EC132 Flashcards

Question

Examples of strategic assets

Answer 1

Examples given in lectures: Natural monopolies Barrier to entry Licensing and regulation

Answer 2

Reputation/Brand Management and governance structure

Answer 3

Expensive advertising signalled a need for repeat customers (to pay for the advertising) and that repeat custom would only occur if the quality was high. So the more obviously expensive the advertising (the more famous the celebrity), the more a firm signals quality!

Answer 4

There is only room for one firm, small market size A competitive firm cannot break even. The industry is loss making where MC=AR Firms that are forced to compete will leave the industry Only a monopoly firm that sets supply where MC=MR can make a profit and remain in the industry Increasing returns to scale (Large fixed costs + Network effects)

Answer 5

When a firm finds it cheaper to produce as they grow in size and output

Answer 6

Railroad networks Public utilities (water, power) Previously: Telephone Satellite TV in the 1980s

Answer 7

Increasing returns to scale Switching costs High sunk costs Limited access to natural resources _________ Strong brand presence Customer loyalty

Answer 8

Govt action can create monopolies (nationalisation for the sake of revenue, protecting output or employment) Govt purchasing can foster concentration by excluding outsiders (e.g. military procurement) Firms can be heavily subsidised to compete (e.g. long-haul airlines such as Emirates, Etihad and Qatar Airways)

Answer 9

Firms benefit from strategic assets: they generate profit and restrict competition However, they do not drive the economy forward, they are not about boosting productivity, lowering costs or innovating Most economists believe that the better avenue for long-term profitability comes from resources These include reputation (for quality), managerial techniques and innovative capacity.

Answer 10

Product innovation Process innovation

Answer 11

The introduction of entirely new products (this may be because it was not cheap enough to be supplied/demanded before)

Answer 12

The production of existing goods at lower cost (a continuation of product innovation)

Answer 13

Continuous innovation -> continuous cost advantage Provides a source of product differentiation May spill over to reputation/brand

Answer 14

Public goods

Answer 15

They are not depleted the more people use them It is difficult to prevent others using them

Answer 16

Those who benefit from resources, public goods and common pool resources do not pay for them or under-pay.

Answer 17

It doesn't affect it at all - there is no added value to the firm

Answer 18

Producer surplus increases - the firm has an incentive to innovate

Answer 19

Costs of litigation, and may not work (Apple vs Samsung) Length Breadth Patent races Can all ideas be patented? Should all ideas be patented? Ethical issues Patent trolls

Answer 20

Restaurants Menu and signature dishes are a major source of competitive advantage. But a restaurant's menu cannot be patented! However, chefs around the world continue to be innovative due to tacit knowledge, fast moving product lines, and possibly relational contracts?

Answer 21

Software industry Innovation occurs organically without patents (open source software) Software innovations are strongly complementary with other innovations - restricting diffusion may limit innovation elsewhere Software patents are often broad and abstract, vagueness can lead to 'patent wars' and costly litigation

Answer 22

More efficient to produce product X and Y in a single firm than in two distinct firms

Answer 23

If all firms who bid for something according to their values, the winner will be the one who overvalued it the most. This makes synergies crucial for mergers and acquisitions

Answer 24

We should merge with 'Company X' to exploit economies of scope (synergies) We should merge with 'Company X' to reduce competition We should acquire 'Company X' to secure its resources (e.g. its patents)

Answer 25

Mismatch of relational contracts Free-rider problem

Answer 26

Performing two or more stages in one firm

Answer 27

Make: Eases coordination of production flows Good when classical contracts too 'costly' Buy: Market firms can achieve economies of scale more easily Market firms 'disciplined' by the market. Must be efficient and innovative to survive. Overall corporate success may shelter in-house departments.

Answer 28

Relationship specific assets - a contractor may know that I need their outputs and may try to renegotiate a contract to extract more.

Answer 29

Accounting profit = Total Revenue - total cost Economic profit = Accounting profit - opportunity cost (a.k.a Value added)

Answer 30

A firm has a competitive advantage in a market if it earns a higher rate of economic profit than the average rate of economic profit (in that market).

Answer 31

Free entry Imitation costless Consumers fully informed Perfect factor mobility

Answer 32

Strategic assets may give us profit, but they mostly apply to monopolies, where the notion of competitive advantage is meaningless. They may apply more broadly but often all firms in the same market will have access to the same strategic assets, so it is not a competitive advantage.

Answer 33

Valuable Rare Inimitable Non-substitutable VRIN

Answer 34

Creating barriers to entry Creating barriers to imitation

Answer 35

We do not observe the many firms who tried to follow these techniques and failed miserably. We have no real idea of the true success rate.

Answer 36

Govt protection (e.g. patents) Strategic assets (e.g. returns to scale, barriers to entry) Strategic behaviour and product differentiation

Answer 37

Pricing products differently for different customers The discounts are offered to individuals who would not pay the normal price.

Answer 38

pg12 week 6 first lecture

Answer 39

Need a way to verify the buyer's 'type' Consumers have moral objections Must prevent arbitrage

Answer 40

How the product compares to its rivals, mostly in terms of: Price Quality

Answer 41

Consumers pick the price/quality pair which suits them. Positioning can allow firms to extract more consumer surplus.

Answer 42

A good or service where it is difficult to know the value of the product before purchasing.

Answer 43

Assume high and low quality sellers exist A consumer is willing to pay £6 for a good. It costs £7 for a high quality seller to make it, which is too costly. Only low quality sellers can afford to sell at that price. Sheer existence of low quality sellers means neither type can sell. -High types cannot cover costs -Buyers should realise any seller willing to sell must be low quality

Answer 44

Reputation (developed over time) Commitment (warranties?) Third party quality certification Signalling via advertising

Answer 45

What if the product cannot be recovered after use? What if the seller cannot verify whether it was faulty/low quality?

Answer 46

How tough should regulation/standards be? Industry capture Fraudulent reviews Ratings shopping Firms can display ratings they find favourable

Answer 47

It indicates that the firm expects to have many repeat purchases. This is a credible signal precisely because it is costly. Only a high quality firm would spend so much, as a low quality firm would never recoup their investment.

Answer 48

A strategy is a best response if it yields the highest payoff, given your opponent's choice of straetgy

Answer 49

A strategy which is always a best response, no matter your opponent's choice.

Answer 50

A self-enforcing outcome where no individual has incentive to change action The resting point of a dynamic process of adjustment (update our best responses over time in a trail and error fashion) A focal outcome of the game - the only rational way to play the game; other outcomes hard to justify if all players are rational (and know others are rational)

Answer 51

Products are homogeneous Firms pick their output Price determined by joint output produced by all firms Firms compete just once and pick outputs without observing the other's decision Barriers to entry prevent other firms competing No fixed cost and constant marginal cost

Answer 52

Write profit function Differentiate with respect to our quantity Set this differential equal to zero Solve for our quantity

Answer 53

Quantity competition is not realistic, firms usually pick prices.

Answer 54

Products are homogeneous Firms pick prices Buyers know all prices and buy from the cheapest firms Firms compete just once and pick prices without observing the other's decision No fixed cost and constant marginal cost

Answer 55

Full control over prices encourages competition - allows firms to differentiate along a dimension consumers care about Increasing quantity also lowers competitors price - no relative advantage

Answer 56

It is assumed within the Cournot model, in which consumers with the highest WTP will get the good.

Answer 57

Hidden collusion This could be through price matching

Answer 58

This game is identical to Cournot except firms differ in the timing of their production decisions. One firm will be a 'leader', the other a 'follower'

Answer 59

Products differentiated so that all buyers can agree on which is better

Answer 60

Buyers don't agree on which product is better

Answer 61

Players must 'position' themselves in some space Players often compete for buyers/voters who have preferences over these locations (e.g. Location A is best, B is worst)

Answer 62

In this two player model when prices are fixed then players have an incentive to move inward. In the extreme case they become completely identical It may explain the prevalence and success of centrist politicians AND why TV channels schedule similar programming at similar times

Answer 63

Relational contracts enforced by the 'shadow of the future' rather than a court. Relationships with certain finite length prone to break down before their conclusion.

Answer 64

If you cooperated yesterday I will cooperate today, if you cheated yesterday I will cheat today Potential for players to 'repent'

Answer 65

I'll trust you by cooperating, but if you cheat me I'll never cooperate again.

Answer 66

They both make one firm more profitable than another. However, strategic assets are for industry specific reasons. Resources are for firm specific reasons.