Chapter 7 - Dynamics: Competing across time Flashcards
microdynamics
the unfolding of competition over time, among a small number of firms
macrodynamics
the evolution of overall market structure
strategic commitments
commitments that alter the strategic decisions of rivals
if a commitment is to provoke a response, it must be:
- irreversible
- visible
- understandable
- credible
irreversible
if it carries no commitment weight, the desired effect will not happen
visible
or rivals will have nothing to react to
understandable
or rivals will have nothing to react to
credible
so that the rivals believe the firm will actually carry out the commitment
stackelberg model
suppose that instead of choosing quantities simultaneously (cournot), firm 1 can commit to Q1 before firm 2 selects Q2. Thus, firm 1’s choice of Q1 can influence firm 2’s choice of Q2
–> firm 1’s choice of Q1 completely determines total quantity and market price
strategic substitutes
when one firm chooses more of some action (e.g., output), and its rival firm cuts back on the same action
strategic complements
when one firm chooses more of some action (e.g., price) and its rival chooses more as well
reaction function is downward sloping when
strategic substitutes
reaction function is upward sloping when
strategic complements
direct effect (of commitment)
its impact on the present value of a firm’s profits if the competitor’s behavior does not change
strategic effect
competitive side of the commitment. How does the commitment alter the tactical decisions of rival and the market equilibrium?
tough commitment
conform to conventional view of competition as an effort to outdo one’s rivals (bad for competitors)
profitable (negative) strategic effect if involving strategic substitutes (complements)
soft commitment
it is good for its competitors (e.g., eliminating production facilities)
profitable strategic effect if involving strategic complements
Fudenberg & Tirole taxonomy of commitment strategies
Strategic substitutes
- top dog
- lean and hungry look
Strategic complements
- puppy-dog ploy
- fat-cat effect
top dog
assert dominance; force rivals to back off
lean and hungry look
actively submissive; posturing to avoid conflict
puppy-dog ploy
placate top dog; enjoy available scraps
fat-cat effect
confidently take care of self; share the wealth with rivals
preserving flexibility
keeping one’s future options open must be considered when evaluating the benefits of the commitment
real options can be used to determine …
the “best” time for a strategic investment
real option
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
Ghemawat 4-step framework for analyzing commitment-intensive choices
- positioning anaylsis
- sustainability analysis
- flexibility analysis
- judgement analysis
positioning analysis
determining the direct effects of the commitment. analyzing whether the firm’s commitment is likely to result in a product market position in which the firm outperforms its competitors
sustainability analysis
determining the strategic effects of commitment. analyzing potential responses to the commitment by competitors and potential entrants. analyzing market imperfections that make the firm’s resources scarce, immobile and protect the competitive advantage from imitation
flexibility analysis
incorporates uncertainty into positioning and sustainability analysis. flexibility gives the firm option value. key determinant: learn-to-burn ratio
judgement analysis
taking stock of the organizational and managerial factors that might distort the firm’s incentive to choose an optimal strategy
two types of errors:
Type 1: rejecting an investment that should have been made (more likely hierarchical)
Type 2: accepting an investment that should have been rejected (decentralized)
learn-to-burn ratio
the rate at which the firm receives new information to the rate at which the firm invests in the sunk assets to support the strategy
(a high ratio implies that a strategic choice has a high degree of flexibility)
tit-for-tat pricing
if the number of firms is not too large, the length of time it takes to respond is not too long, it makes sense for firms to adopt a strategy of always matching each other’s prices. once a market “leader” sets the collusive price, the others will follow. if a firm tries to lower its price, others must match it in order to deter such disruptive business stealing
grim trigger strategy
relies on the threat of an infinite price war to keep firms from undercutting their competitors’ prices
tit for tat combines properties of:
- niceness
- provocable
- forgiving
folk theorem
a property of dynamic games that says 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
lumpy orders
when sales occur relatively infrequently in large batches as opposed to smoothly distributed over the year
demand volatility is an especially serious problem when …
production involves substantial fixed costs
price leadership
each firm gives up its pricing autonomy and cedes control over industry pricing to a single firm
barometric price leadership
price leader merely acts as a barometer of change sin market conditions by adjusting prices to shifts in demand or input prices
most favored customer clause
a provision in sales contract that promises a buyer that it will pay the lowest price the seller charges
contemporaneous
a seller agrees that while the contract is in effect, if it sells the product at a lower price to any other buyer, it will also lower the price to its current buyer
retroactive
a seller agrees to pay a rebate to the buyer if during a certain period after the contract expired it sells the product at a lower price to another buyer
uniform FOB pricing
seller quotes a price for pickup at the seller’s loading dock, the buyer absorbs the freight charges for shipping
uniform delivered pricing
firm quotes a single delivered price for all buyers and absorbs any freight charges itself, whatever their location may be
macrodynamics
reasons why different markets have different structures
endogenous sunk costs
size of branding investment is not determined by some technology but by the firms themselves
disruptive technologies
unexpected innovations that dramatically transform a product’s benefits and/or its cost of production
innovator’s dilemma
confronted by the incumbent that disruptive technologies may destroy the business of the technology they replace
