Week 5 Flashcards

Question

what is countervailing power?

Answer 1

when the power of a monopolistic/ oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up

Answer 2

- The lower the entry and exit costs for new firms, the more difficult it will be for oligopolists to collude and make supernormal profits. If oligopolists do form a cartel (whether legal or illegal), it will be difficult to maintain it if there is a threat of competition from new entrants. - What a cartel has to do in such a situation is to erect entry barriers, thereby making the ‘contest’ more difficult. For example, the cartel could have a research laboratory, denied to outsiders. It might control the distribution of the finished product by buying up wholesale. Or it might let it be known to potential entrants that they will face fallout price, advertising and product competition from all the members if they should dare to set up in competition. - The industry can behave competitively if entry and exit costs are low, with all the benefits and costs to the consumer of such competition – even if the new firms do not actually enter. However, if entry and/or exit costs are high, the degree of competition simply will depend on the relations between existing members of the industry.

Answer 3

- firms may not have the information to maximise profits - they may not even want to maximise profits - firms dont use MR and MC concepts, even if they know how much they're selling in a moment, this gives them only one point on their curve and no point at all on their MR curve - firms operate in a changing environment, demand and supply curves shift, some of this occurs due to factors outside of the firms control, some are a result of a firms policies

Answer 4

that the owners of the firm make price and output decisions, it assumes that owners want to maximise profits, which is a critique of the theory. but do owners always want to?

Answer 5

where decision makers in a firm aim for a target level of profit rather than the absolute maximum level, by not aiming for the max profit, it allows managers to pursue other objectives, such as sales maximisation as their own salary or prestige

Answer 6

attempts to explain why the behaviour of firms deviate from traditional profit maximising because of the managerial use of mental shortcuts to simplify complex decisions and also managerial preferences for fairness

Answer 7

heuristics are rules of thumbs or mental shortcuts to simplify things. 1. copying the strategy of the most profitable businesses in the market 2. focusing on relative rather than absolute profits, a managers performance may be judged by comparing the firms profits or other indicators with that of its rivals 3. making a satisfactory/target level of profit, rather than looking for new opportunities, managers may change a firms strategy only when its profit falls below target level

Answer 8

1. over optimisim: 2. including sunk costs, can lead to different prices from those set by a profit-maximising firm

Answer 9

for fairness, they may care about the equitable distribution of returns to all stake-holders in the business, rather than trying to maximise profits

Answer 10

- firms might be able to make use if they are profit-maximisers but their customers use heuristics that lead to systematic mistakes

Answer 11

an alternative theory which assumes that managers aim to shift cost and revenue curves so as to maximise profits over some longer time period

Answer 12

an alternative theory that assumes that managers are motivated by self-interest. they will adopt whatever policies are perceived to maximise their own utility

Answer 13

an alternative theory of the firm that assumes that managers aim to maximise the firms short run total revenue - unlike the long run profit maximisation and managerial utility maximisation, its easy to identify the price and output that meet this aim, at least in the short run

Answer 14

an alternative theory that assumes that managers seek to maximise the growth in sales revenue (or the capital value of the firm) over time

Answer 15

people who are affected by a company's activities and or performance (customers, employees, owners etc). they may or may not be in a position to take decisions or influence decision taking of the firm

Answer 16

when managers allow space capacity to exist, thereby enabling them to respond more easily to changed circumstances

Answer 17

when a firm purchases supplies and produces both components and finished products as they are required. this minimises stockholding and its associated costs

Answer 18

since different managers are likely to make different judgements about how to achieve maximum profits, - demand and cost curves may shift unpredictably both in response to the firms own policies and as a result of external factors

Answer 19

depends on factors such as salary, job security, power within the organisation and the achievement of professional excellence - given that managerial utility depends on a range of variables, its difficult to use that theory to make general predictions of firms behaviour

Answer 20

believing it will help their salaries, power, prestige etc

Answer 21

as with long-run profit-maximising theories, its difficult to predict the price and output of strategies of a growth maximising firm - much depends on the judgements of particular managers about growth opportunities

Answer 22

a number of different people from managers, shareholders, workers etc - if these people have different aims, then a conflict between them is likely to arise - a fir cannot maximise more than one of these conflicting aims, the alternatives is to seek to achieve a satisfactory target level of number of aims

Answer 23

how managers and other interest groups actually behave, rather than merely identifying various equilibrium positions for output, price, investment etc

Answer 24

they're likely to be made more ambitious next year, if they were not achieved, a search procedure will be conducted to identify how to rectify the problem. this may mean adjusting targets downward, in which case there will be some form of bargaining process between managers

Answer 25

this will be possible if slack if allowed to develop in various parts of the firm, if targets are not being met, the slack can then be taken up without requiring adjustments in other targets

Answer 26

Satisficing firms may be less innovative, less aggressive and less willing to initiate change. If they do change, it is more likely to be in response to changes made by their competitors. Managers may judge their performance by comparing it with that of rivals. - Satisficing firms may be less aggressive in exploiting a position of market power. On the other hand, they may suffer from greater inefficiency

Answer 27

- it seeks to prevent firms from abusing a dominant market practices i.e misusing their economic power.

Answer 28

Industry upset or strategic intent

Answer 29

1. Maintain the price 2. Split the market 3. React with other measures eg differentiation strategy, improve quality, increase promotion,

Answer 30

- takes two forms of either product differentiation, or R&D# it avoids price wars and makes it much less certain that rivals will be able to find an effective counter strategy

Answer 31

technical, quality, design and service standards

Answer 32

vertical: quality is vertical as if two prices are equal, all the consumers prefer the same superior product horizontal: characteristic differences not considered inferior or superior. if two prices are equal, some consumers prefer one product and other consumers prefer the other product

Answer 33

to create a good that is distinct and preferred * Reduces direct substitutability of goods (cross-price elasticity). * Less substitutable, more unique goods have less elastic demand (higher prices & profits can be sustained) * It can act as a barrier to entry Practically: * Costs are often passed onto the customer through those higher prices. * If a new firm has a superior product → experience has shown, advertising alone cannot be an effective barrier

Answer 34

strategic analysis, strategic choice, strategic implementation

Answer 35

Porter’s five forces Model (1980) * Porter’s value chain analysis * Porter’s generic strategies

Answer 36

1. bargaining power of buyers: depends on the Bargaining leverage which refers to buyer concentration versus firm concentration, Buyer volume, Buyer switching costs relative to firm switching costs, Buyer information, Substitute products. and also depends on the Price sensitivity which refers to Price / total purchases, Product differences, Brand identity impact on quality performance, Buyer profits and Decision makers’ incentives. ->customers can use their forces to drive prices up and down to capture more value for themselves, they can plays rivals against each esp when theres no product differentiation etc 2. Bargaining power of suppliers: Depends on differentiation of inputs, switching costs of suppliers and firms in the industry, presence of substitute inputs, supplier concentration, importance of volume to supplier, cost relative to total purchases in the industry and impact of inputs on cost or differentiation. -> suppliers can use their negotiating leverages to charge higher prices or demand more favourable terms 3. Threat of new entrants: depends on the barriers to entry, economies of scale, proprietary product differences, brand Identity, switching costs* Capital requirements, access to distribution, absolute cost advantages, access to necessary inputs, government policy, expected retaliation. -> this threat can force firms to keep prices down, cap their potential profit but it depends on the above factors 4. Threat of substitute products or services: depends on factors like relative price performance of substitutes, switching costs, buyer propensity to substitute. -> 5. Rivalry among existing competitors: the rivalry depends on Industry growth, fixed (or storage) costs / value added, intermittent overcapacity, product differences, brand identity, switching costs, concentration and balance, informational complexity, diversity of competitors, corporate stakes, exit barriers. ->

Answer 37

The model is good from the perspective of a firm looking at its strategic environment However, there are a number of criticisms: * Static (reality is dynamic) * Doesn’t allow for co-operative / collaborative models * It doesn’t consider much the internal elements of the firm

Answer 38

The value chain shows how value is added to the final product as it moves through the chain of production. - Support activities don’t ‘add value’ directly, but can make the production process work more efficiently, i.e. reduce costs or increase quality. steps are: inbound logistics which is warehousing and inventor, operations is converting raw materials into final product, outbound logistics is the delivery, marketing and sales, and service is the maintenance, repair, customer service

Answer 39

competitive advantage which can fall into categories of low cost or product differentiation: 1. Cost Advantage: * Absolute * Relative 2. Differentiation: * Physical characteristics * Psychological reinforcement Market based strategies thus fall into 2 main categories: 1. Cost leadership, 2. Differentiation and (3.) Focus can be whole or ‘segment’ of market

Answer 40

The two basic types of competitive advantage of low cost and product differentiation combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus. 1. Cost Leadership In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. 2. Differentiation In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. 3. Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. The focus strategy has two variants. (a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser's target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

Answer 41

ACTIVE RIVALRY between firms to WIN and RETAIN customers can take a number of forms. Principally these are: 1.Price competition 2.Product differentiation (i.e. Advertising, Promotional Competition) 3.New Product Competition (i.e. innovation) The nature and intensity of competition depends on market factors as Porter’s 5-forces suggest.

Answer 42

The Structure  Conduct  Performance paradigm says that business conduct (behaviour) varies according to the characteristics of the market structure it is faced with. → In turn so therefore does it’s performance

Answer 43

first is Basic conditions which refers to supply, Availability of inputs, Technology, Product specifications and Demand: Tastes and Substitutes 1. Structure - this refers to the construction, formation and the makeup of an industrial organization. It also describes the kind of environment in which an organization or market operates, barriers to entry, cost structure 2. Conduct - this describes the behavior or comportment of buyers and sellers to the structure of a market. It also refers to the way buyers and sellers interact with each other and the way they behave, pricing behaviour, output, mergers etc 3. Performance - this refers to the achievement or accomplishment or results of a particular market or industry. Performance variables that are considered in the market include product quantity, product quality, and production efficiency, market share, share price

Answer 44

ADV: * This is a paradigm based on empirical data * Reduces all industry data into meaningful categories * Consistent with neoclassical theory * Allows a workable standard of performance to be defined DISADV: * Neo-classical theory not precise about S-C-P relationship * Which variables belong to S, C or P? * Difficult to define performance * Difficult to define market/industry structure * Empirical research: Weak relationship for S → C → P causality * No dynamic aspects * Alternative views of link between profits and concentration.

Answer 45

Conduct and Performance have feedback effect on structure. Strategies (conduct) may be more important than structure..

Answer 46

a. Perfect Competition – Many firms/ unrestricted entry/ homogenous (or undifferentiated) product/ examples (approximately) carrots etc. b. Monopolistic competition – Many (or several) firms / unrestricted entry / differentiated product / examples e.g. builders, restaurants etc. c. Oligopoly – few firms (barriers to entry – see conduct) / either undifferentiated or differentiated product / examples cement, phones etc. d. Monopoly – one firm (barriers to entry – monopoly types or see conduct) /

Answer 47

a. Perfect competition firms are price-takers – horizontal demand curve for individual firms (i.e. infinitely elastic); profit max at MC=MR based on output. b. Monopolistic competition engages in product differentiation (costs). Relatively price elastic demand. c. Oligopoly engage in strategic interactions (collusion or competition possible) on price and differentiation. d. Monopoly – Inelastic demand curve, market can bear high price rises, restricted supply pricing; activities to maintain barriers to entry.

Answer 48

a. Perfect competition – zero supernormal profits in long-term, due to market entry pushing price down to bottom of AC curve. As produces at bottom of AC curve is efficient. b. Monopolistic competition – zero supernormal profits in long-term but not producing at lowest AC, so not efficient. (costs of product differentiation) c. Oligopoly – Supernormal profits in the long-run, worse outcome than monopoly if collusion as higher costs from multiple firms d. Monopoly – Supernormal profits in the long-run. X-inefficiency. can have deadweight loss (any deficiency caused by an inefficient allocation of resources) or economies of scale, efficiency and profit for R&D arguments,

Answer 49

Price stickiness, or sticky prices, is the resistance of market price(s) to change quickly, despite shifts in the broad economy suggesting a different price is optimal - happens as firms are reluctant or unable to change prices due to menu costs, fixed contracts, and fear of price wars in oligopolies.

Answer 50

Collusion works best in stable markets with a small number of players where ‘tit-for-tat’ experience can build up – no one has the incentive to break the collusion as it is more profitable - if one firm suddenly has the ability to cut costs it could be more profitable to undercut competitors – hence collusion breaks down.

Answer 51

Overt collusion - ‘cartel’ has a market outcome just as in monopoly, where firms act as one firm and share the profits, but are illegal in many countries (anti-trust laws)

Answer 52

Price leadership eg dominant and barometric price leadership - ‘Rules of thumb’ such as Average cost pricing – everyone set P = ATC + x% or Price benchmarks (i.e. If P = £14.99, then if costs rise → rise P to next benchmark i.e. £15.49).

Week 5 Flashcards

(76 cards)