Industry analysis

Question 1

The definition of benefit leadership?

Answer 1

The price premium is higher than my compeititors → but I can compeitive on my quality and gain a compeitive advantage by serving a higher quality and earning a higher profit by the higher price compared to my competitors.

Question 2

The definition of cost leadership?

Answer 2

Undercut rivals prices and sell more by serving OK quality to a large amount of costumers.

Question 3

The definition of a focus strategy?

Answer 3

Company configures its value chain so as to create superior economic value within a narrow segments, the firms may have lower cost per unit than its broad scope.

Question 4

The definition of a value map?

Answer 4

A value map is a graph that shows the relation between price and quality for a given product. It can be used to illustrate competitive positions. A buyer will choose the product where they gain the highest consumer surplus (willingness to pay - price). There should be a relation between quality and price. The value map illustrates this relation, and products can be over, under or on an indifference curve. If this over the curve, the product exhibit the consumer surplus, if its under the indifference curve, the products has a high consumer surplus.

Question 5

Define horizontal product differentiation

Answer 5

Goods are different but at the same price costumers would still have different preferences for different products. Example; pepsi and coca cola.

Question 6

Define vertical product differentiation

Answer 6

Goods are different but at the same price costumers would all like to buy/have the same product due to the quality of the product. Example: organic over standard/conventional, diapers ability to absorb. BMW over a Fiat.

Question 7

Define product differentiation

Answer 7

Product differentiation is to assume that ”a product is a combination of attributes (characteristics)”. Assumption is that a consumer is not interested in the product itself but in the characteristics that is making up the product.

Question 8

Why is competition more intense when there is a high closeness of products?

Answer 8

• We have two supermarkeds. Consumers are spread out.
• Consumers are looking for low prices → but also the price of transporting yourself to the supermarket.
• Firm 1 has a price of p1, firm 2 has a price of p2.
• The cost is proportional to the distance I have to walk to the supermarket.
• Price determines the quality → the higher the price of firm 1, the fewer costumers are they going to sell to → downward slopping demand.
• The price of walking is showing the strenght of the preferences. If the cost of walking would be higher, that would make the residual demand steeper → the strenght of the preferences.
• If nobody want to walk → there is a monopoly. If everybody walks there is no product differentiation.
• The nash equlibrium depends on the strenght of preferences.

Question 9

What is a spatial model?

Answer 9

The spatial model is used to illustrate horisontal product differentiation based on characteristics and price. The example with Hotels and supermarkets. A costumers will chose the store where the full price=price paid in store+travel cost is the lowest. The more unwilling buyers are to travel the steeper is the risidual demand (high optimal price). Example of coffee shops in Tivoli or at the beach

Question 10

What is the effect of product differentiation?

Answer 10

It softens competition. Market power measured by the price cost margin increases in the degree of product differentiation.

Question 11

What is the effect regarding competition when products are close substitutes?

Answer 11

Products that are close in use (similar performance and ability) are competing for the same costumers. Being close substitutes means that competition between costumers will be more fierce with lower prices as a consequence.

Question 12

What is the effect regarding competition when products do not have close substitutes (like the example of eggs)

Answer 12

Products that dont have good substitutes will command higher prices, and their price elasticity will be low/under neutral or non-elastic. This means that costumers wont be a tempted to react to changes in prices. Example of table eggs.

Question 13

What is the two effect of product positioning? (The example of where on the beach you would place your shop)

Answer 13

Product positioning driven by two effects: Direct effect (maximize volume). It gives an incentive to be near the competitor in order to gain market share. P=MC (low profits)
Indirect effect: It makes sense to move away in order to increase margins. In every strategic choice there is these two effects in play.

Question 14

Define a SNIP test and explain what it is used for

Answer 14

A SNIP test stands for a “Small significant non‐transitory increase in price”. It is used to define a market.

Question 15

Define incumbents

Answer 15

Firms who are already in the market.

Question 16

Define substitutes

Answer 16

n general, two products X and Y are substitutes if, when the price of X increases and the price of Y stays the same, purchases of X go down and purchases of Y go up.

Question 17

Industry vs. market?

Answer 17

• A market is: products/services that are ”reasonably close” substitutes are in the same market:
• ”Similar” performance
• ”Similar” use
• ”Similar” availability
• A market should have the property that the firms within it are in direct competitio

Question 18

Define sunk cost

Answer 18

Sunk Costs (unavoidable, irreversible): Costs that have already been incurred or committed and cannot be recovered. These are not economically relevant costs

Question 19

Define willingness to pay

Answer 19

Willingness to pay is the price a costumers is willing to pay for a given price-quality combination. Willingness to pay may differ among different consumer groups, but we follow the economic-man rationality.

Question 20

What happens when more firms enters a market?

Answer 20

Intense competition = drives down prices/lowers prices = lowers profit.

Question 21

When is there incentive to enter a market?

Answer 21

When there is profit to make. If there is no entry barriers, firms will enter and lower profits for firms in the market. Entry will not stop until entry is no longer profitable.

Question 22

What happens to the risidual demand for en product when a firms enter the market?

Answer 22

Adding the substitute Product 2 will decrease the demand for product 1. This will lead to the risidual demand for product 2 to decrease and shift to the right. This creates incentive to lower prices for product one which leads to lower profits.

Question 23

Define “entry barrier”

Answer 23

Anything that allows incumbents to earn supranormal profits without threat of entry. They can come in many ways → there are asymmetries between the firms who are in the market and the firms that aren’t.

Question 24

Define structural and strategic entry barriers

Answer 24

Structural entry barriers: Outside firms control - exgenous. Regulations (patents), Economies of scale, spefic equipment, large MES in relation to market size, absolute cost advantages, scare resources.

Strategic entry barriers: Inside firms control - endognous. Advertising, R&D, trademarks, distribution network, product proliferation, contracts.

Question 25

What is a entry cost?

Answer 25

The sunk cost a firms pays in order to enter a market.

Question 26

Define minimum efficient scale and relate it to market structure

Answer 26

Minimum efficient scale (MES) is defined as the lowest possible unit cost, given available technologies and input prices. It is natural to compare MES with market size S to get a sense of how many equally efficient firms that can operate in an industry. - Industries where MES/S is small will tend to have **many firms**. - Industries where MES/S is large will tend to have **few firms.** Example: Table egg industry - small MES compared to market size.

Question 27

What is strategic entry deterrence?

Answer 27

The idea is that the incumbent firm take some action to convince a potential entrant that its post entry profits will would be negative. There are three strategies: 1. Decrease entrants demand 2. Increase entrants cost 3. Commit to fierce response if entry would occur.

Question 28

How can one interpret marketing?

Answer 28

A something that improves the "quality" of the incumbents product like advertising, R&D, distribution network

Question 29

Product line expansion? And why is it a good idea when talking strategic action?

Answer 29

Introducing to many products to serve all costumers need - leave no room for entrants products. Example: breakfast products, airlines with frequency of department

Question 30

Define "free entry equilibrium"

Answer 30

A situation where all firms in the market gets their cost covered and there is no incentive/profit to make, why new firms want enter.

Question 31

Which conditions have to be satisfied for a market to be perfectly competitive?

Answer 31

1. Many small independent sellers and many small independent buyers (price takers) 2. Homogenous product 3. Price transparency 4. Free entry and exit in the long run

Question 32

Define complementary products

Answer 32

Complementary products or services are utilized in combination with one another. Typically, a complementary good has limited significance when used alone but, when used with its complementary products, its overall utility increases. Example: Coffee pods and a coffee machine/brewer. These two products are complementary → if we lower the price on the brewer we will sell more pods and the demand for pods will go up.

Question 33

Define network externalites.

Answer 33

The more people that are using the product, the more valueable the product becomes for users. Example: facebook

Question 34

Define "sustainable competitive advantage"

Answer 34

To get a sustainable competitive advantage requires the firm to have some sort of unique assets in terms of resources or capabilities

Question 35

What assumptions are underlying the supply/demand function?

Answer 35

* Underlying the supply function is the assumption of price‐taking behavior where each firm takes the market price as given. → If price taking behavior is not a good description of the market (e.g. if the market is an oligopoly) then there is no supply function! * Underlying the aggregate demand function is the assumption of a homogenous product. → If the firms produce differentiated products then there is no aggregate demand function. – There is, however, always a residual demand function for each variety!

Question 36

Equilibrium in a perfectly competitive market?

Answer 36

Supply and demand functions illutrates a point in time (dynamic) of a price-quantity relation. The is a market clearing point in each time. Anything that tends to drive out the supply of demand function will switch the clearing point.

Question 37

Define Cash cost

Answer 37

All the cost that you have to loss in order to produce.

Question 38

Define total cost and how to calculate it

Answer 38

Total cost includes all economically relevant cost (it excludes all cost that are already sunk) Total cost = fixed cost + variable cost

Question 39

Define average cost and how to calculate it

Answer 39

Average cost is the average cost for producing one unit AC = total cost/quantity It is useful to decide on entry and exit

Question 40

Define marginal cost and how to calculate it

Answer 40

Marginal cost is the cost of producing an additional unit of a product or service. It is useful for production volume. MC =total cost/quantity = variable cost/quantity

Question 41

Define first, second and third degree of price discrimination.

Answer 41

Price discrimination involves the use of different prices charged to various customers for the same product or service. First degree: First-degree is when a seller charges all buyers the highest price and allows for reductions. Second degree: Second-degree is when a seller changes price depending on the quantity purchased. Third degree: Third-degree is when a seller charges different prices for different consumer groups based on a specific attribute

Question 42

Define Porters five forces

Answer 42

In the middle internal rivalry. Threat of entry, bargaining power of buyer, bargaining power of sellers, threat of complements/substitutes. A framework that is useful to describe the current situation in a market but not able to make an analysis

Question 43

Define Nash equlibrium

Answer 43

A situation where no ”player” has any incentive to unilaterally ”deviate”

Question 44

Explain Bertrand paradox - an extreme Nash equlibrium

Answer 44

- Assume that firms compete by setting prices independently and simultaneously and that the product is homogenous. Marginal cost is constant and the same for both firms. - Nash equilibrium? Both firms set a price equal to marginal cost, and make no profit! - If both firms would have a price above marginal cost then the other would have a “profitable unilateral deviation” namely to undercut slightly and take the entire market - If one firm has price equal to marginal cost then the other can not get higher profits by setting a price higher or lower than marginal cost

Question 45

Assume that Firm 1 lowers its marginal cost from 2 to 1, but that the cost for Firm 2 stays the same as before. A) What is the effect on the Nash equilibrium prices B) What is the effect on Firm 1’s own profits? C) What is the effect on Firm 2’s profit?

Answer 45

A) Both prices are lower than before. B) Firm 1’s profit is higher than before. C) Firm 2’s profit is lower than before.

Question 46

Define MR

Answer 46

Marginal revenue is the net revenue a business earns by selling an additional unit of its product. Marginal revenue decrease with volume.

Question 47

What is Lerner index? And what does it calculate?

Answer 47

It is a way to measure market power. L=(P-MC)/P The index ranks between 1 and 0. The closer to zero the closer to P=MC (the lower market power the firm holds)

Question 48

Illustrate: 4) The last few years have seen Dollar Shave Club and Harry’s successfully enter with their own razor products. Discuss briefly whether Procter and Gamble’s history of improving its razor products contributed to the emergence of Dollar Shave Club and Harry’s. Discuss briefly how the entry of Dollar Shave Club and Harry’s influenced the pricing situation of Procter and Gamble and Edgewell Personal Care and the competition between them. Illustrate graphically.

Answer 48

It is the similar situation for both P&B and Edgewell Personal Care. Dollar Shave Club and Harry’s entering intensifies competition and reduces risidual demand for both P&Bs Gillette and for Edgewell Personal Care. this switch back the risidual demand and gives them an incentive to charge lower prices. The illustration can either be one for each firm, or only one stating that it is the same situation. Marcus drawing said "RD before and after entry" and not the typical "D_p&g (P_harrys) Best response switch down - lower nash equilibrium prices for P&G and Edgewell Personal Care .

Question 49

What are Porters Five Forces, and which are the most important factors for each force?

Answer 49

Internal competition - number of firms, concentration, diversity, growth, quality diff., brand loyalty, barriers for exit, switching cost Threat of new entrants - economies of scale, brand loyalty, entry barriers, switching cost, capital requirements Threat of substitute product - number of sub. products, switching cost, product differentiation Power of suppliers - number / size of suppliers, uniqueness, ability to substitute to others Power of buyers - number / size of costumers, difference in preferences, price sensitivity, switching costs