econ2410 final

what are the 5 major barriers to entry in oligopoly markets?

- EOS - patents - tech - name recognition - government regulations

what are 2 important implications of many firms in monopolistic competition?

- "many firms" gives each firm the freedom to set prices w/o engaging in strategic decision making regarding the prices of other firms - each firm's actions have an insignificant impact on the market

what are 2 differences between the Cournot model and the Stackelberg model?

- Cournot is simultaneous while Stackelberg is sequential - in Stackelberg, firm 2 does not have to guess that value of firm 1's output as it already knows this

what is the difference between flexibility of capacity between Bertrand and Cournot?

- Cournot model assumes firms are committed to selling all of their output and therefore will not react to fluctuations in their rival's output - Bertrand assumes capacity is sufficiently flexible and that firms can meet all of the demand that arises at the prices they announce

what are 2 examples of customer specialisation focus strategy?

- Microsoft Word underserves so Latex comes in for writers requiring mathematics - Airlines overserve leisure travellers who do not highly value frequent-flier programs so JetBlue targets leisure travellers looking for cheap prices

what are the 3 forms of exit?

- a firm may simply collapse - a firm may discontinue a particular product or product group - a firm may leave a particular geographic market segment

what are the 2 types of networks?

- actual networks (telephone networks) - virtual networks (app store)

what are 2 ways to reduce the disadvantage of strategic commitments?

- anticipate the consequences of their commitments on competition (delay & observe) - make move game sequential (e.g. Stackelberg) rather than simultaneous (e.g. Cournot)

what are the 3 disadvantages of the Cournot model?

- assumes no differentiation - questionable how often oligopolies compete on quantity rather than price - assumes that 2 firms set their quantity strategy independently of each other but they are likely to be highly responsive to each others strategies in reality

what are the 3 ways cost leader can create more value (B-C)?

- benefit parity: produce products with same B but at a lower C - benefit proximity: produce products with similar B but at a lower C - benefit differences: produce products that is qualitatively different from that of its rivals

what were Joseph Bain's 3 entry conditions (typology of entry conditions)?

- blockaded entry (no action necessary bc structural barriers exist - effort is superfluous) - accommodated entry (cost exceeds benefit of keeping entrants out due to low structural barriers - effort is wasteful) - deterred entry (predatory strategies are effective)

what are the 2 forms of entry?

- brand new firm entering - established firm that is diversifying into a new market

what are the 3 industry segments?

- buyer economics: differences in willingness-to-pay or differences in willingness to trade-off quality for price - supply conditions: differences in cost of producing different product varieties - segment size: differences in geography

what 2 things must a firm consider when a firm is evaluating the benefits of strategic commitment?

- by waiting, a firm preserves its option values - by waiting, a firm may allow its rivals to make the first move

what are the 2 requirements of superior access to inputs or customers' ability to confer sustained competitive advantage?

- can secure access at below-market prices - has unique resources or capabilities that enable it to create more value from the inputs and customers it requires

what are the 3 intangible barriers to imitation?

- causal ambiguity (consequence of the fact that a firm's distinctive capabilities typically involve tacit knowledge obtained through trial and error) - historical circumstances (distinctiveness of capabilities partially bound in firm's history) - social complexity (interpersonal interactions among managers, both within the firm and suppliers/customers that are not easily imitated

what 3 things affect ability to create value?

- changes in market demand - changes in technology - threats from other firms in the industry and other industries

what are the 2 issues of persistence of standards?

- compete for the market or in the market? - toppling dominant standard

summary of the Bertrand model:

- competition on price - incentive to undercut price - vigorous/vicious competition - not much profit to be made

summary of the Cournot model:

- competition on quantity - each firm picks a capacity to produce at and sees what price prevails - give and take - there are profits left over

how can firms create more economic value than its competitors (2)?

- configuring its value chain differently from competitors (e.g. focus on segment of customers and optimise your activities to meet their needs) - performing the same activities as one's rival but doing so more effectively than the rivals (utilising resources (specialised assets (e.g. patents)) and capabilities (activities performed better than rivals)

how is the degree of product differentiation central in monopolistic competition (2 ways)?

- consumer loyalty allows P > MC but it also encourages entry - if consumers are disloyal (due to tastes) and have low search costs, then lower prices from new entry will most likely erode your economic profit

under what circumstances is benefit advantage more profitable than lower cost advantage?

- consumers are willing to pay a premium for benefit enhancement - economies of scale and learning have been already exploited and differentiation is the best route to value creation - the product is an experience good

what are the 2 basic types of most favoured customer clauses in cooperative pricing?

- contemporaneous: any price drop to any customer will be matched for most favoured customer (discourage rivals from using selective price cutting to compete for price-sensitive customers) - retroactive: seller agrees to pay rebate to buyer after contract expired if they sold product for a lower price than the buyer paid (makes it expensive to cut prices in the future)

what are the 3 main types of structural entry barriers?

- control of essential resources - EOScale + Scope - marketing advantages of incumbency (e.g. brand umbrella)

what are the 2 rules of the grim trigger strategy?

- cooperate every period until an opponent deviates - if deviation occurs in any given period, play non-cooperatively for the rest of the game

what are the 2 rules of tit-for-tat?

- cooperate if your rival cooperated in the most recent period - deviate if your rival deviated in the most recent period

in grim trigger strategy, the discounted present value (DPV) implies 1 think about cooperation:

- cooperate if: DPVcooperation > DPVdefection

in tit-for-tat, the discounted present value (DPV) implies 2 things about cooperation:

- cooperate if: DPVcooperation > DPVdefection - cooperate if: DPVcooperation > DPVdefect once

what are 4 general insights that could help firms coordinate price?

- coordinate on a round number price or price increase (e.g. $100 or 10% increase) - even splits of market share - coordination is easier with fewer products that are identical and is more difficult in environments that rapidly change - conventions and traditions make rivals' intentions transparent and help with coordination (e.g. boxing day sales)

when products not differentiated, what way can cost and benefit leader capture the entire market?

- cost leader: benefit parity to lower its price just below the unit cost of the firm with the next lowest unit cost & high-cost rival will not be able to decrease its own price - benefit leader: cost parity to raise its price just below the sum of the following: its unit cost + the additional benefit it creates relative to the competitor with the next highest B & rival will not be able to decrease its price below its unit cost

what are the 3 broad approaches to strategic positioning?

- cost leadership - benefit leadership - narrow focus strategy (offering specialised service in a niche market)

what are the 3 ways a benefit leader firm can create superior values?

- cost parity: produce products with same C but a higher B - cost proximity: produce products with similar C but a higher B - cost differences: produce products that have substantially higher B and C

what are 3 common focus strategies?

- customer specialisation (an array of related products to a limited class of customers) - product specialisation (a limited set of product varieties for a potentially wide set of customer groups) - geographic specialisation (a variety of related products and/or sell to a variety of customer groups within a narrowly defined geographical market

what 2 reasons do the entry of new firms hurt incumbents?

- cutting into incumbent's market share - intensifying internal rivalry and leads to a decline in price-cost margin

what are the 2 types of buyer power?

- direct buyers power: negotiate lower prices and capture some of the profits - indirect power: buyers shop around for the best prices

what are the 2 effects of the strategic commitment?

- direct effect (impact on profits assuming rival's remains unchanged) - strategic effect (accounts for effects of commitment that alter tactical decisions of rival and thus equilibrium)

which technology (sustaining or disruptive) is favoured by entrants or incumbents?

- disruptive innovation: generally carried out by new entrants (products with higher B-C bc of lower C NOT higher B) - sustaining innovation: incumbents have the resources to act and the customer base to respond (improves product performance)

what are 2 disadvantages of real options in strategic commitment?

- do not come free (involve trade-offs) - value of real options might be limited by the risk of preemption

what are the 2 disadvantages of the Bertrand model?

- doesn't account for differentiation, transport and search costs - ignores capacity constraints where sometimes firms cannot satisfy all demand

what are the 2 purposes of predatory pricing (entry-deterring strategy)?

- drive out current rivals - deter future rivals

what are the 3 assumptions of the Cournot model in duopoly markets?

- each firm chooses a quantity to produce independently - all firms make this choice simultaneously - the cost structures of the firms are public information

what 2 reasons would we expect firms to adopt a tit-for-tat strategy?

- easy to describe and understand (just copy what your rivals have previously and then go back to normal) - it combines niceness (never the first to defect/cheat), provocability (immediately punishes rival) and forgiveness (willing to restore cooperation)

what does economic profit earned by a firm depends jointly on (2)?

- economic attractiveness of its market - economic value created by the firm depending on its cost and benefits position relative to competitors

what 3 factors should a firm look at before deciding to increase R&D investments in a patent race?

- effect of additional investment in R&D on productivity - response to rivals increased R&D investment by the firm - the number of competitors in the field

what will be the equilibrium price in an imperfect imitability & industry equilibrium?

- entry will occur but price falls until entry is no longer attractive & the expected profit calculation must account for the fact that not all entrants will surce but in equilibrium, firms in the market will have positive operating profits while a potential entrant's expected profit will be equal to or below the cost of entry

what are 3 strategic barriers to entry erected by incumbents?

- expanding capacity to achieve lower unity costs - resorting to limit pricing (incumbent sets low price and high output which entrants cannot achieve) - resorting to predatory pricing (deliberately pricing lower)

what are the 4 implications of the short-run in monopolistic competition?

- firm's demand is downward sloping - firm follows the monopolist's rule for maximising profit when MR = MC - P does not equal MC since firm has market power - if P > ATC, firm is making economic profits (supernormal possible)

what are the 3 reasons why there is little evidence of entry-deterring behaviour?

- firms are reluctant to report entry deterrence as it may be sensitive, competitive information or violate anti-competition laws - often requires info on firm's MC, demand, degree of industry competition and other factors difficult to obtain - requires to compute the counterfactual rate of entry w/o the predatory act, which is difficult to answer

what 2 things happen to consumer preference in Bertrand when goods are homogenous?

- firms charge different prices: consumers buy from the lowest priced firm - firms charge same price: consumers are indifferent

what is the evidence on sustaining profitability?

- firms earning above-average profits today continue to do so in the future - today's low-profit firms remain low-profit firms in the future

profit sustainability occurs in 2 ways?

- firms may differ with respect to resources and capabilities and the differences persist - isolating mechanisms may work to protect the competitive advantage of firms

what 3 evolutionary economists' views on innovation?

- firms routines change slowly but to ensure survival need to continuously improve - firms with dynamic capabilities (ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments) can adapt their resources and capabilities and exploit opportunities - dynamic capabilities are limited bc of: path dependence; limited availability of complementary assets; closing windows of opportunities

what are the 2 trade-offs of the strategic positions?

- firms wishing to provide superior customer benefits typically incur higher costs to do so - firms seeking low-cost positions typically sacrifice elements of customer service

what are the 2 positioning issues to determine for competitive strategy?

- first: cost or benefit? - second: broad or narrow focus?

how can organisation and managerial factors influence type 1 and 2 errors in Ghamewat's 4. judgement analysis?

- hierarchical decision making may create a bias towards type 1 errors - decentralised decision making may result in higher incidence of type 2 errors

what does a high learn-to-burn ration indicate about a strategic commitment in determining option value in Ghemawat's 3rd step?

- high degree of flexibility - therefore low degree of delay

what are 5 groupings of Porter's production factors?

- human resources - material resources - knowledge resources - capital resources - infrastructure

what are the 3 rules of entry or exit in a competitive market?

- if P > ATC, economic profits exist: enter or expand capacity - if P < ATC, economic losses exist: reduce capacity or exit (if P < AVC) - if P = ATC, economic profits are zero: no incentives

what 3 suggestions to incumbent firms did Joseph Bain make?

- if entry blockaded: effort is superfluous - if entry accommodated: effort is wasted - if entry deterred: firm should consider predatory acts

what are the 2 major threats to sustainable profit?

- imitation and entry (all markets) - price competition (greater threat in competitive markets)

what are the 2 types of isolating mechanisms (that limit extent competitive advantage of firms can be imitated or neutralised)?

- impediments to imitation (impede existing firms and potential entrants from duplicating the resources and capabilities that form the basis of the firm's advantage) - early-mover advantages (once a competitive advantage is acquired by a firm, these mechanisms increase the economic power of that advantage over time)

what are the 4 facts of entry and exit?

- in a typical industry, 1/3 of firms are less than 5 years old, and 1/3 of firms will exit within the next 5 years - entry and exit are highly related: conditions that encourage entry foster exit - industries in which entrants are successful also have high exit rates - industries with little entry also have little exit

what is the difference between a monopolistic firm and a perfectly competitive firm with regards to efficiency?

- in monopolistic competition, P = ATC to the left of minimum ATC so DWL - in perfect competition, P = minATC so no DWL

The Stackelberg model as a 2-stage game?

- in stage 1, firm 1 makes a strategic commitment - in stage 2, both firms simultaneously choose quantities (Cournot) or prices (Bertrand)

when does excess capacity work to deter entry (entry-deterring strategy) (4)?

- incumbent has sustainable cost advantage (advantage in the event of a price war) - market demand growth is slow (otherwise demand would outstrip capacity) - investment in excess capacity must be sunk prior to entry (otherwise entrant might force incumbent to backoff) - potential entrant should not be attempting to establish a reputation for toughness (otherwise holding excess capacity would not deter)

what are 2 requirements for entry-deterring strategies to work?

- incumbent must earn higher profits as monopolist than it does as duopolist - the strategy should change the entrant's expectations regarding post-entry competition

what are the 4 distinctions between entrants and incumbents?

- incumbents have sunk entry costs (diversifying entrants will have but can turn to incumbent-removing strategies) - incumbents have established relationships with customers and suppliers ("adjustment costs") - incumbents move down the learning curve (more experienced) - switching costs are higher

what are 2 types of imperfectly mobile resources?

- inherently non-stradeable (e.g. reputation for toughness) - cospecialised (more valuable together than separated)

what are the 2 considerations about the replacement effect?

- innovation will lower the average variable cost - innovation is drastic: once it is adapted, producers using the older technology will not be viable competitors

what are the 2 types of standards wars?

- intentional standards wars: when companies perceive a competitive threat and preemptively engage in a battle to secure their position (e.g. introduce new technology incompatible with old) - unintentional standards wars: when rival companies have good intentions and join standards bodies in order to collaborate on a standard but disagreement becomes catalyst

what are Porter's 5 forces?

- internal rivalry (intensity of competition) - entry (threat of new entry) - substitutes and complements (existence of close substitutes would reduce price) - supplier power (bargaining power of suppliers) - buyer power (bargaining power of buyers)

what are 2 examples of sunk entrance costs?

- investment in specialised assets - obtaining government licenses

what 3 reasons do small firms have stronger incentives to defect from cooperative pricing than their larger rivals?

- larger firms get a larger share of the benefits of cooperative pricing - small firms have a large set of potential customers to attract by price cutting & suffer less from revenue destruction effect - large firms often have weak incentives to punish small price cutters and will instead offer a price umbrella where the small firm can sustain its lower price

what are the disadvantages to being "stuck in the middle"?

- leads to unfocussed decision making and the pursuit of both have limited impact on lowering C or increasing B - uninspired imitation of rival firms' "best practices"

what are the 4 types of impediments to imitation (barriers to imitation)?

- legal restrictions - superior access to inputs or customers - market size and scale economies - intangible barriers to imitating a firm's distinctive capabilities (1. causal ambiguity, 2. dependence on historical circumstances, 3. social complexity)

what are 3 entry-deterring strategies?

- limit pricing - predatory pricing - capacity expansion

what are the 2 disadvantages of historical circumstances?

- limit the firm's growth potential - mean that a firm's strategy may be viable for only a limited time

what are 2 important sources of idiosyncratic preferences in monopolistic competition which make horizontal differentiation possible?

- location - taste

how can an incumbent be seen as 'tough' to deter entrants (entry-deterring strategy)?

- low costs - irrational desire for market share - other competition the entrant is unaware of - announce market share goals (shows they will do whatever is necessary) - reward managers based on market share rather than profits

what are Fudenberg and Tirole's 4 strategic complements in strategic commitment at the tactical stage (reaction curves are upward sloping)?

- mad dog: tough commitment; make action - puppy-dog ploy: tough; refrain - fat-cat effect: soft; make - weak kitten: soft; refrain

what are the 2 options for benefit advantage (creates larger B-C by raising B)?

- maintain price parity with competitors - charge price premium

3 characteristics of monopolistically competitive markets:

- many firms - free entry and exit - differentiated products

what are the 3 conditions of fierce price competition in a competition?

- many sellers - perceptions of homogeneity - excess capacity (actual production is less than optimal bc demand is down)

what does Dennis Mueller's work imply about sustaining profitability?

- market forces are a threat to profits but only to a point - other forces appear to protect profitable firms

what are the 2 critiques of the assumptions of limit pricing (entry-deterring strategy)?

- market lasts 2 periods: in reality, potential entrant might hang around indefinitely, forcing the incumbent to price low indefinitely - incumbent's ability to influence entrant: in reality, potential entrants can rationally anticipate that post-entry price will not be less than the Cournot equilibrium price

what are the 2 sources of inefficiency in monopolistic competition?

- market power yields a higher price than perfect competition - the firm is not producing at minATC and excess capacity exists (DWL)

what are 2 ways early movers fail to achieve sustainable competitive advantage?

- may lack the complementary assets to make their product succeed - can make mistakes that lock them into inferior technologies and others can learn from these mistakes

what are 3 ways a firm can preserve flexibility when it comes to strategic commitment?

- modify the commitment as future conditions evolve (e.g. modify size of factory) - delay commitment until better info available - make unprofitable commitments today to preserve valuable follow-on commitments in future (e.g. selling unprofitable software now to sell improved profitable software in future)

under what circumstances is lower cost advantage more profitable than benefits advantage?

- nature of the product does not allow benefit enhancement - consumers relatively price sensitive - product is a search good rather than an experience good

even through monopolistically competitive sellers can set price above marginal cost, why are positive profits not guaranteed?

- new entrants can slightly differentiate their products from the incumbent's and create their own niche - free entry will cut into their market share of the incumbents and make economic profits become zero

what are the 3 features of a perfectly contestable market (where the threat of entry limits a monopolist's ability to raise prices (rare!))?

- no entry and exit barriers - no sunk costs - access to the same level of technology

what are 3 examples of disruptive technologies?

- online courses vs. higher education - drones vs. manned fighters - nurse practitioners vs. medical doctors

why does competitive advantage not exist in perfect competition?

- opportunities for earning profits will quickly evaporate as new entrants flow into the market - increase in supply of output - drive price down to the point where economic profit is zero

favourable access to inputs can be achieved by controlling the source of supply through (2):

- ownership - long-term exclusive contracts

where do capabilities reside in (3)?

- particular business functions (e.g. brand promotion) - particular technologies or product designs (e.g. Facebook's web design) - ability to manage linkage between elements of value chain or coordinate activities across it

in innovation competition, what 3 things will first innovator benefit from?

- patent protection - early mover advantages - consumer perceptions (benchmarks for expectations)

what are the 5 classifications of benefit drivers?

- physical characteristics of product - quantity and characteristics of services and complementary goods - characteristics associated with the sale or delivery of the good - characteristics that shape consumers' perceptions or expectations of the product's performance or its cost to use - the subjective image of the product

what 2 things happen when product differentiation softens price competition?

- price cutting is less effective - the advantage of reducing price and getting more customers does not compare to the advantage of keeping the o.g. price and selling to your loyal customers

what are the 3 basic assumptions of perfect competition?

- price taking - product homogeneity - free entry and exit

what are the 2 advantages of the Cournot model?

- produces logical results, w prices and quantities that are between monopolistic (low output, high price) and competitive (high output, low price) leves - yields a stable Nash equilibrium (where neither player would like to deviate unilaterally)

what are the 2 segments of an industry?

- product varieties - customer groups

what are the 3 efficiencies in perfectly competitive markets?

- productive efficiency - allocative efficiency - dynamic efficiency

what are the 3 ways to reconcile the Bertrand and Cournot models?

- recognise they take place over different time frames - recognise difference in flexibility of capacity - recognise they make different assumptions about how firms expect their rivals to react to their competitive moves

what are 2 advantages of advanced announcement of pricing in cooperative pricing?

- reduces uncertainty that the rival will undercut the firm - allows the firms to roll back the changes if rival deviates

how can firms try to change the 5 forces (3)?

- reducing internal rivalry by creating switching costs (making high consumer switching costs) - reducing the threat of entry by pursuing entry-deterring strategies - trying to reduce buyer or supplier power by tapered integration

to support but not be completely sufficient, competitive advantage resources and capabilities have to be (2)?

- scarce (especially if its imperfectly mobile) - imperfectly mobile (superior resource cannot be traded or "sell itself" to the highest bidder)

what are the 3 characteristics of oligopoly markets?

- small number of firms (influence the actions of other firms) - product differentiation may or may not exist - barriers to entry are high

why, even when incumbents can deter entry, economic profits may not be sustained (2)?

- sometimes good performance may be simply due to luck (and over time profits regress to the mean) - a firm might develop competitive advantages that are hard to imitate (protects from rivalry and entry unless suppliers/buyers are powerful and extract profits)

what are the 3 aspects of microdynamics?

- strategic benefits of commitment - informational benefits of flexibility - competitive discipline

what are the 2 classifications of barriers to entry?

- structural barriers (natural advantage) - strategic barriers (incumbents' aggressive actions to deter entry)

what are 3 exit barriers?

- sunk costs (MC of remaining is low) - relationship-specific assets (have low resale value) - government regulations

what does the value net consist of (4)?

- suppliers - customers - competitors - complementors

what 3 things does the firm's value net include?

- suppliers - distributors - competitors

what are the 2 types of technologies?

- sustaining technologies (improve product performance) - disruptive technologies (innovations that forever alter the markets result in worse product performance, at least in the near term)

how do sustaining & disruptive technologies differ with regards to innovation outcome?

- sustaining technologies: meeting current customer technology needs - disrupting technologies: learning & exploring

how do sustaining & disruptive technologies differ with regards to innovative goal?

- sustaining technologies: planning before action - disrupting technologies: action before planning

how do sustaining & disruptive technologies differ with regards to innovation process?

- sustaining technologies: structure & linear - disrupting technologies: dynamic & spontaneous

how do sustaining & disruptive technologies differ with regards to needs assessment?

- sustaining technologies: survey & focus groups - disrupting technologies: ethnography

how do sustaining & disruptive technologies differ with regards to organistional models?

- sustaining technologies: traditional models & roles - disrupting technologies: new structures & quick development cycles

how do sustaining & disruptive technologies differ with regards to primary question?

- sustaining technologies: what do customers need? - disrupting technologies: what do customers do?

what 2 elements of the commercialisation environment affect the market for ideas?

- technology should be well protected by patents - required expertise in production and marketing of the innovative products is not scarce (if it is, then the balance of power shifts away from the innovator to the established firms)

what are the 2 important duopoly models that focus on how firms react to each others moves?

- the Cournot quantity competition - the Bertrand price competition

what is the Stackelberg model?

- the follower, which sets output in response to the leader, will use its Cournot best-response curve to pick a best-response output - therefore, leader can predict what the follower will do and by choosing its quantity first, can manipulate the follower's output choice to its advantage - firm 1 maximises profit subject to firm 2's reaction curve

what are the 2 assumptions of limit pricing (entry-deterring strategy) where incumbent sets price so low entrants decide they cannot cover sunk costs?

- the market lasts only 2 periods, after which the incumbent and entrant effectively disappear (but entrant might hang around indefinitely and thus pricing indefinitely low) - by setting a limit price, the incumbent is able to influence the entrant's expectations about the nature of post-entry competition (entrants can rationally anticipate it is a strategy)

what are the 3 characteristics of Porter's home demand?

- the mix of customers needs and wants - their scope and growth rate - the mechanisms that transmit domestic preferences to foreign markets

what are 2 ways to topple a dominant network standard?

- the rival should offer superior quality - the rival must be able to tap into the complementary goods market

what are the 5 characteristics of a duopoly?

- the two firms produce homogenous and indistinguishable goods - there are no other firms in the market that produce the same or substitute goods - no other firms can or will enter the market - cartels or collusion is prohibited - there exists one market for the produced goods

what are the 3 characteristics of capabilities?

- they are typically valuable across multiple markets and products - they are embedded in organisational routines that survive when individuals are replaced - they represent tacit knowledge in the organisation (kind of knowledge that is difficult to transfer to another person by means of writing or verbalising it)

what are the 3 classifications of cost drivers?

- those related to firm size, scope and cumulative experience - those independent of firm size, scope and cumulative experience - those related to organisation of the transactions

how can a firm increase their learn-to-burn ration (Ghemawat's 3rd step in determining option value of strategic commitment)?

- through experimentation and pilot programs - careful management

what are Fudenberg and Tirole's 4 strategic substitutes in strategic commitment at the tactical stage (reaction curves are downward sloping)?

- top-dog: tough commitment; make action - submissive underdog: tough, refrain - suicidal siberian: soft; make - leon and hungry look: soft; refrain

what differs between traditional economic theories and Porter's diamond?

- traditional economic theories: cite land, location, natural resources, labour and population as determinants in competitive advantage - Diamond Model: competition regardless of natural factor advantages like land and natural resources

what are the 4 assumptions of the Bertrand model in duopoly markets?

- two firms - homogenous products - both firms know the market demand curve - firms have the same MC and MC is constant

what are the 2 types of errors that a firm can make according to Ghemawat's 4. judgment analysis?

- type 1: rejecting an investment that should have been made - type 2: accepting investment that should have been rejected

what are the 2 options for cost advantage (creates larger B-C by lowering C)?

- underprice competitors - match rivals' price and achieve higher price-cost margins than they can

what is consonance analysis?

- understand how a firm's product creates economic value and whether it can continue to do so is a necessary first step in diagnosing a firm's potential for achieving a competitive advantage in its market - understand what drives consumer benefits and what drives costs

what are the 2 assessments of the entry conditions that incumbents must make with regards to structural entry barriers?

- understand the magnitude of structural entry barriers - consider the likely consequences of strategic entry barriers

in contexts where buyers and sellers are geographically separated and transportation costs are significant, what 2 pricing methods affect competitive interactions?

- uniform FOB (free on board) pricing where seller quotes a price for pickup at the seller's loading dock and the buyer absorbs the fright charges for shipping from seller to buyer - uniform delivery pricing

what are the two types of product differentiation in monopolistic competition?

- vertical differentiation (unambiguously differ in quality) - horizontal differentiation (different characteristics where consumer preference matters)

what are the 4 characteristics of an effective strategic commitment to a course of action?

- visible - understandable (clear why firm has done so) - credible (compelling reason to believe firm will continue with the course) - irreversible (for credibility)

when is a price umbrella desirable (2)?

- when B (% price cut by small) is large compared to a (% loss by large): price cut relatively large but small doesn't steal much market share - PCM is small: margins in the industry are relatively small to begin with

what are 3 reasons why firms hold more capacity than they use (entry-deterring strategy)?

- when capacity addition has to be in large increments, firms may have excess for future growth - a temporary downturn in demand may leave firms with excess with no strategies - firms in imperfectly competitive industries may be profitable when operating at capacity, then other firms enter to share profits and create excess

when do structural barriers to entry exist (6)?

- when the incumbents have natural cost or marketing advantages - when the incumbent benefits from favourable (government) regulations - when technology, costs and demand are high - when product differentiation is necessary (entrants must overcome brand loyalty) - when absolute cost advantages are necessary because entrants may have inferior technology - when EOS restrict the number of firms which can operate at minimum costs in a market of given size

what are 2 situations where predatory pricing and limit pricing are rational (entry-deterring strategies)?

- where entrant is uncertain about market conditions or incumbent's costs / motivations - predatory pricing can deter entry when an incumbent wants to have a reputation of 'toughness' on entrants

what 2 things determine whether a strategic commitment has a profitable strategic effect?

- whether a commitment is tough or soft - whether the choices involve strategic complements or strategic substitutes

what were the 2 characteristics of markets argued by Joseph Bain?

- whether entry barriers are structural or strategic - whether incumbents profit from using entry-deterring strategies / whether they are feasible

What 2 things does the desirability of the strategic commitment depend on in the Stackelberg model?

- whether the actions are strategic substitutes or complements - whether the commitment makes the firm tough or soft

what are the 4 things that facilitate industry analysis?

1. assessment of the industry and firm performance 2. identification of key factors that affect performance 3. determination of the effect of changes in the business environment on performance 4. identification of opportunities and threats in the business landscape (SWOT analysis)

what are the 7 factors that determine supplier power (relative to the downstream industry that it sells to)?

1. competitiveness of the input market (determined by the forces of supply and demand) 2. relative concentration of upstream and downstream firms (few suppliers and many buyers = high supplier bargaining power) 3. purchase volume by downstream (suppliers may give better service and lower prices to large purchases) 4. availability of substitutes (limits the price that suppliers can charge) 5. extent of relationship-specific investments (threat of holdup may determine the allocation of rents between industry and suppliers) 6. threat of forward integration by suppliers (may be forced to accept the high supply price or risk direct competition from suppliers) 7. suppliers' ability to price discriminate (can raise prices)

why, for a firm to earn positive profit in a competitive industry, must produce more economic value than its rival & create a level of B-C that its competitors cannot replicate (5)?

1. consumers will purchase a good in a market from a seller whose product quality and price will provide the greatest consumer surplus (B-P) 2. the most aggressive consumer surplus "bid" that a seller can offer is the one at which its profit = 0 (P=C) 3. at such a bid, a firm would hand over all of the value it creates to a consumer in the form of consumer surplus 4. the firm with the advantage in this competition is the one that has the highest B-C 5. will be able to match this "bid" and still retain the extra value its creates in the form of profit & how value creation links to competitive advantage

what are 4 examples of positive interactions that Brandenberger & Nalebuff say Porter ignores?

1. efforts by competitors to set technological standards that facilitate growth 2. efforts by competitors to promote favourable regulations or legislations 3. cooperation among firms and their suppliers to improve product quality to boost demand 4. cooperation among firms and their suppliers to improve product efficiency

what are Porter's 4 attributes in a firm's home market that promote or impede a firm's ability to achieve competitive advantage in global markets (Porter's Diamond)?

1. factor conditions (competitive advantage in the global markets is enhanced by the availability of specialised factors of production in the home market) 2. demand conditions (when home market places a high value on quality, the firm is stimulated to make improvements in the quality dimension) 3. related supplier or support industries (companies with skilful home-base suppliers can be early beneficiaries of newly generated production know-how and may be able to shape innovation in supplying firms) 4. strategy, structure and rivalry (firms that survive vigorous local competition are often more efficient and innovative than are international rivals that emerge from softer local conditions)

what are the 5 rules of evolution theory?

1. forget maximisation and equilibrium - too rigid 2. firms are motivated by profits, but dont maximise of some known choice set 3. efficient firms tend to drive out inefficient ones, but dont do so instantaneously 4. equilibrium is never attained as external conditions are continuously changing and firms adapt to these in order to survive 5. firms are characterised by their routines

what are the isolating mechanisms that fall under the early-mover advantages?

1. learning curve (more experience achieves lower unit cost, undercuts and increases volume) 2. reputation and buyer uncertainty (for experience goods when there is uncertainty over quality, consumers who have had positive experience will continue and new customers perceive this) 3. buyer switching costs (for some products incur substantial costs when buyers develop brand-specific know-how that is not fully transferable to substitute brands 4. network effects (firm that first establishes a large installed base of customers (those currently using) has a decided advantage in the market & attract new customers & set standards)

what are the 7 factors that threaten entry?

1. minimum efficient scale (MES) is large (entrant must achieve a substantial market share to reach MES, and if it doesn't it may be at cost disadvantage) 2. government policies that favour the incumbents 3. brand loyalty of consumers and value placed by consumers on reputation 4. entrants' access to critical resources such as raw material, technical know-how and distribution network (e.g. patents, unique locations) 5. steep learning curve (outs entrance at a cost as it takes time and effort to get to know something) 6. incumbents' reputation regarding post-entry competitive behaviour (e.g. reputation for predatory pricing, history of persevering through price wars, have sufficient excess capacities to flood the market) 7. network externalities where one person's demand depends on the consumption of a good by others that give the incumbents the benefit of a large installed base (e.g. a telephone becomes more useful the more other people also have telephones)

what are 2 other methods for identifying competitors or defining markets?

1. patterns in price changes (observes prices of competitors and how customers react to price changes) 2. standard industrial classification

what are the 4 steps of Pankaj Ghemawat's commitment intensive analysis?

1. positioning analysis (will strategy result in desired market postition) 2. sustainability analysis (rival responses and looking at firm's scarce resources or competitive advantage protection) 3. flexibility analysis (uses "learn-and-burn" ratio to determine option value) 4. judgment analysis (ensuring organisation aligned with goals)

what are the 4 ways firms can facilitate cooperative pricing?

1. price leadership (when leader sets price and followers match) 2. advanced announcement of price changes (firms publicly announce future price) 3. most favoured customer clauses (buyer pays lowest price charged by the seller) 4. uniform delivered prices (firm quotes single delivery price for all buyers and absorbs any fright charges itself)

what are the 4 factors of sustainability?

1. productivity effect (dominant firm's incentive to innovate may be weaker than that of a smaller firm or a potential entrant) 2. sunk cost effect (weaken the incumbent's incentive to innovate) 3. replacement effect (weaken the incumbent's incentive to innovate) 4. efficiency effect (strengthen's dominant firm's incentive to innovate as compared with a potential entrants incentive)

what are 3 strategies to cope with the 5 forces?

1. rivals may position themselves to outperform their rivals, by developing a cost or differentiation advantage that somewhat protects them 2. firms may identify an industry segment in which the 5 forces are less severe 3. firms may try to change the 5 forces, though this is difficult to do

what are the 4 steps to applying the SSNIP test?

1. start with smallest possible market and ask if 5% increase for 1 year is profitable 2. next closest substitute is added to the relevant market and the test is repeated 3. process continues until the point is reached where a monopolist could profitably impose a 5% increase for 1 year 4. market is defined

what are 4 reasons why tit-for-tat pricing strategy might not work?

1. the misread problem (firm mistakenly believes a rival is charging one price when it is actually charging another) 2. lumpy orders when sales are not smoothly distributed (reduce frequency of competitive interactions and lengthen time for reaction to firms actions and therefore make undercutting attractive) 3. information about the sale transaction can be public or private (private undercuts are difficult to monitor and therefore respond to); custom/tailor-made or standardised (difficult to monitor) 4. volatile demand conditions make undercutting harder to detect but can make firm misread situation when their market share decreases

when does price competition heat up (6)?

1. there are many sellers in the market (with many firms, one may be dissatisfied and cheat) 2. some firms have cost advantage over others (low cost firms may undercut to make high-cost rivals exit) 3. some firms have excess capacity in the industry (under pressure to boost sales) 4. products are undifferentiated (homogenous) and buyers have low switching costs 5. prices and sale terms are unobservable 6. large and infrequently sales orders (tempted to undercut to secure a large order)

what is the difference between Porter's 5 forces and Brandenberg & Nalebuff's value net?

5 forces analyses threats to profitability while value net analyses opportunities

what does value created =

B-C = (B-P) + (P-C) * if B-C (the value created) is not positive, the product will not be economically viable but no guarantee that positive profit made

how does the Cournot model and the Bertrand model differ in time frames?

Cournot is long-run capacity competition (can't change output instantly) and Bertrand is short-run capacity competition

what is the difference between Porter's 5 forces and Brandenberger & Nalebuff's value net?

Porter describes how suppliers, distributors and competitors might destroy a firm's profit, while Brandenberger & Nalebuff's insight is that firms often enhance firm profits

how does economics view entry and exit?

a cost-benefit decision where a potential entrant compares the sunk cost of entry with the present value of the post-entry profit stream (post-entry profits will depend on demand and cost conditions as well as post-entry competition)

what is equilibrium under oligopoly?

a firm will want to do the best it can given what others are doing (which is the best they can)

to attain the cooperative outcome rather than another of the folk theorem's equilibria, what must industry firms decide upon?

a focal point strategy which is so compelling that a firm expects all other firms to adopt it as it makes it in each firm's self-interest to refrain from aggressive price cutting

what is a market for ideas?

a place in which the firm can sell its ideas for full value

what is a tit-for-tat pricing strategy?

a policy in which a firm is prepared to match whatever change in strategy a competitor makes

what is competitive dynamics?

a range of actions and reactions of firms taking part in a competitive business environment (evolve over time)

what is the Nash Equilibrium in oligopoly market?

a set of strategies where each firm chooses the strategy to maximise its profits given its opponent's actions, and there is no incentive to change strategies as you cannot improve payoffs (non-cooperative outcomes)

what is a niche strategy?

a targeting strategy in which the firm produces a single product for a single market segment

what is the advantage of a customer specialisation focus strategy?

ability to create extra economic value dependent on the extent to which broad-coverage competitors underserve or overserve target customer group

what is the strategic effect of strategic commitment?

accounts for competitive side effects of commitment where it alters the tactical decisions of the rival and so the equilibrium (e.g. if you expand output and your rival reduces output, profit is affected by the resultant of the equilibrium)

what is allocative efficiency?

achieved in a perfectly competitive market when the right combination of goods will be produced bc the perfect knowledge of firms and consumers creates the right influence of market signals & economy will optimise its allocation of resources, P = MC

what is the value chain?

activities within firms and across firms that add value along the way

how do barriers to entry benefit incumbent firms?

allow incumbent firms to earn positive economic profits while making unprofitable for newcomers to enter the industry

how can firms create real options in strategic commitment?

altering the way in which they configure their internal processes (key managerial skill is spotting the potential to create value-enhancing real options)

what is a return on assets (ROA)?

an indicator of how profitable a company is relative to its total assets (net income = net profit margin x total revenue)

what does the folk theorem say abut ruling out other equilibria (rather than sustaining cooperative pricing)?

an infinite number of equilibria is possible, which can create a coordination problem where any price between monopoly price and MC can be sustained as an equilibrium

what is Ghemawat's 2. sustainability analysis?

analyses the response by competitors and potential entrants and looks at market imperfections that make the firm's resources scarce or protect the firm's competitive advantage

what does the resource-based theory of the firm emphasise?

asymmetries (hetergeneity) in the resources and capabilities of firms in the same business as the basis for sustainable competitive advantage

how do substitutes and complements affect the industry?

availability of substitutes erode the demand for the industry's output (steal business and intensify rivalry) while complements boost industry demand, thereby enhancing profit opportunities for the industry

despite the unrealistic assumption of Bertrand that firms do not believe that their rivals will undercut their high price to steal market share, why does Edward Chamberlin believe it may work?

bc a small number of sellers will recognise that the profit from undercutting will be short lived since it decreases own profits, thus, an equilibrium is set

how can firms create advantage?

by exploiting opportunities that other firms either ignore or cannot exploit - essence of entrepreneurship (the ability to act on the opportunities that innovation and discoveries create)

what is excess capacity (entry-deterring strategy)?

by holding excess capacity, the incumbent can credibly threaten to lower the price if entry occurs (incumbent's excess capacity is sunk)

how can a firm determine the best time to make strategic commitment in uncertain conditions?

by studying real options

what is the shared advantage of all focus strategies?

can protect the focusing firm from competition where customer demand may only be large enough to allow just 1 or 2 firms to operate profitably & earn substantial returns

what is the use for strategic complements and strategic substitutes in strategic commitment?

characterising how commitment affects competition

what is soft commitment in determining the profitable strategic effect of a strategic commitment?

commitment made by a firm such that, no matter what its competitors do, the firm will behave less aggressively (helps rivals) (e.g. elimination of production facilities)

what is tough commitment (aggressive) in determining the profitable strategic effect of a strategic commitment?

commitment made by a firm such that, no matter what its competitors do, the firm will behave more aggressively (hurts rivals) (e.g. capacity expansion)

what must a firm do when deciding whether or not to exit a market?

compare the value of its assets if deployed in their best alternative uses against the present value from remaining in the market

in cross-price elasticity, what does n < 0 mean?

complements

what does a steeper indifference curve indicate?

consumer is willing to pay more for additional quality

how can disruptive technologies that have lower B succeed?

consumers do not put a high value on the extra quality and features of the older technologies enjoy technologies offering substantial lower C

what happens when firms are not identical with regards to price coordination?

cooperative pricing becomes more difficult because there are differences in costs, capacities or product qualities

how do strategic commitments influence the nature of competition in the industry?

could deter new entrants but intensify pricing competition among incumbents

what is the strategic logic of benefit leadership?

create a larger B-C than its rivals by achieving a higher B than its rivals

what is the strategic logic of cost leadership?

creates a larger B-C than its rivals by offering products that have a lower C than its rivals

what is strategic commitment (microdynamics)?

decisions (such as investment in new capacity or introduction of new products) that have long-term impact and are difficult to reverse

what are tactical decisions (opposite to strategic commitment - (microdynamics)?

decisions (such as what price to charge or how much output for a given quarter) that have short-term impact and are easier to reverse

how can a firm avoid the possibility of a misread (which is a reason why tit-for-tat fails)?

deferred response instead of immediate response

what is the SSNIP test?

defines the market by identifying a monopolist to assess market power - when a market is well defined and all of the competitors within are identified, a merger will lead to a small but significant non-transitory increase in price - if a monopolist could profitably impose an increase, the market is correctly defined

what is a disadvantage of market size and scale economies in impeding imitation?

demand may grow too large which will attract additional entry or induce smaller competitors to expand and allow them to benefit from economies of scale

how do you determine how a firm creates value and why it creates more or less value than its competitors?

diagnosis of cost drivers (basic economic forces that cause costs to vary across different organisations) and benefit drivers (attributes of a product that form the basis on which a firm can differentiate itself

what is horizontal differentiation in monopolistic competition?

different in characteristics but at the same price some consumers will buy one and some will buy the other depending on their preferences

why is lowering price not an option in the Cournot model?

each firm expects that its competitors will keep their sales equal to planned production volumes and will set prices less aggressively

how do many firms influence a monopolistically competitive market?

each firm has a small percentage of the total monopolistic market and thus only has limited control over market price such that each firm supposes that its actions will not materially affect other firms, as a result of a large number of firms selling closely related but not homogenous products

what is the Cournot model in duopoly markets?

each firm takes the other firm's choice of output level as fixed (i.e. unaltered by the competitors) and sets its own production quantities

how can profitability be sustained in monopolistic competition?

entry is deterred

what are creative destruction managerial implications?

even competitive advantages based on inimitable resources or capabilities or early mover advantages are vulnerable in the long-run as new tech arise and tastes change, but firms must bridge discontinuities that characterise creative destruction to succeed in the very long-run

what is macrodynamics?

evolution of overall market structure, such as endogenous sunk costs (sunk investments by incumbents that create entry barriers)

what is the economic logic behind broad coverage strategies (serving all customer groups with full line of related products)?

existence of economies of scope across product classes through production facilities, shared distribution channels or marketing

what is the advantage of the product specialisation focus strategy?

exploitation of economies of scale or learning economies within the service or product in which it specialised creates competitive advantage

what is the advantage of geographic specialisation focus strategy?

exploiting unique conditions of the region creates competitive advantage

what does a shallower indifference curve indicate?

extra quality is not worth that much

what is a monopsonist?

faces little or no competition in one of its input markets

what are complementary assets?

firm specific assets that are valuable in connection with a product or tech (e.g. organisational assets, managerial assets or social assets)

what happens when buyers are price sensitive?

firm that undercuts its rivals' prices by even a small amount may achieve a significant boost in its volume that outweighs benefit of maintaining cooperation

what is the competiting "for" vs. "in" the market issue of standard networks?

firm will earn higher expected profits by trying to achieve monopoly status for its own standard (competing for) than by setting for a share of the market with a common standard (competing in) & in standards war, winner is that with largest installed base & attracts early adopters

when exiting a market, if Pexit = minAVC:

firm would either liquidate its assets or redeploy them to another market

how does a benefit leader achieve a higher profit margin?

firm's benefit advantage gives it the "wiggle room" to charge a price premium relative to its lower benefit, lower-cost rivals, creating price-cost margin without sacrificing its market share

how does a cost leader achieve a higher profit margin?

firm's cost advantage via a low-cost leader-quality product means that the firm must charge a price that is lower than those of its higher-cost, higher-quality rivals but at the same time achieve a higher price-cost margin

what is the equilibrium outcome in Bertrand?

firms always have an incentive to cut price until P + MC (when both firms earn zero economic profit)

what do preferences imply in monopolistic competition?

firms can differentiate their products, raise their prices, and yet find that many of their customers remain loyal

why is geographical location an important source of horizontal differentiation in monopolistic competition?

firms can raise their prices in monopolistic competition without losing all its customers since some customers will pay more to forgo travel costs

how does differentiated products influence a monopolistically competitive market?

firms compete by selling differentiated products that are highly substitutable for one another but are not perfect substitutes, so the cross-price elasticities of demand are large but not infinite

why is flexibility valuable in uncertainty (strategic commitments)?

firms do not know market conditions and costs, rivals' goals and capabilities and cannot observe each others actions, thus future options kept open is good

what did Robert Smiley's (1988) survey of 300 major consumer product makers reveal about entry-deterring behaviour?

firms do use entry-deterring strategies, more those that create high entry costs rather than those that change entrant's expectations

what is cost advantage?

firms seek to attain lower costs while maintaining a perceived benefit that is comparable to competitors

what is differentiation advantage?

firms seek to offer a higher perceived benefit while maintaining costs that are comparable to competitors

why can a monopolistically competitive seller raise its price without losing all its customers?

firms sell horizontally differentiated products to consumers who differ in their tastes

what is the assumption of dynamic pricing rivalry and tit-for-tat pricing?

firms would prefer prices to be closer to their monopoly levels

what is the informational benefit of flexibility in strategic commitment?

flexibility gives firms option value where the firm can delay investment and await new info that bears upon the investments profitability (good in uncertainty)

what is Ghemawat's 1. positioning analysis?

focus on whether the firm's commitment is likely to result in the product market position in which the firm operates with lower costs than its competitors or offers superior benefits to its customers

should firms choose between a margin strategy or a market share strategy when product differentiation is weak?

follow a market share strategy: - cost advantage: consumers sensitive to price differences; deep price cuts will increase market share; firm should undercut and build market share rather than maintain high price-cost margins - benefit advantage: consumers sensitive to price differences; deep price increases = large losses in market; firm should maintain price parity and let benefit advantage build the market share

should firms choose between a margin strategy or a market share strategy when product differentiation is strong?

follow a profit margin strategy: - cost advantage: consumers not sensitive to price differences; deep price cuts will not increase market share; firm should maintain price parity with its rivals and profit via high price-cost margins rather than through higher market shares - benefit advantage: consumers not sensitive to price differences; deep price increases will not = large losses in market share; firm should charge a price premium over the competitors and profit via high-cost margins rather than through higher market shares

what is vertical differentiation?

goods are different and all consumers would prefer one to another if they were sold at the same price and goods are of different qualities

what is horizontal differentiation?

goods are different but at the same price some consumers will buy one and some will buy another, it depends on their preferences

what is the effect of Fudenberg and Tirole's puppy-dog ploy tough strategic commitment of strategic complements?

harmful strategic effect where firm 1 makes tough commitment to lower prices and firm 2 will lower prices in response

what is superior access to inputs or competitors in impeding imitation?

high-quality or high-productivity inputs (such as raw materials or information) will be able to sustain cost and quality advantages that competitors cannot imitate

what is the implication of free entry and exit in monopolistic competition?

if P > ATC (due to customer loyalty), the firm will earn economic profit but will be eroded away in long run due to attraction of new firms

what is the implication of differentiated product in monopolistic competition?

if consumer preference for one product is strong enough even when price increases, producer has small amount of market power (a feature of monopoly)

what happens if one firm is a cost leader and the other is a benefit leader?

if consumers have identical preferences, then firm w higher B-C can capture the entire market by setting price at the point where the other firm cannot make a better consumer surplus bid and still cover its costs

how do complementary assets (valuable in connection) limit dynamic capabilities?

if proposed change in an organisational routine undermines the value of complementary assets, firm will be reluctant to adopt changes due to sunk costs

how can the system of price leadership break down in cooperative pricing?

if the leader does not retaliate if one of the followers defects

how does soft commitment (softer) differ in the Cournot model to the Bertrand model?

in Cournot, will cause the firm to produce relatively less output, while in Bertrand, will induce the firm to charge a higher price

how does tough commitment (aggressive) differ in the Cournot model to the Bertrand model?

in Cournot, will cause the firm to produce relatively more output, while in Bertrand, will induce the firm to charge a lower price

how does oligopoly equilibrium differ from monopolistic or perfectly competitive equilibrium?

in an oligopoly the actions of one firm affects the actions of another (Nash equilibrium)

what is the implication of Bertrand with differentiation?

in contrast to homogenous products, each firm earns economic profit above zero

what is the innovator's dilemma?

in order to compete with a disruptive competitor, the incumbent that originally pioneered or dominated the market would have to cannibalise its own business

what is dynamic efficiency virtually impossible to achieve in a perfectly competitive market?

in the long run firms have no profits & the perfect knowledge of the other firms and consumers ensures that any new development will be copied by others, and the competitive edge gained from it will be lost

in what time frame does a firm in monopolistic competition benefit the most?

in the short-run through innovating and further product differentiation

what is the difference between traditional economics and evolutionary economics?

in traditional economics, firms choose the level of innovative activity that maximises profits but in evolutionary economics firms do not directly choose but instead innovation is a result of organisational routines (e.g. methods of production)

what is Ghemawat's 3. flexibility analysis?

incorporates uncertainty and option value into 1. and 2. by using the ration of the "learn rate" and "burn rate" of the firm to determine the option value

how can firms compete successfully in regards to consumer surplus?

increase consumer surplus by increasing the perceived benefit or by lowering the price, as if there is a choice between two or more products, consumer will choose the one with the largest consumer surplus

how are marketing advantages of incumbency structural entry barriers?

incumbent can exploit the brand umbrella (special case of EOScope to offset uncertainty about the quality of a new product) or negotiate the vertical channel

how do disruptive & sustaining tech allow for new entrants?

incumbent introduces higher-quality products or services to satisfy the high end of the market where profit is highest, leaving an opening for entrants to find footholds in the less-profitable segments that incumbents are neglecting, and disruptive technologies challenge the dominance of incumbents

what is limit pricing (entry-deterring strategy)?

incumbent sets price sufficiently low to discourage entrants who conclude there is no way they can cover entrance sunk costs

how is control of essential resources a structural entry barrier?

incumbents may be in control of limited resources or have patents or special know-how

in cross-price elasticity, what does n = 0 mean?

independent

what is the advantage of most favoured customer clauses in cooperative pricing?

inhibits price competition

what is creative destruction?

innovation causes most markets to evolve in a characteristic pattern as markets have periods of comparative quiet (where firms possess superior products, tech etc) interrupted by shocks and discontinuities where old advantage sources are destroyed and replaced by new ones (where entrepreneurs who exploit them enjoy economic profits during next comparative quiet)

what is a distinctive feature of an oligopoly?

interdependence where each firm is so large that its actions affect market conditions

what is Ghemawat's 4. judgment analysis?

involves looking at the organisation and managerial factors to ensure that incentives exist to support the optimal strategy

what is the key to credibility in an effective strategic commitment?

irreversibility (e.g. RSAs, most favoured customer clauses in contracts, public statements of intention of taking actions)

why is delay valuable in strategic commitment?

it allows the firm to avoid the money-losing outcome of investing when market acceptance is low

what is the disadvantage of the value chain and analysis?

it is often difficult to isolate the impact that an activity has on the value that the firm creates

what is the disadvantage and advantage to strategic commitments?

limits options for firms (inflexibility costly if commitment fails) but can alter rivals' expectations and behaviour to benefit firm

what is the value-chain analysis?

looks at every step a business goes through, from raw materials to the eventual end-user & the goal is to deliver max value for the least possible total costs

what is the "grim trigger" strategy?

lower P = MC indefinitely in reponse to rival undercutting and relies on the threat of an infinite price war to keep firms from undercutting

what can low-price sellers do to boost their market share in monopolistic competition?

lower search costs via advertising (but reduce horizontal differentiation = lower prices = lower profits for all firms)

what is industry analysis?

market assessment tool that analyses the complexity of an industry and involves reviewing the economic, political and market factors (e.g. Porter's 5 forces and Brandenberger & Nalebuff's value net)

in what markets is accommodated entry typical (Joseph Bain)?

markets with growing demand or rapid technological improvements

what is a disadvantage of causal ambiguity in impeding imitation?

may be an important source of diseconomies of scale because the firm may be unable to replicate its success from one plant to the other

how does excess capacity differ from predatory pricing and limit pricing (entry-deterring strategies)?

may deter entry even when the entrant possesses complete information about the incumbent's strategic intentions bc when an incumbent builds excess capacity, it can expand output at a relatively low cost

when may a soft commitment be beneficial as a strategic commitment?

may have profitable strategic effect when it involves strategic complements (e.g. firms raises price in short-run, rival follows)

what is an isolating mechanism?

mechanisms that limit the extent to which a firms competitive advantage (scarce and immobile critical resources and capabilities) can be duplicated or neutralised by competitors

if the market is contestable, is it worth the monopolists while to adopt entry deterring strategies?

no

will a firm always be better off as a monopolist?

no, some monopolists operate in markets that have said to be perfectly contestable (where monopolist cannot raise price above long-run ATC)

should monopolistic competition be regulated bc of DWL and why?

no: - market power is relatively small - inefficiency is balanced by increased product diversity where consumers have options

what are exit barriers?

obstacles that determine how easily a firm can leave an industry

what are legal restrictions in impeding imitation?

patents, copyrights etc as well as government control over entry into markets & will not yield economic profits unless the firm has superior information about how to deploy this asset in superior ways that enhances the value of the asst

what is economic value?

perceived benefit B > cost C

what is Fudenberg and Tirole's top-dog strategic commitment of strategic substitutes?

positive strategic effect because firm 2 produces less output, so firm 1 gets greater market share (e.g. firm 1 invests in new plant to lower costs, firm 2 discouraged)

what is a disadvantage of bidding for "superior" inputs/customers?

possibility of winner's curse where may end up overpaying for the asset & winning comes at too high a cost

what is the difference between predatory pricing and limit pricing (entry-deterring strategies)?

predatory pricing is directed at firms already in market, while limit pricing is directed at potential entrants

what happens when the price elasticity of demand with regards to substitutes is elastic?

pressure from substitutes will be significant

what happens when no one leaves as a result of predatory pricing (entry-deterring strategy)?

price war (a firm that faces exit barriers is well positioned to engage in a price war)

how does free entry and exit influence a monopolistically competitive market?

relatively easy for new firms to enter the market with their own brands and for existing firms to leave if their products become unprofitable

what is the advantage of uniform delivered prices?

response to price cutting can be "surgical" and effective in deterring defection from cooperative pricing

what happens when firms overestimate the willingness of consumers to tradeoff price for quality?

risk overpricing their products and either losing market share to competitors or never becoming a viable competitor

what is a disadvantage of major organisational change?

runs the risk of neglecting intangible sources of competitive advantage

what is the purpose of a broad coverage strategy?

seeks to serve all customer groups in the market by offering a full line of related products

is predatory pricing irrational (entry-deterring strategy)?

simple economic models indicate that predatory pricing is irrational as entrants can perfectly foresee the future course of incumbents pricing and therefore strategy will not work

what happens when firms are identical with regards to price coordination?

single monopoly price can be the focal point

how are EOScale + Scope structural entry barriers?

small entrants may face cost disadvantages and thus sell at higher price, while the incumbent may strategically lower price lower (diversifying entrants may have EOScope)

what are disruptive technologies?

special case of products that offer much higher B-C than their predecessors, but do so not through incremental improvements but with entirely new technologies that drastically lower C or have lower benefits and much lower costs

what is share strategy?

strategy by which a firm exploits its benefits or cost advantage through a higher market share than through high price-cost margins

what is margin strategy?

strategy by which a firm maintains price parity with its competitors and profits from its benefit or cost advantage primarily through high price-cost margins, rather than through a higher market share

in cross-price elasticity, what does n > 0 mean?

substitutes

what is the implication of the long-run in monopolistic competition?

supernormal profits attract new firms so existing firm's demand will decrease as they lose market share so supernormal profits are eroded away (the ATC curve just touches the demand curve P = ATC)

what does Porter's diamond argue?

that firms are most likely to succeed in industries or industry segments in which the 4 sources are favourable & the sources form a mutually reinforcing system

what is a search costs in monopolistic competition?

the costs of finding information about alternatives (higher the search cost = higher the overall switching costs = less likely to switch)

what does the amount of market power depend on in monopolistic competition?

the degree of product differentiation

what is consumer surplus?

the difference between max consumer willing to pay and the prevailing market price

what is the disadvantage of Joseph Bain's arguments about entrants and incumbents?

the distinction between incumbents already being in the market and entrants not do not justify treating firms asymmetrically as incumbents do not necessarily have the advantage (with resources, finances etc.)

what is the profitable alternative to Fudenberg and Tirole's puppy-dog ploy strategic commitment of strategic complements?

the fat-cat effect where firm 1 makes a soft commitment on tactical variables that are strategic complements

what is the direct effect of strategic commitment?

the impact on the firm's profits assuming the rival's actions remain unchanged (e.g. if you expand output and ATC declines to increase profit)

what does the degree of horizontal differentiation in monopolistic competition depend on?

the magnitude of consumer search costs (e.g. customers may not switch to lower cost unless they are aware of another seller)

what is the value added analysis?

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

what is the "learn rate" used to determine option value in Ghemawat's 3rd step?

the rate at which a firm receives new information that allows it to adjust its strategy

what is the "burn rate" used to determine option value in Ghemawat's 3rd step?

the rate at which the firm makes irreversible investments in support of its strategy

why may a firm prosper indefinitely in an industry with intense pricing rivalry and low entry barriers?

the sources of its competitive advantage may be so difficult to understand or to imitate

what does the steepness of the indifference curve reflect?

the tradeoff between price and quality that the consumers are willing to make

why do smaller firms suffer less from the revenue destruction effect in duopoly markets when a firm expands its output above monopoly level?

they enjoy more benefits from each additional unit sold

what is the difference between tit-for-tat pricing strategy and grim trigger strategy?

tit-for-tat undercut only lasts one period in reaction while grim trigger is indefinitely undercutting

what do the Cournot, Bertrand and Stackelberg models have in common?

total industry profits are less than what could be achieved if the firms acted like a cartel

what is the Bertrand model in duopoly markets?

two firms both assumes that the other will keep price unchanged, and therefore each firm has an incentive to cut prices (leads to price war) where P = MC but firms may not cover their fixed costs

what is vertical differentiation in monopolistic competition?

unambiguously differ in quality

what is microdynamics?

unfolding of competition (such as strategic commitment, informational benefits of flexibility and competitive discipline) over time among a small number of firms

what is the indifference curve?

upward sloping graph that shows difference between price and quality

what are creative destruction policy implications?

used to defend monopoly on the ground that high economic profits are reward for innovation where policy analysis should focus more on innovation rather than regulating

how do some incumbent firms sustain positive economic profits over long periods; yet to potential entrants the industry appears to offer zero expected profits?

using Lippman & Rumelt's entrant's uncertainty regarding their cost when firms produce undifferentiated products that have different costs (imitation is perfect and so not all firms can achieve the low-cost position)

what is judo economics (entrant strategy)?

using the incumbents strength to own advantage but appearing to be a non-threat in the long-run

what is the advantage of price leadership in cooperative pricing?

way to overcome the problem of coordinating on a focal equilibrium

what is exit of a market?

when a firm stops production and deploys or sells off its assets

what is a strategic substitute in strategic commitment?

when a firm's action induces the rival to take the opposite action (our aggressive behaviour leads to passive response from our rival - reaction functions are downward sloping)

what is predatory pricing (entry-deterring strategy)?

when a large incumbent sets a P < short-runMC to drive smaller rivals out of the market, then recoup losses via monopoly profits (potentially irrational as entrants can forsee incumbents pricing)

what is deterred entry (Joseph Bain)?

when entry deterring strategies are effective and also cost effective / boosts incumbents profits

what is an example of Fudenberg and Tirole's top-dog strategic commitment of strategic substitutes?

when firm 1 invests in a new plant or new technology to lower its production costs

what is an example of Fudenberg and Tirole's lean and hungry look strategic commitment of strategic substitutes?

when firm 1 takes opportunity to expand into another market (not occupied by firm 2); thereby increasing its MC in the present market because of DOScale+Scope

when does real option (created by altering internal processes) exist?

when future information can be used to tailor decisions

what are market size and scale economies in impeding imitation?

when minimum efficient scale (MES) is large relative to market demand and one firm has secured a large share of the market & scale-based barriers to imitation and entry especially powerful in specialised product/service markets where the market demand can be met by one producer

what is a strategic complement in strategic commitment?

when one firm chooses more of an action and its rival chooses more as well (our aggressive behaviour is matched by aggressive behaviour from rival - reaction functions are upward sloping) (e.g. price-raising in response to rival price-raising)

under Cournot model in duopoly markets, why does the pursuit of individual self-interest not maximise profits of the group as a whole?

when one firm expands its output above monopoly level, it reduced market price and lowers the revenue of other firms (revenue distruction effect)

what is accommodated entry (Joseph Bain)?

when structural entry barriers are low bc entry-deterring strategies are ineffective or the cost to the incumbent exceeds benefit of keeping entrants out

what is blockaded entry (Joseph Bain)?

when the incumbent does not need to take action to deter entry because existing structural barriers are effective

in a perfectly contestable market (entry and exit), what is a hit-and-run strategy?

where an entrant can rapidly enter a market, undercut price, reap short-term profits and exit if the incumbents retaliate with a lower price (due to low or no entry and exit barriers)

what is standard-setting?

where different products are compatible with one another through some form of common interface

what is productive efficiency?

where goods and services are produced at the lowest cost possible, P = minimum of the long-run average cost curve

what is a contestable market (entry and exit)?

where the threat of entry limits a monopolist's ability to raise prices (rare!)

what is path dependence?

where we have been in the past determines where we currently are and where we can go in the future, so with threats from new entrants, even small path dependencies can have major consequences for competitiveness (e.g. if a firm that has developed significant commitments to a particular way of doing business may find it hard to adapt to minor changes in technology)

what is competitive advantage in a market?

whether it is more or less successful than rivals in creating and delivering economic value (perceived benefit B > C)

what does creative destruction imply about isolating mechanisms?

will not be permanent

why, with differentiated products, do customers not switch easily when a firm cuts prices?

will not switch unless the differential in price or quality large enough

when products are differentiated, which duopoly model is used?

with differentiation, the demand curves and reaction functions are different for each firms, and so firms are more likely to compete on price (Bertrand)

which model of duopoly is used in business booms in the airline industry and why?

with operation at near capacity, and the inability to increase business with few available seats, competition is based on quantity and allows the airlines to reap substantial profits (Cournot)

which model of duopoly is used in business downturns in the airline industry and why?

with substantial excess capacity on virtually every route, perception of undifferentiation and low search costs, undercutting and stealing customers will fill empty seats but will lead to substantial industry losses (Bertrand)

can a firm be "stuck in the middle" be successful?

yes, bc: - firms that offer high quality products expand market share and then reduce average costs bc of economies of scale and learning curve - firm might be able to achieve both a high-quality and low-cost position in the industry bc production works must exercise more care to produce a higher quality product (this is why high quality rather than low quality)

what does it mean if a price-quality combination sits below the indifference curve?

yields a higher consumer surplus than yielded by products along the curve (superior product)

what does it mean if price-quality combination sits above the indifference curve?

yields a lower consumer surplus than yielded by products along the curve (inferior product)

what does it mean if a price-quality combination sits along the indifference curve?

yields the same consumer surplus and will maintain market share