Micro 16-18
Bargaining power of buyers
Buyers can suppress the profitability of the industries from which they purchase by demanding price concessions or increases in quality.
grim trigger strategy
Cooperate until opponent defect, then defect forever
Perfect price discrimination
First degree: Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit. (able to charge the highest possible price and make every sell) same Q as perfect competition. Ex: auctions, play game for free but special features cost money.
first-mover advantage
Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage
Existing competitors
Price competition- competing to win customers by offering lower prices (works best when selling similar products, and when prices are easily observed with low switching cost) Non-price competition- competing to win customers by differentiating your product (Market positioning)
quantity discounting
Second degree: charging prices based on the quantity purchased. Ex: Sams club vs Wal-mart
Bargaining power of suppliers
Suppliers can exert power by threatening to raise prices or reduce the quality of purchased goods and services
Group pricing
Third degree price discrimination; very common. Ex: student discount, senior citizen Business travelers vs vacationers
potential competitors
Threat of entry depends on the extent to which barriers to entry shield businesses from competition by new entrants. (new startups or expanding businesses)
median voter theorem
When a winner is decided by who gets the most votes, the best strategy is to appeal to the median voter. (consumer) 1) if prices competition is intense, you want to = differentiate (move away from competition) 2) if price competition is subdued, you want to = minimize the differences
Nash equilibrium
an equilibrium in which the choice that each player makes is a best response to the choices other players are making.
Payoffs
benefit each player receives as consequences of actions (profit or consumer surplus)
Advertising
can help to position your product causing demand. Advertising can shift curve to inelastic.
second mover advantage
challenger observes what has made the leader successful and improves on it
strategy
complete set of actions for each possible situation. Timing of actions = who makes the first choice = simultaneous (actions at the same time) or sequential (one player, then the other)
players
individuals or groups making a decision (consumers, Producers)
product positioning
is making a choice about the attributes that a product has relative to it competition. Products should be positioned to be attractive to as many customers (demand) as possible, while trying to be (supply) different from our competitors. (trade off)
Strategic Interaction
occur when your best choices may depend on what others choose and their best choices may depend on what you choose.
Hold up problem
occurs if the other side tries to renegotiate a deal after a relationship-specific investment has been made. Relationship specific investment lowers your bargaining power. Write long term contracts that commit both sides to solve the hold out problem. Vertical integration where two firms merge.
Actions
possible choices for each player (Pricing, Quantity)
non-price competition
price competition can spark price war that push profit to ZERO "sticky customers can be attracted through product differentiation (same as perfect competition) They compete by changing product features or better quality, design style or location.
collusion
secret agreement or cooperation
dominant strategy
situation in which a particular strategy yields the highest payoff regardless of the other players strategy
price discrimination
the business practice of selling the same good at different prices to different customers
reservation price
the maximum price a consumer is willing to pay for a product or service based on the total perceived consumer benefits.
anti-coordination game
when your best response is to take a different (but complementary) action to the other player
Steps for making good strategic decisions
1) consider all possible outcomes = Actions of each player =payoff 2) Think about the "what ifs" separately = what if Y plays "A" 3) play your best response strategy = if Y plays "A" what should X do? 4)
successful price discrimination
1) increase in quantity sold 2) reduced deadweight loss 3) increases profits 4) reduces consumer surplus
necessary conditions for price discrimination
1) must have market power 2) prevent the resale of the product 3) can target the right price for the right customer
Competitors in other markets
1) potential substitutes can come from unrelated industries 2) disruptions often come in the form of cheaper alternatives 3) substitutes are bugger threat when switching cost are to low 4) complements can point to new opportunities
Long-term profitability depends on
1) the type and intensity of competitive forces 2) decisions you make in response to these forces
Five forces framework
1. competition from rival sellers 2. competition from potential new entrants to the industry 3. competition from producers of substitute products 4. supplier bargaining power 5. customer bargaining power
Prisonser's dilemma
A game where the best outcome is to COOPERATE but the equilibrium out is NO COOPERATION (worst outcome)
tit-for-tat strategy
A means of encouraging cooperation by at first acting cooperatively but then always responding the way your opponent did (cooperatively or competitively) on the previous trial
coordination game
A type of game in which a Nash equilibrium occurs when each player chooses the same strategy; neither player can do better than matching the other player's strategy
Bargaining power
Ability to negotiate a better deal. Bargaining power is determined by next best alternative "opportunity cost"
game theroy
Analyzes the choices made by rivals firms, people and even governments when they are trying to maximize their own well-being while anticipating and reacting to the actions of others in their environment.