Extra leren

Question 1

What is the essence of the replacement effect (the innovator’s dilemma)?

Answer 1

An entrant has more to gain from innovation than a monopolist. An entrant can replace a monopolist, but a monopolist can only replace itself.

Question 2

What is the essence of the efficiency effect?

Answer 2

The incentive to innovate from an incumbent of stronger than that from a potential entrant. The Incumbent wants to keep the entrant out.

Question 3

What is the essence of the sunk cost effect? (innovator’s dilemma)

Answer 3

Commitment to technology with sunk costs will create bias. A firm that has not yet committed to technology is not biased.

Question 4

What is the essence of the productivity effect?

Answer 4

How a firm spreads its resources for the most effective way of research. Incumbents are often betters at the allocation of research dollars.

Question 5

What are the four attributes Poters identifies in a firm’s home market that promote or impede a firm ability to achieve competitive advantage in global markets?

Answer 5

1. Factor conditions (describe a nation’s positions regarding factors of production)
2. Demand conditions (include size, growth, and character of home demand for the firm’s products)
3. Related supplier or support industries (suppliers or support with strong internationally work in favor)
4. Strategy, structure, and rivalry (context of competition)

Question 6

What is a relationship-specific investment?

Answer 6

Relationship-specific investments are investments made to make a transaction with a partner firm more efficient. They create value but are at the same time only useful for that specific transaction (relationship specific)

Question 7

What are the reasons to make?

Answer 7

1. Incomplete contracting
2. Coordination of production flow through the vertical chain
3. To avoid leakage of private information
4. Avoid paying transaction costs
5. relationship-specific assets causing them not to switch partners
6. To avoid rents and quasi-rents
7. To avoid the holdup problem

Question 8

Vertical integration is more attractive when…

Answer 8

1. When the ability of the outside market specialist is limited
2. The larger the scale of the firm’s product market activities
3. The greater the extent to which involved in production are relationship-specific

Question 9

What are structural entry barriers?

Answer 9

Control of essential resources
Economies of scale and scope
Marketing advantages of incumbency

Question 10

What are entry-deterring strategies that create high entry costs?

Answer 10

1. Aggressive price reductions to move down the learning curve
2. Intensive advertising to create brand loyalty
3. Acquisition of patents for all variants of a product

Question 11

What are entry-deterring strategies that change an entrant’s expectation of post-entry competition?

Answer 11

1. Enhancement of firm’s reputation for predation through the announcement
2. Limit pricing
3. Holding of excess capacity

Question 12

What is the folk theorem?

Answer 12

The folk theorem implies that cooperative pricing behavior is a possible outcome in an oligopolistic industry, even if all firms act unilaterally

If firms expect to interact indefinitely and have sufficiently low discount rates, then any price between the monopoly price and marginal cost can be sustained as an equilibrium

Question 13

What are the impediments to imitation?

Answer 13

Legal restrictions
Superior access to inputs or customers
Market size and scale economies
Intangible barriers to imitating a firm’s distinctive capabilities: causal ambiguity,
dependence on historical circumstances, and social complexity

Question 14

What is throughput and why is it important for reaching economies of scale?

Answer 14

Throughput is the amount of products (inputs) that move through a production process in a given amount of time. It is important to ensure scale economies. Having a large production capacity is not sufficient, the firm also needs a sufficiently large production level, i.e., throughput.

Question 15

Suppose that a firm is a cost leader and that its demand is price elastic. What type of strategy should this firm adopt to exploit its competitive advantage? What type of strategy should this firm adopt when its demand is price inelastic? Explain

Answer 15

When its demand is price elastic, it should adopt a share strategy. This is because a price cut will gain lots of market share. The key here is to exploit the competitive advantage through a higher market share. When demand is price inelastic, it should adopt a margin strategy. The key here is to exploit the advantage through higher profit margins as a price cut gains little share.

Question 16

What is the revenue destruction effect?

Answer 16

The pursuit of individual self-interest does not maximize the profits of the group as a whole. This is known as the revenue destruction effect. Smaller firms are often most willing to disrupt pricing stability.

Question 17

In a perfectly competitive market, is a firm’s demand more or less elastic than market
demand? Explain your answer

Answer 17

In perfect competition, a firm’s demand is infinitely elastic, so “more”.

Question 18

What is judo economics and how is judo economics related to the revenue destruction effect?

Answer 18

Judo economics is the recognition that small firms and potential entrants can use the incumbent’s size to their own advantage. The revenue destruction effect states that a large incumbent loses more revenue when slashing prices than smaller rivals.

Question 19

Explain Sutton’s theory of endogenous sunk costs

Answer 19

Sunk investments by incumbents that create barriers to entry

Question 20

c. Explain why uniform delivered pricing may facilitate collusion. (2 points)

Answer 20

This applies when firms are geographically dispersed and transportation costs are high (e.g., cement). Under uniform delivered pricing, the firm quotes a single delivered price for all buyers and absorbs the freight charges itself. It facilitates cooperative pricing by allowing firms to make more surgical responses to price cutting by rivals. That is, it only has to retaliate by cutting prices for some of its customers which makes it less costly and more credible.

Question 21

According to the so-called sunk cost effect, are large firms more or less innovative than potential entrants? Explain your answer.

Answer 21

Answer:
Large established firms have sunk investments in some technology and ignore these sunk costs in evaluating the various technological alternatives. For a potential newcomer, these upfront investments in the technology are not (yet) sunk. Accordingly, the incumbent values its technology more than the potential entrant and is therefore less likely to invest in new technology.