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Customer, markets and firm strategy > Tutorial 1-4 > Flashcards

Tutorial 1-4 Flashcards

1
Q

What is the optimal margin of constant elasticity functions? [formula]

A

Optimal Margin M: is absolute value of the reciprocal (Kehrwert) of the elasticity

M = ABS [ 1/e]

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2
Q

Constant elasticity functions: What is the optimal margin, if e= -4 ?

What does a higher elasticity mean?

A

For example, ε = - 4,

optimal margin M* = 25%

–> Higher elasticity means lower optimal margins

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3
Q

Constant Elasticity Price-Quantity
Functions: what is the implication about demand and pricing?

A
  • The more elastic the demand is, the more aggressive the pricing should be
  • the higher elasticity of demand, the lower optimal margins
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4
Q

constant elasticity function

What is the formula for the >profit maximizing price when we have a constant elasticity function?

A

P = C/ (1-M*)

M* = Optimal margin

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5
Q

What are the 5C´s analysis? Name the 5 C only:

A

1.Customers

2.Competitors

3.Company

4.Context

5.Collaborators

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6
Q

What is the 5C´s analysis? (Which questions to ask)
Customers:

A

1.Customers: analysis target market and customer base

  • Target audience?
  • What are the channels?

What is the total available market?
- Total Available Market (TAM)
- Serviceable Available Market (SAM)
- Serviceable Obtainable Market (SOM

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7
Q

What is the 5C´s analysis? (Which questions to ask)
Company:

A

Company: Understand the company’s strengths, weaknesses, resources, capabilities, and strategic objectives

–>Useful: SWOT-Analysis

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8
Q

What is the 5C´s analysis? (Which questions to ask)
Competitor:

A

Competitor: Understand the company’s competitive position and identify key competitors

  • Compare market shares within the industry
  • But what actually is the “industry”. What are its boundaries?
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9
Q

What is the 5C´s analysis? (Which questions to ask)
Context:

A

Context: Understand external factors that can impact the company’s performance and strategy (Context in which a firm operates)

Often useful to use a PESTEL analysis:

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10
Q

What is the PESTEL analysis?

A

PESTEL:
- It provides coverage into the areas that may affect a business, but where the business exercises either no or limited control
- Changes to contextual factors may impact the industry as a whole rather than a particular company

  • Political factors
  • Economical factors
  • Sociocultural factors:
  • Technological factors
  • Environmental factors
  • Legal factors
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11
Q

What is the 5C´s analysis? (Which questions to ask)
Collaborators:

A

Collaborators: are entities that allow or enhance a company’s ability to provide its particular good or service in the way that it does

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12
Q

Define market segmentation ?

A

Market segmentation is

  • the division of an overall heterogeneous market into homogeneous submarkets or “segments”.
  • This division takes place according to certain needs, characteristics or behaviors of the actual or potential buyers
  • Each segment is better addressed with an individual marketing strategy than with a generic one.
  • Within a segment individuals should be as similar as possible
  • Between segments they should be dissimilar as possible to each other
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13
Q

explain the basic
requirements for effective market segmentation`?

A
  • Measurable: Data is available to identify segments
  • Accessible: People in the identified segment can be reached via marketing actions
  • Profitable: Take margins of each segment into account to assess whether it is profitable. Also the effort to arrive at this segmentation should be taken into account
  • Differentiable: The identified segments are in fact different with regard to their usage and purchase behavior
  • Actionable: You need to get different response from the different segments when they are
    met with your marketing actions
  • Aligned with corporate strategy: The identified segments need to fit to the overall corporate strategy
  • Provide value: A segmentation should provide some form of value to the company
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14
Q

List four specific types of segmentation criteria (segmentation approaches and give one specific example. Give at least one advantage or disadvantage per segmentation approach=?

A

Geographic: e.g. Country, City
- Disadvantage: Limited temporal stability

Demograhpic: Gender, Age, Household size
- Advantage: Rather stable over time

Psychographic: Lifestyle, Traits#
- Disadvantage: Difficult to segment

Behaviroral factors: Price sensitivity
- Advantages: Especially relevant for
purchase behavior

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15
Q

What is the marketing mix?

A

Product: featues, quality, branding, packaging, and lifecycle

Price pricing strategy, discounts, payment terms, perceived value

Place: location, distribution channels, logistics, and market coverage

Promotion: Advertising, sales promotions, public relations, personal selling, and digital marketing

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16
Q

What is the attribute dependency theory?

A

= is one of the five innovation methods of Systematic Inventive Thinking (SIT).

  • It works by creating (or breaking) a dependency between two attributes of a product or its environment
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17
Q

What are the steps in the “Attribute dependency” technique`?

A
  1. List internal/external variables.
  2. Pair variables (using a 2 x 2 matrix)
  3. Internal/internal
  4. Internal/external
  5. Create (or break) a dependency between the variables.
  6. Visualize the resulting virtual product.
  7. Identify potential user needs.
  8. Modify the product to improve it
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18
Q

What is A/B testing?

A

=is a method used to compare two versions of a web page, email, or other marketing asset to determine which one performs better

–>This technique is commonly used in marketing, web development, and product management to optimize user experience, increase conversion rates, and improve overall effectiveness of digital campaigns

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19
Q

What is statistical power?

A

= is the probability that the test rejects the null hypothesis when it should be rejected

  • It is basically 1 minus beta. = 1- ß
  • A common value for statistical power is 0.80 (so beta is 0.20).
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20
Q

Why are the concepts of own and cross-price elasticities of demand essential to competitor identification and market definition?

A

Own-price elasticity of demand
- Equals the percentage change in a product market’s (or industry’s) sales that results from a 1% change in price
- Measures the magnitude of consumer responses to changes in a product market’s (or industry’s) price

21
Q

What would you analysis to identify a market? Example: Ivy league schools

A

Customer and demand analysis
- Conduct a survey to uncover who the applicants to the elite schools were

  • Separate market if applicants were from the same pool of high-school students and did not apply outside the elite schools

Pricing and enrollment history analysis

  • Will consumers switch to sellers outside the market
  • Separate market if schools collectively raised prices compared to other schools and did not see a drop in their enrollment
22
Q

How would you characterize the nature of competition in the restaurant industry? (Nature, differentiation, prices, substitutes, profitability

Are there submarkets with distinct competitive pressures?

Are there important substitutes that constrain pricing?

Given these competitive issues, how can a restaurant be profitable

A

Monopolistic competition

  • Differentiation: Horizontal: type of cuisine, ambience, décor, location
  • Vertical: quality of food and service
  • Prices: constrained by geographic location and local competition
  • Substitutes: home-prepared meals and frozen dinners
  • Profitability: driven by superior location or loyal customers
23
Q

What is the **industry- level **price elasticity?

A

= percentage change in quantity demanded per percentage change in price when all firms simultaneously change price

24
Q

How does industry-level price elasticity of demand shape the opportunities for making profit in an industry?

A
  • Determines the limits on firms’ abilities to profit from collective price increases
  • Shapes profit opportunities in environments where firms are able to coordinate their pricing behavior to more closely resemble that of a monopolist
25
Q

What is firm-level price elasticity of demand?

A

= percentage change in a firm’s quantity demanded per percentage change in price when that firm changes its price but other competing firms do not

26
Q

How does firm-level price elasticity of demand shape the opportunities for making profit in an industry?

A
  • Determines perceived benefits from a price cut aimed at stealing business from competitors
  • Shapes industry profitability by influencing the likelihood of destabilizing price-cutting behavior by firms
27
Q

What is the “revenue destruction effect”? (Chain of effects)

A
  • Output expansion of a firm .–> market price reduction –> lower sales revenue of rivals
  • Effect occurs in oligopoly markets
  • One firm expands its output which leads to a market-wide reduction in price and to a destruction of profits for the industry
28
Q

What is the reasoning behind the revenue distruction effect of the firm initiating it?

A

Each firm seeks to maximize its own profit rather than total industry profit

29
Q

As the number of Cournot competitors in a market increases, the price generally falls.

What does this have to do with the revenue destruction effect?

A
  • result: greater is the divergence between the Cournot equilibrium and the collusive outcome
  • number of firms increases, competitive pressure -> foreces firms to produce more and reduce prices
  • this price reduction leads to the revenue destruction effect

Divergence the price level between under collusion and cournot get larger

30
Q

Smaller firms often have greater incentives to reduce prices than do larger firms

What does this have to do with the revenue destruction effect?

A
  • The smaller a firm’s share of industry sales, the greater is the divergence between private gain and the revenue destruction effect
  • for smaller firms the private gain from reducing prices (increased market share + revenue) is greater compared to the revenue destruction effect
31
Q

Numerous studies have shown that there is usually a systematic relationship between concentration and price.

What is this relationship?
Offer two brief explanations for this relationship

A

Relationship: Prices tend to be higher in concentrated markets

Industry with high concentration ratio:

  • Total industry output and price are closer to the levels that would be chosen by a profit-maximizing monopolist
  • Tacit collusion is more successful with a small number of sellers (tacit = situation where firms indirectly coordinate actions)
  • Divergence between a firm’s private gain and the revenue destruction effect from output expansion is small
32
Q

What factors, besides the number of firms in the market, might affect margins?

A

Influencing factors:

  • Regulation
  • Product differentiation
  • Nature of sales transactions
  • Concentration of buyers
33
Q

What are the characteristics of homogenous product markets?

A
  • Marginal costs = marginal revenues
  • Firms do not earn an economic profit
  • Firms only earn returns on their factors of production
  • Production efficiency allows firms to expand output and gain market share
    –> increases total returns to the factors (but still not allows to earn an economic profit)
34
Q

What are the characteristics of oligopoly and monopoly markets, regarding the profitability and efficiency

A

Oligopoly and monopoly markets

  • Firms earn economic profits in excess of their factor costs
  • Efficiency lowers production costs and allows for an increase in output quantity and market share
  • Higher output quantity increases the economic profit earned by a firm
35
Q

“The only way to succeed in a market with homogeneous products is to produce more efficiently than most firms.”

Comment.
Does this imply that efficiency is less important in oligopoly and monopoly markets?

A
  • Efficiency is important in all market structures
  • It can be argued that efficiency is less important in oligopolies and monopolies
  • as firms earn economic profits in excess of their factor costs
  • However, all firms seek to maximize profits -
    -> profit maximization is obtained by producing a greater quantity at a point where the firm’s marginal cost equals its marginal revenue
36
Q

How does the revenue destruction effect explain differences between monopoly and oligopoly pricing?

A

Oligopoly

  • Reduction in market price is shared among all firms in the market
  • Output expanding firm does not bear the full burden of revenue destruction

Monopoly

  • Output expanding firm incurs entire amount of revenue destruction
  • Monopolists are less likely than oligopolists** to expand output
37
Q

In what ways are monopolistically competitive markets “monopolistic?”

A

“Monopolistic”

  • Monopolistic competitors produce products that are slightly differentiated
  • Monopolistic competitors can earn economic profits by advertising the differences in their products
  • –>Make products seem unique (“monopolistic”)
38
Q

In what ways are monopolistically competitive markets “competitive?”

A

Competitive”

  • Relatively low barriers to entry
  • New entrants reduce individual market shares
  • Economic profits are eliminated in the long-run
  • Monopolistic competitors become “price-takers” (not unlike perfect competitors)
  • and earn only returns on their factors of production
39
Q

According to Bertrand’s theory, price competition drives firms’ profits down to zero even if there are only two competitors in the market.

Why don’t we observe this in practice very often?

A
  1. Product differentiation
    – Bertrand model: two firms sell identical products
    – reality: firms often sell differentiated products, i.e. undercutting the rival’s price does not guarantee total market demand
  2. Dynamic competition
    – Bertrand model: firms compete in one period only, i.e. price is chosen once and for all (static nature)
    – reality: firms dynamically compete over multiple periods, i.e. undercutting a rival’s price may cause the rival to lower its price too, possibly initiating a price war (threat of retaliation)
  3. Capacity constraints
    – Bertrand model: no capacity constraints
    – reality: firms often have capacity constraints and may not be able to satisfy total market demand – even if they receive it by undercutting the rival’s price
40
Q

What characteristics of a specific industry will you look for to determine whether this industry is better represented by price competition or by quantity competition?

Discuss

A
  • Presence of capacity constraints:
    Is there unlimited capacity or do firms face some sort of restrictions?
  • Short-term adjustability of prices:
    Can firms easily change their prices or are they costly and complex to adjust

Quantity competition:
- Do firms in an industry stick to a particular quantity and sell this quantity at any price? –> implies quantity competition

  • Appropriate model choice in case of limited capacities, even if firms are price setters
41
Q

Questions, when quantity competition is the best model to explain the industry?

A

Quantity competition:
- Do firms in an industry stick to a particular quantity and sell this quantity at any price? –> implies quantity competition

  • Appropriate model choice in case of limited capacities, even if firms are price setters
42
Q

Questions, when price competition is the best model to explain the industry?

A

Price competition:
- Do firms in an industry stick to a particular price and sell any quantity at this price? –> implies price competition

Appropriate model choice
- in case of unlimited capacity or
- when prices are more difficult to adjust in the short run than quantities

43
Q

Which model (Cournot, Bertrand) would you think provides a better approximation to each of the following industries:
* Oil refining
* Insurance
* Farmer markets
* Cleaning services

A

Oil refining:
- firms decide how much to sell up to a capacity constraint and this determines the price

  • few firms in the market, large fixed costs to enter –> Cournot model

Insurance:
- diverse field of players with many large companies
- capacity constraints are not a major issue as insurance supply depends on the number of employees involved (labor) –>Bertrand model

44
Q

Which model (Cournot, Bertrand) would you think provides a better approximation to each of the following industries:
* Farmer markets
* Cleaning services

A

Farmer markets:
- large number of suppliers who have to decide how much to supply each year
- total supply (crop) determines market price –>Cournot model

Cleaning services:
- mainly labor-based industry with a large number of independent suppliers plus some larger companies
- labor supply is fairly flexible –>Bertrand model

45
Q

“The degree of monopoly power is limited by the elasticity of demand.”
Comment.

A

Relation in optimal monopoly pricing:
P - MC/P = 1/elasiticy

  • with p = price, MC = marginal cost and ɛ = demand elasticity
  • The greater the value of ɛ, the lower the value of** (p – MC) **and the lower the monopoly profits
  • Very elastic demand –> monopoly profits at competitive level
46
Q

A study estimated the long-run demand elasticity of AT&T in the period of 1988–1991 to be around 10. Assuming the estimate is correct, what does this imply in terms of AT&T’s market power at that time?

A
  • An elasticity of 10 implies that AT&T’s demand is very elastic
  • Market power is a firm’s ability to raise price above marginal cost and earn a positive profit
  • The more elastic the demand, the lower is a firm’s market power –> here: no significant market power for AT&T
47
Q

What does attribute dependency mean?

A
  • “Attribute Dependency” is when one attribute or variable depends on the status of another attribute/variable
48
Q

Why are the concepts of own and cross-price elasticities of demand essential to competitor identification and market definition?

A

Cross-price elasticity of demand between two products

  • Measures the percentage change in demand for good Y that results from a 1% change in price of good X
  • Allows to identify substitutes
  • The higher the cross-price elasticity, the more readily consumers substitute between two goods when the price of one good is increased

Customer, markets and firm strategy (20 decks)

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