Competitive advantage and principle agent problem Flashcards
How can rivals erode a firm’s competitive advantage?
- Imitate formula for success
- Use new technologies, products and business practises
In a perfectly competitive industry, firms are:
Price takers
In a perfectly competitive industry, competitive advantage:
Doesn’t exist
In monopolistic competition, Firms sell __ __ products
Horizontally differentiated
In monopolistic competition, each seller faces a downward sloping demand curve due to:
Product differentiation
Sellers in a monopolistic competition market get to set their price above:
Marginal cost
What to isolating mechanisms do?
Limit the rivals from eroding a firm’s competitive advantage
What are two types of isolating mechanisms
- Impediments to imitation
- Early mover advantage
What are two types of impediments to duplicating?
-Legal restrictions
-Superior access to customers
-Market size
Intangible barriers
Why is innovation so important?
- Increasing importance of intangible assets
- Knowledge is created
- Innovation = economic growth
What are the two types of innovative environments?
- Ideas are scarce
- Ideas are common knowledge
What are two types of innovation?
- Product innovation
- Process innovation
What is R&D?
Creative work to make innovation
What are the differences between Drastic and nondrastic innovation
Drastic allows the innovator to behave as a monopolist, nondrastic means they still have to compete
Through creative destruction, good products become:
Monopolies
Patents are transferable through:
licenses
What are the two modes of patent licensing?
- Royalty per unit
- Fixed fee (split of profits etc
What is the principle - agent problem?
The principle wants the agent to perform an action costly to the agent, but the action isn’t directly observed by the principle
The principle agent problem arises mainly due to:
Asymmetric information
Who are examples of agents in the principle agent problem?
- Worker
- CEO
- Driver
Agency problems arise when:
- The objectives of the principal and the agent are different
- The actions of the agent aren’t observable
- The information possessed by the agent isn’t observable
What is the moral hazard trade off in the principal-agent problem
Minimum effort vs maximum profit
What is hidden action?
Principal can convince agent to exert high
What are three ways to combat agency problems
- Monitoring
- Pay for performance incentives
- Bureaucracy
What are three disadvantages of monitoring?
- It can be expensive
- It can be imperfect
- It can add a better layer in the agency relationship
