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Z AREC 684 > Topics 11-15 > Flashcards

Topics 11-15 Flashcards

1
Q

What are the five key traits of strategic commitment?

A

Long-term
Costly reversal
Changes rival’s strategy
Limiting
Simultaneous game to sequential w/ 1st mover advantage

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2
Q

What are strategic compliments?
Bertrand or Cournot?

A

When a firm’s action induces the rival to take the SAME action. Bertrand model.

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3
Q

Will announcing intentions alter rivals’ actions?

A

No. Need to make a commitment of some kind (i.e. put some $ down)

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4
Q

What are the two key traits of a tactical decision?

A

Short term
Easily reversible

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5
Q

What are strategic substitutes?

A

When a firm’s action induces the rival to take the OPPOSITE action.
Cournot model.

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6
Q

What is the Lean and Hungry strategy?

A

Strategic substitutes - Cournot
Negative impact
Stage 1: incumbent plays soft, lowers q.
Stage 2: Cournot competition, entrant plays aggressive, increases q.

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7
Q

What is the Top Dog strategy?

A

Strategic substitute - Cournot
Positive impact.
Overinvesting to be tough
Stage 1: Incumbent plays tough, increases production.
Stage 2: simultaneous quantity choice.

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8
Q

What is the Puppy Dog Ploy?

A

Compliments - Bertrand
Negative impact
Stage 1: Incumbent plays aggressive, charges lower price.
Stage 2: Entrant also plays aggressive.

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9
Q

What is the Fat-Cat Effect?

A

Compliments - Bertrand
Positive impact
Stage 1: Incumbent plays soft by charging a high price
Stage 2: Entrant also charges a high price

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10
Q

How do we get some flexibility out of a strategic commitment?

A

Break it into smaller portions.

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11
Q

How do we do the tit-for-tat problem?

A
  • Q=q1+q2
  • NPV = coupon + coupon/r
  • First period the lower priced firm does Q(=q1+q2)
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12
Q

Why should firms choose tit-for-tat?

A

Does well in the long run against a variety of strategies.

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13
Q

What is the Grim Trigger Strategy?

A

Period 1: Firm 1 = Pmonopoly
Period 2+: If firm 2 = Pcompetitive, then firm 1 = P=MC FOREVER

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14
Q

What is the difference between Grim Trigger and Tit-for-Tat?

A

Tit-For-Tat = one period at a time
GT = Forever

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15
Q

What kind of returns to scale do we get when AC < MC?

A

Diseconomies of scale

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16
Q

What are the two determinants of the horizontal boundaries of the firm?

A

Economies of scale
Economies of scope

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17
Q

What is Minimum Efficient Scale?

A

The very first part of the flat bottom of the long run AC curve.

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18
Q

What are the four parts of the Long Run AC curve?

A

Economies of scale
Minimum efficient scale
Constant returns to scale
Diseconomies of scale

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19
Q

What kind of returns to scale do we get when MC < AC?

A

Economies of scale

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20
Q

What is the math for economies of scope?

A
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21
Q

What are two reasons to get economies of scope?

A

Leverage core competencies
Compete on capabilities

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22
Q

What are the three reasons economies of scale and scope occur?

A

Product-level economies
Plant-level economies
Firm-level economies

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23
Q

What are product-level economies of scale / scope?

A

Fixed costs setup
Specialization of inputs
Learning by doing
Cube square rule

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24
Q

What are plant-level economies of scale / scope?

A

inventories
meshing / indivisibilities

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25
What are firm-level economies of scale / scope?
Multiple plant operations Input procurement Sales promotion
26
What is the cube square rule?
Output is proportional to volume of vessel Costs are proportional to surface area of vessel
27
What are some sources of diseconomies of scale or scope?
Labour - lack of specialization Spreading resources too thin Bureaucracy
28
What are the 3 advantages of umbrella branding?
Transference Brand recognition New products easier to introduce
29
What are the 2 disadvantages of umbrella branding?
Transference Dilution of brand
30
What is an indivisibility?
Certain inputs have a minimum level = FC have economies of scale and scope
31
What are the levels of economies of scale and scope?
Product level Plant level Multi-plant level
32
What are the 7 sources of economies of scale and scope?
Product-specific FC Trade-offs among alternative production technologies Cube-square rule Purchasing Advertising Inventories R & D
33
Why diversify?
Slides: - Increasing efficiency - Economies of scale and scope - Manager preferences to limit risk or increase social capital or - compensation Class: - Increased market = increased sales - protection from market volatility - Use excess capacity
34
Why should we not diversify?
Slides: - Influence costs - Need elaborate control and reward systems - Reduced functioning of internal capital markets Class: - Additional tools needed - Dilution of expertise - Dilution of brand - Opportunity cost
35
What do we consider when deciding to make vs buy?
Quality / process control Cost Reliability Location Patents
36
Why might it be cheaper to buy?
supplier has economies of scale
37
Why might it be cheaper to make?
supplier power is high
38
Why might it be more reliable to make?
unreliable suppliers concentrated supply market
39
Why might it be just as reliable to buy?
Large number of backup suppliers
40
Why might a patent mean we need to buy?
Supplier owns the patent
41
Why might a patent mean we need to make?
We own the patent
42
Why might we buy when looking at quality?
Specialized supplier with high quality
43
Why might we make when looking at quality?
Process control
44
What is the make-or-buy continuum?
Buy: market transactions Buy: long-term contracts strategic alliances and joint ventures Subsidiaries Make
45
What are the benefits of buying?
Economies of scale Market firms are more efficient and innovative
46
What are the costs of buying?
Coordination of production flows IP Transaction costs
47
What are the three reasons to buy?
IP for low-cost production held buy seller Economies of scale of seller Learning economies of seller
48
What are the three efficiency and incentive concerns with regards to making?
Transfer pricing between divisions Agency costs are internalized Influence costs
49
What are the two components of an effective contract?
Completeness Body of contract law
50
What is a complete contract?
Thorough: - Responsibilities - Rights
51
What 3 things make a contract incomplete?
- ambiguities - missing contingencies - incomplete explanation of rights and responsibilities
52
What causes incomplete contracting?
Slides: - Bounded rationality - Difficulties specifying or measuring performance - Asymmetric information Class: - Time
53
What are some limitations of contract law?
- broad language subject to interpretation - uncertainty due to ^^ increases transaction costs
54
What are the reasons to make instead of buying?
Limitations of contracts Coordination costs Leakage of private information Transaction costs From class: flexibility
55
What is the assignment problem?
- issue with coordination - getting the right people to do the right jobs - easier to solve internally than with market
56
What are the sources of transaction costs?
- relationship-specific assets - holdup problem - quasi-rents
57
What are the four forms of relationship-specific assets?
Dedicated assets Specificity of: - Site - Physical asset - Humans
58
What is quasi-rent?
The excess economic profit (compared to alternative transactions)
59
Why do quasi-rents occur?
Relationship-specific assets
60
What can happen if there are quasi-rents?
- Partners can be induced to build a relationship-specific asset by the potential for them - Other partners can exploit the quasi-rent through holdup. ***double check this with prof.
61
What does quasi-rent show us?
The magnitude of the holdup problem
62
What is the holdup problem?
One transactor takes advantage of another's lack of comparably valued alternatives to insist on more favourable terms of trade.
63
What usually leads to holdup problems?
Relationship-specific assets
64
What is the principal-agent problem?
- divergence in interests - Agent is acting simultaneously on the principal's behalf and on their own behalf, which causes conflicts of interest.
65
When do we get the principal-agent problem?
- Objectives are different - actions or info of agent hard for principal to observe
66
What are the main two ways of combatting the principal-agent problem?
Monitoring Pay-for-performance
67
What are the 3 limitations of monitoring?
Expensive Imperfect Extra layer in relationship
68
What are the three things to consider when selecting performance measures?
Absolute vs Relative Augment explicit incentive contracts with direct monitoring and subjective performance evaluations Narrow vs broad measures
69
What are the three things that make a good performance measure?
- No random factors - doesn't divert attention from important tasks - doesn't motivate counterproductive actions
70
What is a Certainty Equivalent?
the smallest amount the decision maker would be willing to accept in exchange for the risky payoff.
71
What is a risk premium?
Risk premium = E-CE (Expected - Certainty Equivalent)
72
Is CE higher or lower when the variability is higher?
CE drops as variability increases
73
What is risk sharing?
the cost of the consequence is distributed amongst parties
74
Why should we pool risk?
Pooling and sharing can reduce the variability without decreasing the expected value.
75
Does the CE increase or decrease when we pool risk?
Increases because we aren't as scared.

Z AREC 684 (6 decks)

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