Tentamen vragen Flashcards
- Give two reasons for unrelated diversification that are not efficiency enhancing
A) Diversification of the portfolio benefits shareholders by reducing risks
B) Managerial reasons: managers favor growth as size is related to prestige, higher salary, and lower dismissal risk.
- Explain the relationship between the concepts of “relationship-specific investments” and sunk costs.
Relationship-specific investments involve costs/investments (made to enhance the efficiency of inter-firm transaction relationships) that are at least partially sunk costs: once made, the firm cannot recoup these costs, and they cannot use the investments -with the same efficiency- for a different transaction.
Relationship specific investments related sunk costs make firms stick to their transaction partner, even if the partner can appropriately have “quasi-rents” from the firm through holdup (prices only have to be above the variable costs or the next best alternative sales opportunity
Is the statement true or false:
“The value of a strategic commitment is higher in industries with greater horizontal differentiation, everything else equal.”
FALSE (2p).
With more differentiation, an aggressive move, e.g., a cost reduction or plant investment, has less effect on rivals and, most important, does not affect the rival’s strategy much. The direct (beneficial) effect of strategic commitment dominates over indirect strategic effects (2p).
What is throughput and why is it important for reaching economies of scale?
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
In a perfectly competitive market, is a firm’s demand more or less elastic than market demand? Explain your answer
In perfect competition, a firm’s demand is infinitely elastic, so “more”.
Explain why uniform-delivered pricing may facilitate collusion.
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 toprice 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.
According to the so-called sunk cost effect, are large firms more or less innovative than potential entrants? Explain your 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 a new technology.
What is the so-called Hold-up Problem? Is this problem positively or negatively related to the amount of quasi-rent? Explain your answer.
The hold-up problem is the problem that arises when a party in a contractual relationship exploits the other party’s vulnerability due to relationship-specific assets. The quasi-rent is the difference between the profit you get when everything goes ahead as planned and the profit you get from your next-best option. This implies that the problem of the hold-up is bigger the larger the quasi-rent, all else equal
According to the so-called efficiency effect, is an incumbent monopolist more or less innovative than a potential entrant.
The efficiency effect highlights that large established firms have more to lose from another firm’s entry than that firm has to gain from entering the market. Hence, the efficiency effect makes the incumbent’s incentive to innovate stronger than that of a potential entrant
What is the Innovator’s Dilemma?
The innovator’s dilemma is the problem thatarises when innovative investments by incumbents cannibalize their successful business model while failure to innovate may invite entry.
