Topics 4-7 Flashcards by Jessica Roth

According to class slides, what are the two types of Broad Strategic Positions?

Cost advantage
Benefits advantage

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According to Gray, what are the three strategic position options?

Product and Process Innovation
Operational Excellence / Cost Leadership
Customer Intimacy

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What is cost advantage and to which type of good does it apply?

Can produce the good or service at a lower cost than competitors
Often applies to search goods

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What is benefits advantage and to which type of good does it apply?

Can produce a better quality product, thereby increasing the price
Often applies to experience goods

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According to class slides, what is the one narrow type of strategic position?

Focus strategy

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What are the two subgroups of cost leadership strategy?

Benefits parity
Benefits proximity

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What are the two subgroups of benefits leadership strategy?

Cost parity
Cost proximity

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What is a value map?

Price and cost on the Y axis, quality on the x axis.

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Is this value map for cost leadership or benefits leadership?

Cost leadership

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Is this value map for cost leadership or benefits leadership?

Benefits leadership

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How can a firm capture the market with an undifferentiated strategy?

Either cost or benefits leadership.

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What is horizontal differentiation?

Differentiation that is not based on price or quality. Generally has price and quality parity.

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What is vertical differentiation?

Differentiation that is based on both quality and price.

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What is a competitive advantage with respect to B/C?

The firm with the greatest (Benefits - Costs) wins.

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Which two things must a firm do to achieve competitive advantage?

Creating and delivering greater economic value.
Capturing a portion of that value in profits.

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What does economic profitability depend on?

Market economics
Value created relative to competitors

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What dictates value created relative to competitors?

Benefits
Cost

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When does cost leadership make sense?

Consumers are price-sensitive
Search good

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When does benefits leadership make sense?

Price premiums are possible
Experience good

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What are the three types of focus strategies?

Customer specialization
Product specialization
Geographic specialization

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What is the short version of the value creation equation?

WTP - C = B - C
where:
WTP = Willingness to Pay
B = Benefits
C = Cost

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What is the Consumer Surplus equation?

CS = WTP - P
where
WTP = Willingness To Pay
P = Price
CS = Consumer Surplus

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What is the long version of the value creation equation?

Value created = CS + Profit = (B-P)+(P-C) = B-C

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What are the four horizontal parts of the value chain on the arrow diagram?

Infrastructure
Human Resources
Technology
Procurement

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What are the five vertical sections of the value chain arrow?

Inbound logistics Production/ops Outbound Marketing/Sales Service

What are the four sources of competitive advantage sustainability stemming from customers?

- Taste-based loyalty - Uninformed consumers - Switching costs - Network effects

What are the three sources of sustainability of competitive advantage stemming from firm factors?

- Learning - Economies of scale - Intellectual property rights

What are the three types of network effects?

- Direct - Indirect - Cross-side

What are direct network effects?

Product works better because more users.

What are indirect network effects?

Use of complimentary goods.

What are cross-side network effects?

Serving two interacting groups (i.e. Etsy: shoppers and merchants)

What are the top three threats to sustainability of competitive advantage?

Market structure Government intervention Systemic challenges

What is game theory?

Using math to predict decisions of rival firms

What are the three main elements of a strategic game?

Players Strategies Payoffs

What is the Nash Equilibrium?

Each strategy is a best reply to the other. No player can improve their situation by taking a different strategy based on the actions of the other players.

What is a dominant strategy

Best response no matter what the other player does

What is a pure strategy

A strategic decision made with 100% certainty.

What is a mixed strategy?

Probability of using a variety of strategies.

What is the prisoner's dilemma?

Dominant strategies lead to a Nash Equilibrium that is not the most efficient outcome.

What does an oval or dotted line mean on a tree diagram?

The choices are made simultaneously.

What is a subgame?

part of the extensive form beginning with a decision point & including everything below

What is a PROPER subgame?

A subgame that isn't connected to another oval and everything below that.

Reminder

Make sure you can do the two proofs he asked

What is the difference between SPNE and NE?

SPNE is the NE of a subgame.

What are the three hallmarks of a competitor? (what, not how to identify)

Their strategic choices affect your outcomes. Compete to control market share. Constrain each other's ability to raise price.

What is a market?

The interaction of firms and consumers.

How can we tell for sure if a product is a substitute?

Cross-price elasticity.

Is the industry or the position more important?

Trick question: BOTH are important.

What are the two broad things we look at to define the relevant market?

Industry Geography

What is SSNIP?

What is the smallest relevant market within which a monopolist could sustain a Small but Significant Non-transitory Increase in Price (5%-10%, >1yr)

Which 3 things makes two products close substitutes?

- performance - occasion for use - geographic area

What are five ways we empirically identify competitors?

- Cross-price elasticity - Pattern of price changes over time - Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS) - SSNIP test - Flow-limiting geographic demarcations (borders)

What is the equation for cross-price elasticity?

Is x-P elasticity positive or negative for substitutes?

Positive for substitutes; normal n is negative, so for a substitute it has to be positive.

What is the main goal of competitor analysis?

To understand their strategies so that we can outcompete them.

What is the range of market structures?

What is the n-firm concentration ratio?

The combined market share of the N largest firms in the market: (company sales/total market sales) *100%

How do we calculate the Herfindahl Index?

sum of squared market shares

What is the CR4?

Concentration ratio of the top 4 (n) firms. CR=S1+S2+S3+S4

What is the CR4 or 8 in perfect competition?

What is the CR in a monopoly?

~100%

What is the CR in an oligopoly?

~50%< CR <~100%

What is a Herfindahl Index in perfect competition?

<0.2 (same as monopolistic competition)

What is the Herfindahl Index in Monopolistic competition?

<0.2 (same as perfect competition)

What is the Herfindahl Index in an oligopoly?

0.2 to 0.6

What is the Herfindahl Index in a monopoly?

>0.6

What are the 4 characteristics of perfect competition?

- Many buyers and sellers - Homogenous good - No barriers to entry/exit - Buyers and sellers are price takers (Individual firms face infinitely elastic demand)

How do we prove: MR = P(1-(1/n))

- MR=dTR/dQ =P(dQ/dQ)+Q(dP/dQ) - P/P=1 - separate P - 1/n = Q/P*dP/dQ - n = P/Q*dQ/dP - *n is NEGATIVE* (don't forget the minus sign)

How do we prove that PCM = 1/n?

PCM= (P-MC)/P MR=MC MR=d(P* Q)/dQ MR=P(dQ/dQ)+Q(dP/dQ) 1/n=-Q/P* dP/dQ n=P/Q* dQ/dP - *n is negative* (don't forget the minus sign)

Topics 4-7 Flashcards

Problem Set 2