Competitors and Competition

Question 1

Competition - Market structure

Answer 1

Multiple market participants on both demand and supply side

Question 2

Competition - Rivalry: Benefits (2)

Answer 2

Lower prices

Innovation

Question 3

Competition - Rivalry: Negatives (2)

Answer 3

Incentives to misinform, form cartels

Question 4

Competition - Manager’s view (Definition)

Answer 4

• Competitive environment in which the firm operates
• Driving factors and their impact on profitability
• Key Q: How to create value?

Question 5

Strategy - approaches

Answer 5

1. Firm oriented

2. Game theory

Question 6

Strategy - Firm oriented

Answer 6

• Basic long-term goals
• appropriate courses of action
• resource allocation

Question 7

Strategy - Game theory

Answer 7

Complete plan of actions for each eventuality

Question 8

Strategy (Definition)

Answer 8

• Long-term goals and how to achieve them
• account for interactions with other players
• long-term orientation
• commitment

Corporate Strategy = Scope of Firm

Question 9

Nash equilibrium Definition

Answer 9

Combination of strategies that represents the best responses to each other’s strategies; any individial player cannot gain from unilaterally deviating from its strategy

Question 10

Benefits of Nash Equilibrium

Answer 10

• Allows simple analysis of situations

- Offers plausible outcomes

Question 11

Drawbacks of Nash Equilibrium

Answer 11

• oversimplification (no temporal development, asymetricity ignored, bounded rationality ignored)
• possibility of 0 or multiple equilibria

Question 12

Bertrand Competition

Answer 12

Simultaneously decide on price

• positive q and profit only for the cheaper firm
• Q still higher than in monopoly as price is lower

Question 13

Cournot Competition

Answer 13

Simultaneously decide on quantity

• price fixed
• positive q and profit for both firms
• both take competitors production into account

Question 14

Bertrand paradox

Answer 14

central assumptions of Bertrand not valid:

• homogeneous products
• no repetition
• perfect transparency
• infinitely price elastic
• endogeneous pricing

Question 15

Sequential games + credible threats: 2 Steps and 2 Nash equilibria

Answer 15

1. Entrant enters monopolistic market
2. Monopolist potentially fights back

NE1: Monopolist is better of not fighting
NE2: Monopolist commits to price war (e.g. due to contractual obligation; in which case entrant may decide against entry)