7 - Dynamics: Competing Across Time

Question 1

Micro dynamics

Answer 1

Describe the change of competition over time among a small number of firms

Question 2

Macro dynamics

Answer 2

Revert to overall changes in the market structure

Question 3

Strategic commitment

Answer 3

Must involve an irreversible decision that is visible, understandable, and credible.

Whether a commitment has a profitable strategic effect depends on whether the commitment is tough/ soft and whether the choices involve strategic complements/substitutes.

Question 4

Stackelberg model

Answer 4

Cournot model but firms don’t have to guess the other firms’ reaction they know it

Question 5

Actions are strategic substitutes

Actions are strategic complement

Answer 5

If 1 increase => 2 decrease (cournot)

If 1 increase => 2 increase (Bertrand)

Question 6

Animals

Answer 6

Top dog
Submissive underdog
Suciadal Siberian
Lean and hungry look
Mad dog
Puppy dog ploy
Fat-cat-effect
Weak kitten

Question 7

Flexibility

Answer 7

Smaller commitment have smaller strategic effect but gives the company the opportunity to maintain a certain flexibility for future actions.

=> separate large commitment into small ones

Question 8

Real option

Answer 8

Compares the possible future options a firm has in terms of future outcome (NPV).

=> can often create real options by altering the way in which they configure their internal processes (cost)

Question 9

Timing of investment

Answer 9

Should depend on the degree of uncertainty about future business conditions.

Question 10

Tit-for-tat

Answer 10

Strategy if always matching each other’s price if:
- can perfectly observe each other’s actions
- reduced number of firms
- response length not too long
=> equilibriums of monopolistic agreement

Question 11

Impediments to coordination

Answer 11

• misread problem
• lumpy orders
• secret or complex transaction terms
• products are tailor made to individual buyers
• faster retaliation when prices are public (représailles)
• volatility of market demand

Question 12

Folk theorem

Answer 12

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

Question 13

Sustainability of cooperative pricing

Answer 13

Difficult when:

• differences in costs, capacities and product qualities
• price sensitivity of buyers

Question 14

Facilitating practices of cooperative price

Answer 14

• price leadership
• advance announcement of price change discourage firms from undercut price
• most favoured customer clause (contemporaneous or retroactive)
• uniform delivery prices: uniform FOB pricing (buyer pays), uniform delivered pricing (supplier pays)

Question 15

Sutton’s endogenous sunk costs

Answer 15

A market filled with small seemingly similar firms evolved into a split between a handful of leading brand and a larger number of
Niche competitors. Big winners are those that enjoy some initial advantage and are quick to successfully market their brand.

Question 16

Collusion

Answer 16

When there is a bilateral secret agreement between parties

Question 17

Coopetition

Answer 17

Cooperation + competition (A + JV) done a lot in R&D

Question 18

Keep price constant for monopoly of durable goods

Answer 18

• if customers expect the price to decrease they won’t buy until MC=MR
• to avoid that you make a strong statement (most preferred customer clause)