Chapter 7

Question 1

Define an effective commitment.

Answer 1

Should restrict our freedom of action, either by directly limiting our options or by making certain options so unattractive so that we avoid them.

Question 2

What is a strategic commitment?

Answer 2

These are commitments that alter the strategic decisions of rivals and must be irreversible, visible, understandable, and credible.

Question 3

What is a strategic substitute?

Answer 3

When one firm chooses more of some action, such as an output decision, and its rival firm cuts back on the same action

Question 4

What is a strategic complement?

Answer 4

When one firm chooses more of an action and its rival chooses more as well.

Question 5

What is the difference between a tough and soft commitment?

Answer 5

A firm’s tough commitment is bad for competitors, whereas a soft commitment is good for its competitors.

Question 6

What is the type of strategy according to the taxonomy?

Strategic substitutes
Commitment posture: Tough

Answer 6

Top dog

Question 7

What is the type of strategy according to the taxonomy?

Strategic substitutes
Commitment posture: Soft

Answer 7

Lean and Hungry Look

Question 8

What is the type of strategy according to the taxonomy?

Strategic complement
Commitment posture: Tough

Answer 8

Puppy-Dog Play

Question 9

What is the type of strategy according to the taxonomy?

Strategic complement
Commitment posture: Soft

Answer 9

Fat-Cat effect

Question 10

What is a real option?

Answer 10

It exists when a decision maker has the opportunity to tailor a decision to information that is unknown today but will be revealed in the future. Decisionmaker can delay that option to get more knowledge about the market conditions.

Question 11

What is the Net Present Value, and how to calculate it?

Answer 11

used to calculate the expected net present value
percentage of each total present value - the investment.
0.5(300) + 0.5(50) − 100 = $75 million.

Question 12

What is the four-step framework for analyzing commitment-intensive choices?

Answer 12

1. Positioning analysis
2. Sustainability analysis
3. Flexibility analysis
4. Judgment analysis

Question 13

What is tit-for-tat pricing?

Answer 13

The market “leader” sets the collusive price, and others will follow. But if a firm tries to lower its price, others must match it in order to deter such disruptive business stealing.

Question 14

What is the folk theorem?

Answer 14

The folk theorem implies that cooperative pricing behavior is a possible outcome in an oligopolistic industry, even if all firms act unilaterally

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

Question 15

What is dynamic pricing rivalry?

Answer 15

Firms seek monopoly prices but cannot communicate with competitors. They try so unilaterally.

Question 16

What are the impediments to coordination?

Answer 16

1. The misread problem
2. Lumpiness of Orders
3. Information about the sales transaction
4. Volatility of demand conditions

Question 17

What is the misread problem?

Answer 17

By “misread,” a firm mistakenly believes a competitor is charging one price when it is really charging another or a firm misunderstands the reasons for a competitor’s pricing decision or its own change in market share.

Question 18

What are Facilitating Practices for cooperative prices?

Answer 18

1. Price leadership
2. Advance announcement of price changes
3. Most favored customer clauses
4. Uniform delivered prices

Question 19

What is price leadership?

Answer 19

In price leadership, each firm gives up its pricing autonomy and cedes control over industry pricing to a single firm.

Question 20

What is meant by most favored customers clauses?

Answer 20

Is a provision in a sales contract that promises a buyer that it will pay the lowest price the seller charges.

Question 21

What are Uniform Delivered Prices?

Answer 21

Under uniform delivered pricing, the firm quotes a single delivered price for all buyers and absorbs any freight charges itself.

Question 22

What is position analysis?

Answer 22

Can be likened to determining the direct effect of the commitment.

Question 23

What is the sustainability analysis

Answer 23

It can be likened to determining the strategic effects of the commitment.

Question 24

What is the flexibility analysis?

Answer 24

Incorporates uncertainty into positioning and sustainability analysis.

Question 25

What is the judgment analysis?

Answer 25

Assessing the factors that could influence a company’s decision-making towards an optimal strategy by examining its organizational and managerial aspects.