everything else stays the same), the quantity demanded for coffee stir sticks will drop as consumers will purchase fewer sticks. If the coefficient is 0, then the two goods are not related

Barriers To Entry

Barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry. Barriers can also be obstacles an individual faces in trying to gain entrance to a profession, such as education or licensing requirements. Because barriers to entry protect incumbent firms and restrict competition in a market, they can distort prices. Monopolies are often aided by barriers to entry. Examples of barriers to entry include: Capital: need the capital to start up such as equipment, building, and raw materials. Customer loyalty: Large incumbent firms may have existing customers loyal to established products. The presence of established strong brands within a market can be a barrier to entry in this case. Economy of scale: The increase in efficiency of production as the number of goods being produced increases. Cost advantages can sometimes be quickly reversed by advances in technology. Intellectual property: Potential entrant requires access to equally efficient production technology as the combatant monopolist in order to freely enter a market. Patents give a firm the legal right to stop other firms producing a product for a given period of time, and so restrict entry into a market. Patents are intended to encourage invention and technological progress by guaranteeing proceeds as an incentive. Similarly, trademarks and service marks may represent a kind of entry barrier for a particular product or service if the market is dominated by one or a few well-known names .

Why are complements so important to a core product?

Complements are products or services used together with an industry's product. Complements arise when the customer benefit of two products combined is greater than the sum of each product's value in isolation. Computer hardware and software, for instance, are valuable together and worthless when separated. In recent years, strategy researchers have highlighted the role of complements, especially in high-technology industries where they are most obvious. By no means, however, do complements appear only there. The value of a car, for example, is greater when the driver also has access to gasoline stations, roadside assistance, and auto insurance. Complements can be important when they affect the overall demand for an industry's product. However, like government policy, complements are not a sixth force determining industry profitability since the presence of strong complements is not necessarily bad (or good) for industry profitability. Complements affect profitability through the way they influence the five forces. The strategist must trace the positive or negative influence of complements on all five forces to ascertain their impact on profitability. The presence of complements can raise or lower barriers to entry. In application software, for example, barriers to entry were lowered when producers of complementary operating system software, notably Microsoft, provided tool sets making it easier to write applications. Conversely, the need to attract producers of complements can raise barriers to entry, as it does in video game hardware. The presence of complements can also affect the threat of substitutes. For instance, the need for appropriate fueling stations makes it difficult for cars using alternative fuels to substitute for conventional vehicles. But complements can also make substitution easier. For example, Apple's iTunes hastened the substitution from CDs to digital music. Complements can factor into industry rivalry either positively (as when they raise switching costs) or negatively (as when they neutralize product differentiation). Similar analyses can be done for buyer and supplier power. Sometimes companies compete by altering conditions in complementary industries in their favor, such as when videocassette-recorder producer JVC persuaded movie studios to favor its standard in issuing prerecorded tapes even though rival Sony's standard was probably superior from a technical standpoint. Identifying complements is part of the analyst's work. As with government policies or important technologies, the strategic significance of complements will be best understood through the lens of the five forces.

Evidence on Price and concentration

Concentration within an industry refers to the degree to which a small number of firms provide a major portion of the industry's total production. If concentration is low, then the industry is considered to be competitive and prices are lower. If the concentration is high, then the industry will be viewed as oligopolistic or monopolistic. Government agencies such as the U.S. Department of Justice examine concentration within an industry when deciding to approve potential mergers between industry firms. For example, in a recent study Auto Rental prices in concentrated markets (monopoly/duopoly) are found to be approximately 30% higher compared to competitive markets with seven or eight firms.

What is hit and run entry?

Entry to a market in the expectation of making an immediate profit, possibly followed by withdrawal. This can occur only if the entrant does not incur sunk costs. If there are sunk costs entry will be profitable only if the entrant expects to stay in the market long enough to recoup them. Absence of sunk costs is probable only through economies of scope: firms with skills or facilities which can be put to a variety of uses can afford hit-and-run entry to a particular market. Hit and run competition occurs when a firm temporarily enters a market and then leaves when supernormal profits are exhausted. Hit and run competition is considered to be a feature of a contestable market. A contestable market has low barriers to entry and exit. Therefore, if firms in the industry are making supernormal profits, there is an incentive for a new firm to enter and take advantage of the high profits. If the industry no longer makes supernormal profits, it is easy for the firm to exit and leave without excessive costs. The threat of hit and run competition may be sufficient to keep prices and profits low. If the market is perfectly contestable, firms might wish to engage in some form of limit pricing to avoid the disruption of hit and run competition. Example of Hit and Run Competition If a type of clothing becomes particularly fashionable (for example the Onesie), firms can set high prices and make supernormal profits. However, this will encourage other firms to enter into the market and also produce Onesies. If it falls out of fashion, some clothing firms will leave that particular segment of the clothing market. Therefore, firms may enter the 'Onesie' market for just a short time - a classic example of hit and run competition. Hit and run competition may also be highly seasonal. For example in the peak of summer, being a tourist guide becomes quite profitable. Therefore, some entrepreneurs may temporarily enter the market until supernormal profits are exhausted at the end of the tourist season. Requirements for Hit and Run Competition Good information about the profitability of the industry. Low barriers to entry and exit Low sunk costs. Sunk costs are unrecoverable and so will create a costly exit - discouraging hit and run competition.

Discuss some of the national infrastructure changes that has changed business and competition since the 1840s.

In 1840, communications and transportation infrastructures were poor. This increased the risk to businesses of operating in too large a market and mitigated against large-scale production. Business in 1840 was dominated by small, family-operated firms that relied on specialists in distribution as well as market makers who matched the needs of buyers and suppliers. By 1910, improvements in transportation and communications made large-scale national markets possible and innovations in production technology made it possible to greatly reduce unit costs through large-scale production. Mass distribution firms developed along with the growth in mass production. Businesses in 1910 that invested in these new technologies needed to assure a sufficient throughput to keep production levels high. This led them to vertically integrate into raw materials acquisition, distribution, and retailing. Manufacturing firms also expanded their product offerings, creating new divisions that were managed within an "M-form" organization. These large hierarchical organizations required a professional managerial class. Unlike managers in 1840, professional managers in 1910 generally had little or no ownership interest in their firms. Continued improvements in communications and transportation have made the modern marketplace global. New technologies have reduced the advantages of large-scale production and vertical integration and promoted the growth of market specialists.

Discuss firm effects vs. industry effects as they relate to competitive advantage.

Industry effects create competitive advantage BETWEEN industries - Huge disparity between industry profitability e.g. Pharma over Airlines - Using Porter 5 Forces one can answer why industries are so different - Positioning View states that the majority of profit are obtained from industry level factors such as barriers, regulation, market structure, etc -Items such as barriers, regulations lead to different and more/less restrictive market structure. The market structure leads to different conduct (behavior), which leads to better/worse performance. The industry effects make entire industries more or less profitable (pharmaceuticals vs airlines). Firm effects create competitive advantage WITHIN industries -A resource-based view/theory emphasizes that a firm utilizes its resources and capabilities to create a competitive advantage that ultimately results in superior value creation. -RBT can effect industries, but are more likely to create the competitive advantage of a firm within a industry (Walmart or SWA) -Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few competitors can acquire easily. The following are some examples of such resources: * Patents and trademarks * Proprietary know-how * Installed customer base * Reputation of the firm * Brand equity According to the resource-based view, in order to develop a competitive advantage the firm must have resources and capabilities that are superior to those of its competitors. Without this superiority, the competitors simply could replicate what the firm was doing and any advantage quickly would disappear. Firm effects capture the unique firm characteristics which influence the variation in strategies and performance outcomes across industries and firms, and industry effects refer to attributes common to an industry.

Limit pricing

Limit Pricing is a pricing strategy a monopolist may use to discourage entry. If a monopolist set its profit maximising price (where MR=MC) the level of supernormal profit would attract new firms into the market. Therefore, the monopolist may decide to set a price below this profit maximising level, but still enable it to make higher profits than in a competitive market. For limit pricing to be effective, the monopolist needs to increase output up to the level where a new firm will not be able to make any profit on entering the market. The monopolist may also build excess capacity as a threat that if firms enter, it will reduce price even further. Two companies are competing for a market segment. Both companies have perfect information. Company A is already in the market and is making a monopolistic profit. Company B is considering entry into the market segment to take some of the profits from company A. Company A is not keen on the idea. So, to discourage company B from entering the market, company A begins to sell its products below the monopolistic price (or threatens to sell its products below the monopolistic price if company B decides to enter the market). This action would reduce or eliminate any potential future profits company B would make if it entered the market segment. Ultimately company B decides the profit margins are to low and forfeits entering the market segment. Company A continues making monopolist profits. An unsuccessful limit pricing strategy can occurs if one of the firms involved cannot make the rational link between costs and future profits.

Barriers to Exit

Obstacles or impediments that prevent a company from exiting a market. Typical barriers to exit include highly specialized assets, which may be difficult to sell or relocate, huge exit costs, such as asset write-offs and closure costs, and inter-related businesses, making it infeasible to sell a part of it. Another common barrier to exit is loss of customer goodwill. A company may decide to exit a market because it is unable to capture market share or turn a profit or for some other reason altogether. High barriers to exit might force it to continue competing in the market, which would intensify competition. Specialized manufacturing is an example of an industry with high barriers to exit, because it requires large up-front investment in equipment that can only do one task. These obstacles often cost the firm financially to leave the market and may prohibit it doing so. If the barriers of exit are significant; a firm may be forced to continue competing in a market, as the costs of leaving may be higher than those incurred if they continue competing in the market. The factors that may form a barrier to exit include: High investment in non-transferable fixed assets: This is particularly common for manufacturing companies that invest heavily in capital equipment which is specific to one task. High redundancy costs: If a company has a large number of employees, employees with high salaries, or contracts with employees which stipulate high redundancy payments, then the firm may face significant cost if it wishes to leave the market. Other closure costs: Contract contingencies with suppliers or buyers and any penalty costs incurred from cutting short tenancy agreements.

Define and describe a PEST analysis. What are the uses and benefits of a macro-institutional analysis (aka environmental analysis)?

PEST describes a framework of macroenvironmental factors used in environmental scanning. It is a part of the external analysis when doing market research and gives a certain overview of the different macroenvironmental factors that the company has to take into consideration. PEST analysis allows marketing and financial experts to examine more factors than money alone when making decisions about the company's services or products. PEST also examines the political, economical and social environment that enables a company to thrive, as well as any environmental, legal or technological changes that may eventually affect its profits. Results from PEST analysis allow the company to make specific choices in planning for the company's future, from how the brand should be presented to any changes within the structure of the company's organization to the development of new products. PEST, also known as PESTLE, is an acronym for "Political, Economic, Social, Technological, Legal and Environmental." PEST looks at the factors taking place in a nation or marketplace and examines how those factors affect the consumer. For example, a manager or executive using PEST analysis may focus on the social aspects of the company's customers. These may include customer demographics, culture and buying patterns. The environment may also play a role in customer reach. Adverse weather conditions, how the customer views sustainability and even environmental policies at the local or national level can affect the future of the brand. Political - Current political strife, changes in governmental policies and funding from the government all may affect the buyer's decision. Deregulation of utility and other industries, Affordable Care Act Economic - Interest rates, Unemployment, Consumer Price index, Trends in GDP Social - Greater concern for fitness, Greater concern for environment, Postponement of family formation Technological - Genetic Engineering, Cancer Drugs, 3D Printing, Nanotechnology

If you were in marketing, how would your advertising strategy differ based on your market structure (competitive, monopolistic competitive, or oligopoly, and monopoly)

Perfect Competition: Advertising in perfect competition does not enable a company to either increase their price or to get a larger share of total market. Fierce Competition: Not focus on the product at all but rather try to build up the brand to promote brand loyalty. Monopolistic Competition: Advertise to highly differentiate my product from my competitors. Consistently remind my customers how much different and better our product is than the other firms. Oligopoly: Non-price competition is the favoured strategy for oligopolists because price competition can lead to destructive price wars. Spending on advertising, sponsorship and product placement - also called hidden advertising - is very significant to many oligopolists. Oligopolistic firms can gain maximum from advertisement by increasing its market share as well as increasing total market demand. To achieve this, they need to establish the superiority of their products over those of their competitors, and in doing so they must also counter the impact of advertisement of the competitors. Monopoly: In monopolies advertising may be used to generate greater awareness of the product and its value to the customer. This can result in increasing overall market demand. However the monopolistic supplier has no need to use advertising to increase market share.

Predatory pricing

Predatory pricing occurs when a firm sells a good or service at a price below cost (or very cheaply) with the intention of forcing rival firms out of business. Predatory pricing could be a method to deal with new firms who enter an industry. If a monopoly is enjoying supernormal profits, it will attract new firms into the industry. However, in response to a new firm entering the market, the incumbent monopoly could cut price and make a temporary loss. The incumbent monopoly may have significant savings to finance a price war. However, faced with a low price, the new firm may be unable to make profit and so be forced to leave the market. The monopoly firm regains its monopoly power, but also its action of predatory pricing discourages other firms from trying to enter. Microsoft's decision to offer its web browser (Internet Explorer) helped to make it very difficult for its main competitor (Netscape) who was also forced to offer its web browser for free. In Germany Metro immediately responded to Wal-Mart's entry by launching a price war. At a disadvantage in customer relations, employee relations, and distribution costs, it was only a matter of time—less than 8 years to be exact—before Wal-Mart exited Germany.

Elasticity

Price elasticity of demand measures the responsiveness of demand to changes in price for a particular good. If the price elasticity of demand is equal to 0, demand is perfectly inelastic (i.e., demand does not change when price changes). Values between zero and one indicate that demand is inelastic (this occurs when the percent change in demand is less than the percent change in price). When price elasticity of demand equals one, demand is unit elastic (the percent change in demand is equal to the percent change in price). Finally, if the value is greater than one, demand is perfectly elastic (demand is affected to a greater degree by changes in price). Necessities like milk and gasoline usually have low elasticity meaning price has to change dramatically to change the amount demanded (consumers will still buy it regardless of the price). Luxury Items like high-end cars and electronics have high elasticity (small decrease in price, leads to large increase in demand). For example, if the quantity demanded for a good increases 15% in response to a 10% decrease in price, the price elasticity of demand would be 15% / 10% = 1.5. The degree to which the quantity demanded for a good changes in response to a change in price can be influenced by a number of factors. Factors include the number of close substitutes (demand is more elastic if there are close substitutes) and whether the good is a necessity or luxury (necessities tend to have inelastic demand while luxuries are more elastic). If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded. To illustrate, suppose management believed n = 0.75. If it contemplated a 3 percent increase in price, then it should expect a 3 x 0.75 = 2.25 percent drop in the quantity demanded as a result of the price increase.

What is a strategic group? How are some of the ways it can be measured?

Strategic groups refer to meaningful collections of firms or substructures within an industry. They are often defined as sets of firms with similar strategies or as groups of firms isolated by common mobility barriers. Strategic groups segment firms into 'sets of companies whose competitors, actions and results are relevant to each other'. The first question we face in strategic group analysis is identifying the groups. Firms in a particular group pursue similar strategies along particular strategic dimensions. Dimensions that are commonly used in defining strategic groups include: Specialization, Brand Identification, Product Quality, Technological Leadership, Cost Position, Vertical Integration, Service, Financial Leverage (for more details see the first page above). Typically, two or three of these dimensions are chosen and these dimensions form the axes for a graph (called a strategic map) on which the positions of the firms in the industry are plotted. There are two basic approaches that may be taken, both of which involve surveying managers.The first is to ask managers to categorize the firms in their industry into groups, allowing for the possibilities of outliers,and to aggregate over these groupings to identify a set of cognitive groups. A second method for identifying groups is to ask each participant to identify their own group and to derive cognitive groups by aggregating over these groupings. This method makes a greater allowance for the bounded rationality of managers and may be more consistent with recent work on managerial cognition.

What is the difference between strategic and structural barriers to entry. Give some examples.

Structural barriers have more to do with basic industry conditions such as cost and demand than with tactical actions taken by incumbent firms. Structural barriers may exist due to conditions such as economies of scale and network effects. Sometimes it is possible to quantify these kinds of barriers because it is known in advance how much it will cost to build an efficient plant or to purchase necessary inputs. -Economies of large scale production. If a market has significant economies of scale which have already been exploited by the incumbents, new entrants are deterred. -Network effects A network effect is the effect that multiple users have on the value of a good or service to other users. The greater the number of people using the specific good or service the greater the individuals benefit. -High set-up costs. High set-up costs deter initial market entry. Many of these costs are sunk costs. Sunk costs are those that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. -High R&D costs When firms spend money on research and development (R & D), it is often a signal to potential entrants that they have large financial reserves. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future. This deters entry and is widely found in oligopolistic markets such as pharmaceuticals and the chemical industry. Strategic barriers, in contrast, are intentionally created or enhanced by incumbent firms in the market, possibly for the purpose of deterring entry. These barriers may arise from behaviour such as exclusive dealing arrangements, for example. It can be substantially more difficult to measure the difficulties that such behaviour can impose on potential entrants than it is to measure the height of structural barriers. Furthermore, it is not always easy to determine whether strategic behaviour should be viewed as fostering or restricting competition in the first place. Based on the experience of competition agencies, some strategic behaviour may be designed to thwart competition by raising entry barriers, which can help incumbent firms to maintain their market shares. In other instances, however, strategic behaviour may result in the retention of market share because it is efficient, even though it also happens to raise entry barriers. Competition authorities sometimes face the difficult problem of determining which conduct is pro-competitive and which is anti-competitive when both types of conduct would raise entry barriers. Predatory pricing. Limit pricing. Predatory acquisition This involves taking over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out. As with other deliberate barriers, regulators, like the Competition Commission, may prevent this as it would reduce competition. Switching costs Switching costs are those costs incurred by a consumer when trying to switch suppliers. They can involve costs of purchasing or installing new equipment, loss of service during the switching process, and the effort involved in searching for a new supplier or learning a new system. These are common when switching energy suppliers, banks, TV and telephone suppliers. While these may also be structural in nature it is common to refer to them as strategic barriers as they are understood and exploited by suppliers. Advertising Advertising is another sunk cost - the more that is spent by incumbent firms the greater the deterrent to new entrants. A strong brand This creates loyalty, 'locks in' existing customers and deters entry. Loyalty schemes Schemes, such as Tesco's Club Card, help oligopolists retain customer loyalty and deter entrants who need to gain market share. Exclusive contracts, patents and licenses Contracts, patents and licenses make entry difficult as they protect existing firms who have won the contract, or who own the license or hold the patent. For example, contracts between specific suppliers and retailers can exclude other retailers from entering the market. Vertical integration This can 'tie up' the supply chain and make life difficult for potential entrants, such as a manufacturer having its own retail outlets, such as a brewer owning its own pubs.

What are sunk cost and how are they related to entry and exit decisions?

Sunk costs are costs incurred when entering a market that are irrecoverable should a firm decide to leave the market. A sunk cost represents the investment a firm puts at risk when entering a market. This cost cannot be retrieved. The size of a sunk cost influences whether a firm enters into a business. This type of cost creates a barrier of entry for a new firm. If the size of a sunk cost is large, entrants are hesitant because the cost of failure could be detrimental. However, if the size of a sunk cost is zero or low, entrants are likely to enter a market. High sunk costs create barriers to entry for a new firm and causes it to veer away from the market because of the expenses it must cover. For example, suppose firm ABC wants to enter the oil market. However, firm ABC finds that it cannot recover the costs associated with drilling for oil. If the firm fails, the sunk costs would be 100% of ABC's capital investment. These high sunk costs deter the firm from entering the market because the potential loss would force the firm into bankruptcy. On the other hand, low sunk costs encourage firms to enter a market. For example, suppose a firm wants to start a clothing business. The cost of materials, labor and marketing are relatively small to the firm. If the firm fails, it can receive some money by selling its unused materials. However, the money spent on labor and marketing are sunk costs. Since an unsuccessful entry into the market is not costly to the firm, it enters the industry because it has little to lose.

What are core competencies? What is important about core competencies when designing them for sustained competitive advantage?

The collective learning and coordination skills behind the firm's product lines. They made the case that core competencies are the source of competitive advantage and enable the firm to introduce an array of new products and services. CCs can be thought of as the DNA of a firm and something a firm does exceptionally well. According to Prahalad and Hamel, core competencies lead to the development of core products. Core products are not directly sold to end users; rather, they are used to build a larger number of end-user products. Focusing on core competencies creates unique, integrated systems that reinforce fit among your firm's diverse production and technology skills - a systemic advantage your competitors can't copy. A core competence should be difficult for competitors to imitate and it will be difficult if it is a complex harmonization of individual technologies and production skills. A rival might acquire some of the technologies that comprise the core competence, but it will find it more difficult to duplicate the more or less comprehensive pattern of internal coordination and learning. Once you've identified core competencies, enhance them by: -investing in needed technologies -Infuse resources throughout business units -Forge strategic alliances Honda has been able to pool its engine-related technologies; it has parlayed these into a corporate wide competency from which it develops world-beating productions, despite R&D budgets smaller than those of GM & Toyota. You can measure a firms competitive advantage when by examining a firm's increase in profitability over the average profitability among its strategic group.

What are some of the definitions of competitive advantage. How is it measured? Give an example.

When a firm sustains profits that exceed the average for its industry, the firm is said to possess a competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable competitive advantage. Michael Porter identified two basic types of competitive advantage: * cost advantage * differentiation advantage There are two main types of competitive advantages: comparative advantage and differential advantage. Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers. Southwest Airlines eschews the hub-and-spoke concept, instead flying from one city to another in one or two short hops. Southwest provides point-to-point service between midsized cities that other carriers treat as feeders for their hubs. With less restrictive work rules than other major airlines, a highly motivated workforce, and a fleet that consists only of Boeing 737s to economize on maintenance and training, Southwest has average operating costs that are among the lowest in the industry.