Chapter 9 Flashcards
What is the definition of competitive advantage?
When a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market.
When a firm has the ability of a firm to outperform its industry
What is the consumer surplus?
Software package worth to me (B or perceived Benefit) = 150
Market price (P) = 80
Consumer surplus = 150 - 80 = 70
Also: B - P
What is the maximum willingness-to-pay and how to denote it?
The maximum amount a consumer is willing to pay. Denote it with a B for the perceived benefit
When is the economic value created?
The economic value created is thus the difference between the perceived benefit and cost, or B – C, where B and C are expressed per unit of the final product.
So for the consumer and producer.
What is the producer surplus
That is, the producer’s profit margin, P – C, represents the portion of the value-created that it captures.
When will a firm profitably purchase inputs from suppliers?
When B - C is positive.
What is a cost leadership strategy?
A firm that creates more value than its competitors by offering products that have a lower C than its rivals.
How can firms achieve cost leadership?
- benefit parity: making products with the same B but with a lower C than its rivals
- Benefit proximity: Slightly lower B than rivals.
- Offer a product that is qualitatively different from that of its rivals
What is a benefit leadership strategy?
A firm that follows a strategy of benefit leadership creates more value than its competitors by offering products that have a higher B than its rivals.
How can firms achieve benefit leadership?
- The benefit leader can achieve benefit parity by making products with the same C but at a higher B than its rivals.
- Cost proximity: entails a C that is not too much higher than competitors.
- Offer a substantially higher B and C
How to retain the most profits as a cost leader?
A cost leader that has benefit parity with its rivals can lower its price just below the unit cost of the firm with the next lowest unit cost. This makes it unprofitable for higher-cost competitors to respond with price cuts of their own and thus allows the firm to capture the entire market.
How to retain the most profits as a benefit leader?
A benefit leader that has cost parity with its rivals can raise its price just below the sum of:
1. Its unit cost,
2. The additional benefit ΔB creates relative to the competitor with the next-highest B.
To top this consumer surplus bid, a competitor would have to cut prices below its unit cost, which would be unprofitable. At this price, then, the firm with the benefits advantage captures the entire market.
What type of strategy to use when there is the low price elasticity of demand?
price changes have no impact on demand
Margin strategy: exploit advantage through higher profit margins.
Cost advantage: maintain price parity with competitors
Benefit advantage: charge price premium relative to competitors
What type of strategy to use when there is high price elasticity of demand?
demand for the good or service is more than proportionally affected by the change in its price
Share strategy: exploit advantage through underpricing competitors and gain higher market share.
Cost advantage: underprice competitors.
Benefit advantage: maintain price parity and let benefit advantage increase share.
When is an advantage based on lower cost likely to be more profitable than a benefits strategy?
- The nature of the product limits opportunities for enhancing its perceived benefit B.
- Consumers are relatively price sensitive and will not pay much for a product with more benefits.
- The product is a search good (quality can be assessed prior to purchase)
