Lecture Unit 6: Dynamic competition across time (3/3) Flashcards
What are impediments to coordination?
- The Misread Problem
- Lumpiness of orders
- Information availability regarding sales transaction
- Volatility of demand conditions
- Asymmetries among firms
What happens when it is possible to misread a rival’s move in a tit-for-tat strategy? (Performance)
tit-for-tat may not perform as well as more forgiving strategies
What are two scenarios where misread can happen?
(Impediments to coordination)
1. firm mistakenly believes a competitor is changing one price when it is really charging another
- A firm may be able to observe the rival’s list price but not the effective price;
2. firm misunderstands the reasons for a competitor’s pricing decision or the own change in market share.
- A drop in the list price may be read as a price cut when effectively it may not be one
What can a single and additional misread lead a firm to do?
(the Misread probelm)
will lead the firm to alternate between cooperative and non-cooperative moves.
Additional misreads can make the pattern of moves even worse.
What is the effect of additional misreads?
Additional misreads can make the pattern of moves even worse.
Which response might be better when there is a possibility of misreads?
Deferred response may be better than immediate response.
When are orders considered “lumpy”?
Name industry examples!!
(2nd impediment to coordination)
- when sales occur relatively infrequently in large batches as opposed to being smoothly distributed over the year
Examples: airframe manufacturing, ship building
- The lag between orders makes the gain from price cutting more valuable relative to the cost imposed by the rival’s retaliation
What happens to the frequency of competitive interactions when orders are lumpy?
(2nd impediments to coordination)
The frequency of competitive interactions is reduced.
How does the lag between orders affect the gain from price cutting?
The lag between orders makes the gain from price cutting more valuable relative to the cost imposed by the rival’s retaliation.
When can one easier detect deviations from cooperative pricing? Name example
–>Information availability regarding sales transaction –>(Impediments to coordination)
easier to detect when the transactions are public than when they are private
Example: transaction prices for gasoline sales are easily observable while they are not easily observable for automobile sales
–>Information availability regarding sales transaction
When can one harder detect deviations from cooperative pricing? Name example
are harder to detect when the products are custom made than when they are standardized
How do complex transactions affect the likelihood of misreading?
(Availability of information about sales transactions ->impediments to coordination)
Complex transactions may make misreadings more likely compared with simple transactions
(Volatitiy of demand conditions 3thrd impediments to coodrination)
When is price cutting harder to detect?
- when demand conditions are volatile
- and the firm can observe only its own volume of sales
(Volatitiy of demand conditions 3thrd impediments to coodrination)
In which situtation may a firm misread an situation to be an effort to steal busssines?
- Suppose one firm cuts its price in response to a decline in demand
- If other firms see the price cut but cannot detect their rival’s volume reduction, they may misread the situation as an effort to steal business
What might happen if one firm cuts its price in response to a decline in demand?
(Volatility of demand)
- Other firms may see the price cut but cannot detect their rival’s volume reduction,
- leading them to misread the situation as an effort to steal business.
(Volatitiy of demand conditions 3thrd impediments to coodrination)
What makes the coordination difficult? ( costs]
With large fixed costs, the monopoly price fluctuates a lot making coordination difficult
Volatiliy of demand
What impact do large fixed costs have on monopoly pricing?
Large fixed costs cause the monopoly price to fluctuate a lot, making coordination difficult.
What can be a focal point when firms are identical?
A single monopoly price.
Why is it difficult for firms to coordinate pricing strategies?
(assymmetries among firms, sustianabiltiy of cooperative prices)
- Firms usually differ in costs, capacities, etc., which makes it difficult for them to coordinate pricing strategies to common objectives.
Why might small firms have incentives to deviate from an agreement pricing strategy?
- Larger firms often have weak incentives to punish smaller price cutters
- Small firms might induce customers to buy their products by cutting prices.
Coordination in practice
What factors help with coordination among competitors in a market?
- using round number price points
- maintaining even splits of the market shares
- Fewer identical products also make coordination easier
- established conventions and traditions can make rivals’ intentions transparent, aiding in coordination efforts
Coordination in practice
When is coordination easier among products? (in terms of products
Coordination is easier with fewer products that are identical.
Coordination in practice
When is coordination likely to be difficult? (Competitive environment)
in a competitive environments that are turbulent and rapidly changing
(Coordination problem)
What does the folk theorem suggest about cooperative pricing?
- The folk theorem implies that cooperative pricing behavior is a possible outcome in an oligopolistic industry, even if all firms act unilaterally (self-interest)
