Chapter 7 - Dynamics: Competing across time

Question 1

microdynamics

Answer 1

the unfolding of competition over time, among a small number of firms

Question 2

macrodynamics

Answer 2

the evolution of overall market structure

Question 3

strategic commitments

Answer 3

commitments that alter the strategic decisions of rivals

Question 4

if a commitment is to provoke a response, it must be:

Answer 4

• irreversible
• visible
• understandable
• credible

Question 5

irreversible

Answer 5

if it carries no commitment weight, the desired effect will not happen

Question 6

visible

Answer 6

or rivals will have nothing to react to

Question 7

understandable

Answer 7

or rivals will have nothing to react to

Question 8

credible

Answer 8

so that the rivals believe the firm will actually carry out the commitment

Question 9

stackelberg model

Answer 9

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

Question 10

strategic substitutes

Answer 10

when one firm chooses more of some action (e.g., output), and its rival firm cuts back on the same action

Question 11

strategic complements

Answer 11

when one firm chooses more of some action (e.g., price) and its rival chooses more as well

Question 12

reaction function is downward sloping when

Answer 12

strategic substitutes

Question 13

reaction function is upward sloping when

Answer 13

strategic complements

Question 14

direct effect (of commitment)

Answer 14

its impact on the present value of a firm’s profits if the competitor’s behavior does not change

Question 15

strategic effect

Answer 15

competitive side of the commitment. How does the commitment alter the tactical decisions of rival and the market equilibrium?

Question 16

tough commitment

Answer 16

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)

Question 17

soft commitment

Answer 17

it is good for its competitors (e.g., eliminating production facilities)

profitable strategic effect if involving strategic complements

Question 18

Fudenberg & Tirole taxonomy of commitment strategies

Answer 18

Strategic substitutes

• top dog
• lean and hungry look

Strategic complements

• puppy-dog ploy
• fat-cat effect

Question 19

top dog

Answer 19

assert dominance; force rivals to back off

Question 20

lean and hungry look

Answer 20

actively submissive; posturing to avoid conflict

Question 21

puppy-dog ploy

Answer 21

placate top dog; enjoy available scraps

Question 22

fat-cat effect

Answer 22

confidently take care of self; share the wealth with rivals

Question 23

preserving flexibility

Answer 23

keeping one’s future options open must be considered when evaluating the benefits of the commitment

Question 24

real options can be used to determine …

Answer 24

the “best” time for a strategic investment

Question 25

real option

Answer 25

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

Question 26

Ghemawat 4-step framework for analyzing commitment-intensive choices

Answer 26

• positioning anaylsis
• sustainability analysis
• flexibility analysis
• judgement analysis

Question 27

positioning analysis

Answer 27

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

Question 28

sustainability analysis

Answer 28

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

Question 29

flexibility analysis

Answer 29

incorporates uncertainty into positioning and sustainability analysis. flexibility gives the firm option value. key determinant: learn-to-burn ratio

Question 30

judgement analysis

Answer 30

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)

Question 31

learn-to-burn ratio

Answer 31

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)

Question 32

tit-for-tat pricing

Answer 32

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

Question 33

grim trigger strategy

Answer 33

relies on the threat of an infinite price war to keep firms from undercutting their competitors’ prices

Question 34

tit for tat combines properties of:

Answer 34

• niceness
• provocable
• forgiving

Question 35

folk theorem

Answer 35

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

Question 36

lumpy orders

Answer 36

when sales occur relatively infrequently in large batches as opposed to smoothly distributed over the year

Question 37

demand volatility is an especially serious problem when …

Answer 37

production involves substantial fixed costs

Question 38

price leadership

Answer 38

each firm gives up its pricing autonomy and cedes control over industry pricing to a single firm

Question 39

barometric price leadership

Answer 39

price leader merely acts as a barometer of change sin market conditions by adjusting prices to shifts in demand or input prices

Question 40

most favored customer clause

Answer 40

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

Question 41

contemporaneous

Answer 41

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

Question 42

retroactive

Answer 42

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

Question 43

uniform FOB pricing

Answer 43

seller quotes a price for pickup at the seller’s loading dock, the buyer absorbs the freight charges for shipping

Question 44

uniform delivered pricing

Answer 44

firm quotes a single delivered price for all buyers and absorbs any freight charges itself, whatever their location may be

Question 45

macrodynamics

Answer 45

reasons why different markets have different structures

Question 46

endogenous sunk costs

Answer 46

size of branding investment is not determined by some technology but by the firms themselves

Question 47

disruptive technologies

Answer 47

unexpected innovations that dramatically transform a product’s benefits and/or its cost of production

Question 48

innovator’s dilemma

Answer 48

confronted by the incumbent that disruptive technologies may destroy the business of the technology they replace