chp 16 econ

Existing competitors

widens market, increasing competitors, reducing differences, pressure to compete on price. Determines the type and intensity of existing competition.

Which of the following mergers between two companies would be considered to be a vertical merger? A. A hair salon merges with a dry cleaner. B. A dressmaker merges with a doughnut shop. C. An auto repair shop merges with a boat repair shop. D. A fabric mill merges with a pants factory.

D. A fabric mill merges with a pants factory.

As a basic rule of thumb, business owners should differentiate their products as much as possible when: A. costs are high. B. costs are low. C. price competition is subdued. D. price competition is intense.

D. price competition is intense.

non-price competition

Is when businesses compete by differentiating their products—offering different features, service, or brand reputation, and positioning their products to win different segments of the market.

Beyond the threat of new substitutes, you should also keep track of the opportunity offered by:

emerging complements

perfect competition

is when you're just one of many small businesses in the industry selling identical goods—competition is so intense that you have no market power.

Market structure determines:

long term profitability

When Joe's Manufacturing Company successfully differentiates its product, then from the perspective of consumers: A. the product may be different, but price remains the key factor in purchase decisions. B. there are different prices charged by different sellers, but the product is the same. C. rival sellers produce different but equally desirable products. D. the output of rival sellers is not a good substitute for Joe's output.

D. the output of rival sellers is not a good substitute for Joe's output

When an input seller has market power in the input market, its customers: A. may end up paying a higher price for inputs. B. gain market power in their product markets. C. may earn higher profits. D. have the ability to charge a higher price for their products.

A. may end up paying a higher price for inputs.

Marta wants to open a shop specializing in gourmet candies and is having a difficult time finding space to rent in a location where many potential customers will pass by each day. There are only two possible locations that meet Marta's criteria, and several other types of businesses are vying to rent each location. This leads to high rents. What challenge to profitability is Marta facing as she starts her business? A. suppliers with bargaining power B. customers with bargaining power C. the threat of potential entrants D. the threat of competition from existing competitors

A. suppliers with bargaining power

Which of the following can reduce the incentive of business partners to hold up a company when the company has made relationship-specific investments? A. The greater the level of relationship-specific investments, the lower the incentive for the partners to hold-up. B. A long-term relationship based on trust exists between the partners and the company. C. The more the company relies on the business partner, the lower the incentive for the partners to hold-up. D. A high level of market power is held by the business partners.

B. A long-term relationship based on trust exists between the partners and the company.

Under the 5 forces framework, how can the market power of customers impact a seller's profitability? A. The market power increases the total number of customers, raising market demand. B. Customers with market power can use their leverage to lower the selling price that the sellers charge. C. They can raise the selling price sellers charge. D. The market power reduces the total number of customers, raising market demand.

B. Customers with market power can use their leverage to lower the selling price that the sellers charge.

Marcella is a tomato farmer, under which of the following conditions would she face the most intense competition? A. there are 6 suppliers in the market for the main input used by firms in the tomato market. B. Marcella is 1 or 1,200 tomato farmers who sell in the same tomato market. C. Each tomato farmer in the market produces its own hybrid variety of tomatoes. D. there is little threat of new entrants in the market.

B. Marcella is 1 or 1,200 tomato farmers who sell in the same tomato market.

How does the threat of potential substitutes lessen the market power of a business? If the substitute becomes available, then the: A. addition of new substitutes will raise the level of customer satisfaction, allowing higher prices to be charged. B. business may lose customers to the substitute good's market unless it lowers price. C. business may gain customers from the substitute market, adding to its profits. D. business may reduce its costs by substituting one input for another input.

B. business may lose customers to the substitute good's market unless it lowers price.

A search good is a product that: A. is not yet available, but consumer desires for it are known. B. can easily be evaluated before purchase. C. is produced with rare or hard-to-find inputs. D. is difficult to locate, so it takes time to find it.

B. can easily be evaluated before purchase.

When advertising increases brand loyalty for your company's brand, then the company's demand curve becomes: A. more elastic. B. more inelastic. C. more unstable. D. horizontal.

B. more inelastic

Which of the following statements about product differentiation is FALSE? A. It can be achieved even when the product is identical to that for sale by other firms. B. It can be achieved through customer service. C. It is charging a lower price than other sellers. D. It is a key way for a seller to maintain long-term profits.

C. It is charging a lower price than other sellers.

What distinguishes persuasive advertising from informative advertising? A. Persuasive advertising uses facts about the product to convey its excellence. B. Persuasive advertising relies on statistics summarizing customer reviews. C. Persuasive advertising focuses on emotions and provides few facts about the product. D. Persuasive advertising focuses on brand reputation by frequent reminders of awards won by brand.

C. Persuasive advertising focuses on emotions and provides few facts about the product.

Price competition is most likely when:

- You and your rivals sell extremely similar products; - Prices are easily observed; and - Switching costs are low.

producers of potential substitutes...

may become competitors

Rivalry is more intense when:

you face more competitors producing similar goods.

What protects a business from the threat of entry by potential competitors? A. barriers to entry B. low price C. potential substitutes D. high costs

A. Barriers to entry

According to the 5 forces framework, the ______ the degree of rivalry in an industry, the ______ the average profits will be in the industry. A. greater; lower B. more variable; greater C. lower; more variable D. lower; lower

A. greater; lower

What is market competition? A. Sellers force competitors to lower their prices until the competitors have losses. B. Sellers try to win customers through charging as low a price as possible. C. Sellers differentiate products so they can charge a higher price. D. Sellers compete with each other by charging as high a price as possible

B. Sellers try to win customers through charging as low a price as possible.

Relationship-specific investments are investments that: A. create seller-to-seller training programs. B. are worth more in the context of a specific business relationship. C. increase your bargaining power. D. contractually obligate a business partner to continue working with the investor.

B. are worth more in the context of a specific business relationship.

In which of the following situations would a company have a lower chance of losing customers when it raises the price of its product? A. There are low switching costs. B. Customers have many sellers to choose from. C. The product is differentiated across companies. D. Companies advertise their prices.

C. The product is differentiated across companies.

In differentiating a product, the supply-side consideration is to _____ as possible. A. cut price as much B. create as many barriers to entry C. be as different from competitors D. increase the number of competitors as much

C. be as different from competitors

Dinesh owns a restaurant. He is able to negotiate lower prices than other restaurants pay with his supplier because he buys in volume and threatens to buy from another supplier. Dinesh is: A. operating in a highly competitive market. B. operating at a disadvantage compared to other restaurants. C. exercising bargaining power. D. trying to gain market share in the input market.

C. exercising bargaining power.

Five Force Framework

describes the competitive forces in your market. It helps correct this tendency, reminding you to take a broader view. you analyze not only your existing competitors, but also four other economic forces: potential entrants, substitute products, suppliers, and customers. Together, these five forces describe the competitive pressures that determine your long-run profitability.

interdependence principle

implies that buyers decisions are affected by many factors other than the price of an item.

customers

leverage their bargaining power as buyers to demand that you charge lower prices.

price competition

occurs when businesses compete to win customers by offering lower prices.

2 dimensions to consider:

the intensity of competition and the type of competition.

The greater the degree of rivalry in your industry,

the lower your profits will be.

Suppliers

use their bargaining power as sellers to charge you higher prices on your inputs.

Potential Entrants

Threat of new entrants, also shape the nature of your future.