Man Ec: #11 Flashcards
Oligopolists recognize their mutual interdependence because
the product is differentiated
industry sales are large
there are few firms in the market
all of the above
c
An important implication of the kinked demand curve model is
that oligopolists typically will refrain from price-cutting since they can expect matching cuts from rivals, which will nullify any profit gains
that collusion on prices is quite probable because of the ease with which rival products can be substituted
the forces are operating in oligopolistic markets that will result in more frequent price changes than in perfectly competitive industries
that each oligopolist has a strong incentive to charge a price corresponding to the output where MC = MR
all of the above
a
Which of the following is an advantage to be derived by oligopolistic firms from collusion?
increased profits
decreased uncertainty
a better opportunity to control the entry of new firms
all of the above
d
It is difficult to maintain a cartel for a long period of time. Which of the following is the more important reason explaining this result?
No firm has an incentive to cheat.
Firms outside the industry will encounter barriers to entry.
Some firms in the cartel will cheat.
Consumers will deplete the inventories of the cartel and the agreement collapses.
c
The most distinguishing feature of oligopolistic markets is the
large advertising expenditures
long-run profitability
absence of non-price competition
interdependence of firms
d
Suppose that a hitherto unorganized industry is formed into a cartel. What price will it charge?
The cartel may choose a price above the monopoly price.
The cartel will choose a price equal to the monopoly price.
The cartel must choose a price below the monopoly price and often above the competitive price.
b
The cartel is simply a monopoly organization uniting oligopolistic firms under a single management. The best it can do after organization is to charge a monopoly price.
According to the kinked demand curve model,
none of these
profits are greater above the kink than below the kink
the higher the cost curves, the more pronounced is the kink in each firm’s demand curve
sellers have no incentive to increase or decrease the price
rival oligopolists will tend to make frequent, independent changes in price
d
The kinked demand curve features a discontinuous
pricing impulse economic rationale marginal revenue curve cost increase
c
In game theory, a non-cooperative equilibrium is not possible.
true false
false
Gains will usually be lower if players are not permitted to cooperate, but often the nature of the situation prohibits cooperation, just as it does in the prisoner’s dilemma game. That does NOT prohibit an equilibrium, however.
In game theory’s Nash equilibrium, a player pursues his own best payoff without regard to what the rival(s) may do.
true false
false
In a Nash equilibrium, each player does the best he can do GIVEN the behavior of the other players.
An important implication of the kinked demand curve model is
that each oligopolist has no incentive to charge a price corresponding to the output where MC=MR
the forces are operating in oligopolistic markets that will result in more frequent price changes than in perfectly competitive industries
that oligopolists typically will refrain from price-cutting since they can expect matching cuts from rivals which will nullify any profit gains
that collusion on prices is quite probable because of the ease with which rival products can be substituted
c
A repeated game is one in which the players have to decide on strategies about the same situation with the same rivals repeatedly.
true false
true
This is precisely the situation with many games; they are not played on a one-time basis only.
A key question in the prisoner’s dilemma is whether the player of a game can cooperate with rivals.
true false
true
When the prisoner is facing the question of confessing and turning states evidence, the dilemma arises because he is not permitted to communicate with his partner criminal and, hence, to cooperate with him.
Oligopoly is a market structure characterized by a
large number of firms selling a homogenous product
single source of supply
few firms and a great deal of interdependence
large number of firms selling a highly differentiated product
single source of demand
c
If the aim of the cartel is to maximize cartel profits, it will allocate sales to firms in such a way that
sales are in accord with the firm’s productive capacity
sales are in accord with a firm’s level of sales in the past
those firms with the most influence receive the largest sales quotas
sales are evenly divided among the firms
the marginal cost of all firms is equal
This would assure that high-cost producers have the same production quota as low-cost producers, making the total industry cost of production higher than need be.
In game theory, the prisoner’s dilemma is whether to deny involvement in a crime or to confess, turn state’s evidence, and incriminate your partner in crime.
true false
true
This is a particular, original form of the problem; it captures the basic idea of the problem well.
new chap
new chap
We speak of market failure when
there are numerous bankruptcies
many firms exit the market
the market fails to reach an efficient equilibrium
its equilibrium point is less than one
c
A benefit that is involuntarily imposed on another party is considered a
public benefit negative externality private cost positive externality
d
Which of the following is not a characteristic of the Coase theorem?
The outcome will be efficient if all assumptions are met.
Transactions costs must be present.
Property rights must be clearly assigned.
No bargaining costs can be involved.
b
When the allocation of goods, services, and productive resources is such that no alternative allocation could improve the well-being of at least one party without reducing that of any other party, that allocation is said to be
efficient a virtual corporation in equilibrium profit-maximizing
a
The free-rider problem occurs when a choice is made by a firm to not pay for goods and services it has received.
true false
false
This is just dishonest behavior. Defaulting on payments is not free riding. Free riding is when you are in a situation that you can participate in some public-good situation where you can’t be required to pay.
The ultimate public good is
good water
national defense
the environment
the American dream, or the right to own your own home
c
The Atlantic Ocean is not particularly endowed with properties associated with public goods.
true false
false
It is difficult to exclude private individuals and institutions from its use, so it is like a public good.
Which of the following would be an example of a positive externality?
the impact of the pollution created by chemical producers on nearby residents
sneezing in a crowded elevator
the close proximity of a fruit growing orchard to a farm that raises bees
c
In the case of a positive externality, the market produces
too much of the good and should be taxed more heavily
too much of the good and should be subsidized
too little of the good and should be subsidized
too little of the good and should be taxed more heavily
c
Public goods are characterized by nonrivalrous consumption and nonexcludability.
true false
true
That individuals cannot be prohibited (excluded) from taking advantage of the benefits of public goods is what makes them public. It also makes free riding possible.
If there is a negative externality in production, the market outcome (relative to the efficient outcome) will result in too much output at too high a price.
true false
false
There will be too much output of the good (and, therefore, also of the negative effluent involved), but it will be sold at too low a price, which has encouraged too much product (and, therefore, also of the effluent involved).
Public goods are characterized by nonrivalrous consumption and nontransferability.
true false
false
Nonrivalrous consumption is correct, but nontransferability is not a salient characteristic of a public good since privatization is possible.
Public goods are characterized by nonprofitable and nonrepetitious consumption.
true false
false
These are not salient characteristics for public goods. Nonrepetitious consumption would also make them private goods since a second citizen could not enjoy them after the first one consumed it. It would in that instance not be public.
Gasoline is not particularly endowed with properties associated with public goods.
true false
true
People who do not pay for gasoline can generally be excluded from its use, so it is a private good.
new chapter
new chapter
- Costs above and beyond the contract price, such as coordination and motivation costs, are known as ________ costs.transaction
required
third party
additional
a
If, in order to complete a contract, at least one party is required to tailor some of its resources to very unique and specific needs, the ________ dimension of transactions costs is relevant.
familiarity
asset specificity
relationship of the transaction to others
complexity and uncertainty
b
Coordination costs do not include
costs associated with allocating workers for specific tasks
costs associated with bringing transactaion participants together
costs involved with imperfect commitments
costs involved with acquiring information about the location of different parties
c
Adam Smith made perhaps the most valuable contribution to economics in his century with the notion of
cooperation generalism specialization all of the above
c
Antitrust action has historically been undertaken to curtail organizational change such as mergers or takeovers in industries where monopoly profit seeking endangers the consumer and public interests. If transaction costs are recognized as a key element in business organization and activity so that organizational changes reflect attempts to cut costs (rather than raise prices), one should expect less antitrust activity.
true false
true
In fact, this has formally been announced as the policy and objective of antitrust agencies in the United States. The lack of antitrust action in the face of much merger activity, which we will discuss in future lessons, attests to this fact.
The presence of significant transaction costs will preclude the market mechanism from achieving an efficient outcome.
true false
true
If transactions costs are excessive, fewer transactions will occur, and that means that less will be produced than is efficient.
If, in the completion of a contract, at least one party must tailor some of its resources to very unique and specific needs of the contract partner, we refer to this as constrained efficiency.
true false
false
This phenomenon is known as “asset specificity.”
If most buyers and sellers have good information and some have even more information than others, we cannot speak of imperfect or asymmetric information.
true false
false
If even one buyer does not have information available to other parties, we can speak of imperfect or asymmetric information.
The constrained efficiency postulate says that in spite of transactions costs and the bounded rationality of economic agents, there will be a tendency to reach efficient outcomes where parties can negotiate an agreement about resource use.
true false
true
Even when transactions costs exist (which the Coase theorem assumes away) and economic agents have limited information and decision-making capacity, economists expect that when voluntary bargaining leads to an enforceable allocation, we can expect a tendency toward efficient outcomes.
Vertical integration addresses the issue of what business a firm should be in. A vertically integrated firm is usually a multi-product firm that supplies goods related by consumer use or by a common set of inputs. A chemistry firm, for example, may supply plastics for toys, fertilizer for agriculture, and prescription drugs for the health industry.
true false
false
This statement describes horizontal integration. Vertical integration is the case where a firm’s production processes control several portions or stages of production of a single commodity.
It is possible that markets may be chosen as an alternative to firms when parties choose to coordinate economic activity.
true false
true
Markets cause producers to supply the right amount of commodities to those who demand them at a price mutually acceptable to buyers and sellers. But this type of coordination doesn’t always occur with the right speed and with enough refinement. Thus, firms are organized to allocate resources where the market mechanism is not seen as adequate for a particular task.
More horizontally structured firms are gradually replacing the large, highly integrated mass production firms created earlier in this century. Of these, the so-called “virtual corporation” seems to be the trend of the future. This would seem to indicate that the transaction costs of organizing activity in markets must be higher in today’s business environment than they were earlier in the century.
true false
false
Lower transactions costs would make inter-firm cooperation and activity more prolific than otherwise.
A virtual corporation is a temporary network of companies that come together quickly to exploit fast-changing opportunities.
true false
true
The virtual corporation is a union of similarly motivated firms that work together on a project with the alliance ending when the need for the project no longer exists. Each company contributes what it does best.
new
new
Which of the following is not a solution to adverse selection in a contracting environment?
incentive-based contracting
the use of unbiased outside appraisers
altering the selection, or mix, of potential trading partners
target marketing to identify certain socio-demographic and economic groups
a
Which of the following theoretical propositions is more likely to be relevant in describing bargaining behavior in the real world?
the constrained efficiency postulate
bounded rationality
the Coase Theorem
a
When an agent seeks to pursue his own interests, he can best be described as exhibiting
strategic misrepresentation
reneging
opportunism
adverse selection
c
Two types of ex post opportunism are
holdups and reneging
adverse selection and holdups
holdups and strategic misrepresentation
private information and adverse selection
a
Buyers place a valuation price on a good that expresses their preferences, income, prices, and purchases of all their goods.
true false
false
This is not called a valuation price but a reservation price.
Two types of ex post opportunism are
holdups and strategic misrepresentation
private information and adverse selection
holdups and reneging
adverse selection and holdups
c
Two types of ex ante opportunism are
adverse selection and reneging
holdups and private information
adverse selection and strategic misrepresentation
holdups and strategic misrepresentation
c
Which of the following is a possible solution to transactions costs in a contract?
bounded rationality relational contracts rational consumption
b
When people wish to sell their used car, they may not be anxious to inform potential buyers about all the car’s characteristics. Select the answer that is irrelevant from this chapter’s main concern with this problem
of pre-contractual opportunism
which exists for the buyer, since the car’s undisclosed problems might prompt a bad decision
of asymmetric information.
which exists for the market as a whole, since as the “Lemon Market” case of Akerloff demonstrates, industry-wide sales will be inefficiently low due to asymmetric information.
which exists for the seller, because the buyer’s post-contractual driving behavior may endanger him along with everyone else.
e
Which of the following is consistent with credit rationing?
Banks and other lenders obtain a degree of corporate control in the firms that they make loans to.
Some categories of applications are simply denied credit.
Some applicants for funds are denied even though similar applicants are approved for loans.
Borrowers may receive loans for lower amounts than they requested.
all of the above
e
For the managers of a firm, reneging and hold-up problems represent
transactions costs
the benefits of complete contracting
the benefits that arise because contract parties have risen above the temptation to be opportunistic.
cost-cutting opportunities
production costs
a
A good example of adverse selection is found in the used car market. The problem, in this setting, is due to
no optimal price existing
sellers having an informational advantage
the majority of used cars being low-quality “lemons”
an excess supply in the market, which is the sign of efficiency
b
new
new
Given a situation where an employee cannot be perfectly monitored, we can assume that there is potential for (select all that apply)
human capital marginal productivity moral hazard
c
Which of the following refers to the total costs that arise from the separation of ownership and management?
an exit agency costs a proxy Deconglomeration an acquisition
b
Who would be the best, most efficient choice to be appointed as a monitor for the firm?
a manager who abides by the rules
the owner who receives all of the profits
an individual hired from outside the company
a loyal and problem-free employee who has been with the company for twenty-five years
b
Which of the following are instances or examples of moral hazard?
failure to give full effort on a work team
shirking on the job
the principal-agent problem
all of the above
d
The example of the Savings and Loan crisis is remarkably rich for it involves moral hazard on the part of several distinct groups. Which of the following group(s) was able to exploit the taxpayer?
the depositors who enjoyed artificially high interest rates in select Savings and Loans
the S&L owners who took excessively risky investments and/or committed outright fraud
the politicians in both the legislative and executive branches who favored the industry (with either good or bad intentions) at the expense of the general taxpayer
all of these
d
A poison pill is sometimes used by management threatened by a takeover. This is usually as effective as a bullet to the head but takes longer to achieve the desired effect.
true false
false
The poison pill referred to here is not fatal at all. It is a takeover defense in which current shareholders are allowed to purchase additional shares in the firm once a third party acquires a given percentage of the ownership of the firm. It is designed to raise the cost of acquiring the firm, making a takeover more difficult for an invader.
Which of the following is not considered descriptive of behavior consistent with the presence of moral hazard in some form or another in an economic relationship?
security brokers “churning” their clients’ portfolios
doctors practicing conservative medicine
a secretary spending large parts of every Friday cutting food coupons in preparation for the weekend shopping trip
a depository institution engaging in normally sound investment policies
managerial misbehavior arising from the different incentive schemes for the owners and managers of an organization
d
Shirking cannot exist where markets are functioning properly.
true false
false
If monitoring is possible and the principle knows what he can expect from the worker, competition will guarantee that workers will be found who will deliver. But if monitoring is not successful and the real production possibilities of a worker are unknown, shirking may become an ingrained problem not touched by competitive markets.
The ________ problem is the tendency planners have to leave out of their decision calculus the costs and benefits their actions may have on the business after they have left the business.
forecasting horizon future-planning projection
b
Which of the following are instances or examples of moral hazard?
failure to give full effort on a work team
the principal-agent problem
shirking on the job
all of these
d
The concept of team production is subject to many problems. A similar set of problems is described more generally by economic theory as it pertains to ________.
public goods risk sharing opportunism production
a
Opportunism describes many kinds of behavior aside from that of this particular situation.
Contracting problems in the insurance industry can be of the following type:
asymmetric information moral hazard Neither a or b Both a and b None of these are true
d
Attempting to monitor an individual worker and link that worker’s pay to realized productivity may damage the value created by the relationship between the worker and the firm.
true false
true
Once a worker has been spoiled by enjoying unearned income, he tends to think of it as a rent to which he has a right by precedent. Giving up that kind of situation is unpleasant.
The problem of shirking almost always reflects a lack of cultural indoctrination associated with capitalist economies. People shirk because they have not been trained to take their work responsibilities seriously.
true false
false
This is sometimes a problem, but shirking is generally done because of opportunistic behavior in the face of a monitoring problem.
In spite of all the corruption of the S&L case, it may be that the managers involved in the crisis were no less moral than corporate managers on average.
true false
true
Certainly, all managers are not immoral. The thing that is noteworthy about the S&L case is the extent of moral hazard. The temptation for dishonest behavior was made extremely great by the situation involving moral hazard on the part of politicians, managers, and investors.
Which of the following statements best describes a contracting situation plagued by moral hazard?
when one party puts forth less effort than it would if its actions were being effectively monitored
an exchange made subject to the standard neoclassical, competitive conditions
when at least one involved party fails to understand the ethics or morals of a given situation
when a party’s actions are perfectly observable and impact the value of the exchange to other parties
a
new
new
Consider the relationship between a firm and its stockholders. Which of the following parties in that relationship can best be said to be the “principal”?
stockholders
Securities and Exchange Commission
firm
board of directors
a
Which of the following comes closest to describing the percentage of earnings traditionally retained by U.S. firms?
10-20% 35% 65-75% 90-95%
c
The first Modigliani-Miller Theorem states that
a firm’s capital structure is independent of its total market value
ignoring bankruptcy, taxes, informational asymmetries, and managerial incentive problems, a firm’s capital structure is independent of its total market value
ignoring bankruptcy, taxes, informational asymmetries, and managerial incentive problems, a firm’s total market value is independent of its capital structure
a firm’s total market value is independent of its capital structure
c
According to the efficient market hypothesis, the price investors are willing to pay for a share of stock depends on everything listed below except
the liquidity of that firm’s bonds
the size of the dividend
current profitability of the firm
expected capital gains
a
According to the net present value concept, other things being equal, the expectation of receiving a dollar in one year is worth more today than the expectation of receiving a dollar in two years.
true false
true
The basic idea of present value analysis is that today is better than tomorrow. Investors must be recompensed for having to wait.
If market interest rates fall from 10 percent to 8 percent, the price of that firm’s bonds in the secondary market will fall.
true false
false
When prices for a bond fall, the bond still commands its original face value. If the original price reflected a given potential interest rate gain and the market price of that bond later drops, the difference between the purchase and redemption price increases. That means the interest rate has effectually increased.
If market interest rates rise from 10 percent to 12 percent, the value of that firm’s bonds will also rise.
true false
false
When interest rates rise, it is because the market value or the price of the bonds has fallen. The relationship between interest rates and bond prices is an inverse one because lower prices paid for a bond mean that the gap between the acquisition or purchase price and the redemption price has increased, which is to say that the effective interest rate for the bond has increased.
Over the past 10 years reported by the chart in the text, most of the funds used by corporations in the United States are from which of the following sources?
issuing of debt
issue of new equities
junk bonds
internal financing in the form of retained earnings
d
A large firm whose shares are traded on the NYSE is planning a $100 million expansion. Currently, the market value of the firm’s shares outstanding is twice the amount of debt issued by the firm. If the firm raises the $100 million by issuing debt then, according to the first Modigliani-Miller theorem
the firm’s debt-equity ratio will change, but the total market value of the firm will not
the firm’s debt-equity ratio will change as will the total market value of the firm
neither the firm’s debt-equity ratio, or the firm’s total market value will change
the firm’s debt-equity ratio will not change, but the total market value of the firm will change substantially
a
The stockholders of a corporation are liable for debts incurred by the CEO of the corporation.
true false
false
Limited liability for corporations means that the firm’s owners can lose only as much as they invest.
Which of the following are characteristics of debt issued by firms as a way of raising funds?
In the event of firm bankruptcy, debt holders are paid the amount of their investments before stockholders are paid theirs.
The holders of the debt are liable for expenses incurred by the firm in excess of the dollar amount of their holdings.
In the event of firm bankruptcy, stockholders are paid the amount of their investments before debt holders are paid theirs.
The actual payments to debt holders will vary across time while the payments to stock holders are legally required to be the same amount period to period.
a
Of the following sources of financial capital, which of the following give their holders rights as residual claimants?
retained earnings bonds equities secured mortgages
c
_______ asserts that well organized equity markets, such as the NYSE, are efficient markets, at least as a practical matter.
The Coase theorem
The constrained efficiency hypothesis
The efficient market hypothesis
The Miller-Modigliani theorem
c
One view of the total market value of a firm is that it is equal to the amount of the firm’s debts plus the market value of the firm’s outstanding shares.
true false
true
The firm’s outstanding debts and market value together constitute total market value. Thus, Total Market Value = Market Value + Debt.
________ receive fixed, stipulated payments while ________ are residual claimants on current and future profits.
Corporations, stockholders
Stockholders; stakeholders
Suppliers; producers
Debt holders; equity holders
d
This question obviously relates to the differences between holders of corporate debt (bonds) and equity (stocks). Consider even the first element of options a, b, and c. Suppliers, stockholders, and corporations do not receive fixed, stipulated payments. Fixed payments for what? Debt holders receive fixed, stipulated payments for their investment in corporate bonds.
Outside investors frequently take part in a management buyout (MBO), perhaps even contributing a significant portion of the funds required to transfer ownership. These outside investors
often encourage management to invest only a small portion of their personal portfolios in the companies they manage
are typically not concerned with the size of investment made by the managers in their firms
often encourage management to invest a large portion of their personal investment portfolios in the companies they manage
c
If the stock market feels that the managers of a large, publicly traded firm are not making efficient use of a firm’s assets, then which of the following statements regarding the market value of a firm and its book value is (are) true?
The market value of the firm is likely to increase while the book value is likely to stay constant.
The book value of the firm is likely to increase while the market value of the firm is likely to decrease.
The book value of the firm is likely to increase.
The market value of the firm is likely to decrease while the book value stays constant.
d
A company, in the event of a possible takeover, will put in place a mechanism to pay its managers huge amounts of money if the “wrong” group of investors acquires the firm. This device is called a(n)
hostile takeover golden parachute economic suicide poison pill
b
Value-maximizing behavior by managers transfers wealth from
stockholders to the board of directors
the corporation to stockholders
the firm to the board of directors
stockholders to consumers
b
new
new
According to the textbook, an LBO is a legal bonding organization.
true false
false
An LBO is a leveraged buyout.
If a threatened management team adopts a poison pill, effectively blocking a hostile takeover attempt, overall economic efficiency is enhanced.
true false
false
It would be foolish to pay takeover stock prices for a firm unless the invading firm is quite confident that it can manage the firm more effectively and increase profits substantially. We cannot, therefore, assume that a besieged management could increase efficiency by maintaining control over the firm.
Over the period from 1973 to 1992, the ratio of market value to book value of large U.S. firms
declined to a point relatively far below historical values
fluctuated wildly but randomly
increased to a point relatively far above historical values
did not change significantly from previously established historical values
a
Studies have determined that MBOs result in
unchanging levels of marketing activities for the firm
declining productivity of the firm
decreasing marketing activities for the firm
increasing productivity of the firm
increasing marketing activities for the firm
d
From 1973 to 1992, the market value and the book value of large corporations in the U.S. increased, but the book value increased relatively much faster, causing the market to book ratio to decrease substantially.
true false
true
This is exactly why, with stock prices depressed and managerial performance uninspiring, many firms had become appropriate takeover targets.
A Board of Directors may issue special provisions for their upper management in terms of bonus, stock options, or just plain cash payments in the event of a corporate takeover. This is known as issuing a ________.
perquisite takeover buster severance pay benefits package golden parachute
e
From an efficiency standpoint, the primary role of the control mechanisms in our society that affect corporations is to
force managers to take on extremely high debt loads, which makes them pay close attention to the bottom line so that they can make their payments
provide a use of funds so that there will be demand sufficient to invest all that individuals have deposited in commercial banks
force exit of inefficient management
c
One of the best known ways to spin off part of a firm by having management buy it is known as a management buyout.
true false
true
The buyout may be done with debt, i.e., it may be leveraged, so the buyers are not limited to the managers, but the managers motivate and make the purchase, so we speak of it as a management buyout.
The book value of a firm is best defined as
the amount that investors will pay for the firm’s outstanding shares less the firm’s liabilities
the accounting valuation of the firm’s liabilities less the amount of assets the firm has pledged as collateral on loans
the accounting valuation of a firm’s assets including investments and depreciation
the dollar value of all of the books in the firm’s library
c
A conglomerate firm may lack efficiency because of the problem of too little specialization; the top managers must control diverse firms in fields where they have little or no managerial experience.
true false
true
Division or department heads of acquired firms in the conglomerate may have the specialized knowledge needed, but most of the key decisions made by the firm for those specialized divisions will be made by the overly centralized management.
When economists speak of the separation of ownership and control, the latter term refers to the regulatory controls of the anti-trust system.
true false
false
They are referring to the fact that one group (of stockholders) owns while another group manages.
new
new
The competitive force of substitute products tends to be stronger in a given market when
buyers have high psychic costs in severing old supplier relationships and establishing new ones
buyers view the prices of the substitutes as being too high
the quality and performance of the substitutes is sub-par
the costs facing buyers to switch over to the substitutes are low
d
The economic leverage and bargaining power of suppliers is greater when
the supplier industry is composed of a large number of relatively small suppliers
buyer switching costs are low
one or more suppliers pose a credible threat of forward integration into the business of the buyer industry
barriers to entry are low
c
Which one of the following is not a characteristic of competition?
Competition is a process of moves and countermoves on the part of rival firms.
Competition is manifested by an independent striving among rival sellers for increased buyer patronage.
Competition may concern both price and nonprice variables.
Competition often leads to rival firms both creating and responding to new trends, buyer preferences, and market conditions.
Competition is primarily centered on the activities of buyers.
e
The power of customers to exert a competitive influence over an industry is greater when
the item being bought is not an important component in the total consumption menu
the supplying industry is comprised of a small number of relatively large sellers
buyers purchase in small quantities
a
Driving forces are the most important of the forces that cause changes in an industry and its competitive landscape; they create changes in markets and competitive conditions by creating incentives or pressures for change.
true false
true
This is so by definition, as a check of the Porter literature or the chapter text shows.
In the long-run, the process of competition is continuous since there are such things as a continuous stream of strategic opportunities and threats emerging from the possibilities for production variation, new tastes and preferences on the part of buyers, shifts in buying power, and new product availability.
true false
true
This is the message of Porter and the reason firms require a competitive strategy that needs to be reevaluated from time to time.
Ups and downs in the economy usually represent a driving force capable of producing significant changes in an industry.
true false
false
All firms and industries must deal with periodic recessions and recoveries in similar fashion, so these will not usually affect an industries structure and situation as do the competitive forces emanating from within the industry or from that industry’s competitive forces.
The strength of suppliers as a strong competitive force is increased when
buyer switching costs are high
buying firms pose a credible threat of backward integration into the suppliers’ business
buyers are important customers of suppliers
input suppliers have to compete with the substitute inputs of suppliers in other industries
a
In most traditional industries the strategic interplay of rival firms tends not to be highly competitive because normal firms are inclined to employ strategies that are easily imitated and not very threatening.
true false
false
Most firms seek to implement strategy options that are neither easily imitated nor easily defended, and the business environment is more competitive today than ever.
Among the major sources of entry barriers are
a high selling price for the product
the presence of a large number of sellers in the market
the presence of important economies of scale
all of these
c
The nature and strength of competition and competitive forces usually depend on the
power of customers and suppliers
threats of entry from new firms
price and availability of substitute products (e.g., aluminum for steel)
strategic moves and countermoves of rival firms
all of these
e
The rivalry among competing firms tends to be stronger when
demand for the product is growing rapidly
products and services are strongly differentiated such that customers have high switching costs
rival firms all belong to the same strategic group and also have comparable priorities, resources, and corporate cultures
rivals are tempted to use price cuts or other marketing tactics to boost unit volume
d
The competitive force of substitute products limits the price that sellers can charge for their product.
true false
true
If two products are competitive, raising the price of one beyond narrowly defined limits would cause most of the buyers of that product to abandon it for the one with the more competitive price.
The competitive force of substitute products is not much of a factor when firms have substantial economies of scale.
true false
false
Substantial economies of scale permits firms to sell at much lower prices and still cover costs as their production grows. That means they could afford to reduce their price when competition requires it.
new
new
A focus strategy
tends to give firms a pricing advantage
makes it easy for the first-time buyers to try the product
is based on finding the least frequently traveled strategic path and the dictum “never follow the crowd”
is where a firm specializes in serving only a portion of the total market
d
The strategy of striving to be the low-cost producer tends to be more appealing than a differentiation or focus strategy when
customers are not very price-sensitive
there are many differences among buyers and buyer groups
there are many ways to achieve product differentiation
the offerings of rival firms are essentially identical, standardized, commodity-like products
d
Which of the following is not one of the three generic strategic plans?
low-cost producer focus or specialization differentiation technological superiority
d
Differentiation strategies are suited for situations
where customers are very price sensitive
when there are many ways to differentiate a product or service and these differences are perceived by buyers to have value
when the firm’s resources do not permit it to go after a wide segment of the total market and be a “full-line” producer
all of the above
b
Achieving a cost advantage over rival firms may not require revamping the production-cost chain to eliminate or bypass some important activities in order to generate cost savings.
true false
true
If a firm differentiates its product in more than one way, it is likely that
the firm’s profits will be enhanced
the firm will be better insulated against competitors
it will penetrate specialized markets
it will confuse the customer
d
This option is not very likely since successful differentiation in a single characteristic can be very powerful and rewarding. To dilute the effort by emphasizing multiple differentiation facets makes each facet seem less significant on its own and will tend to confuse the customer as to specifically why it is he should choose the product in question.
Achieving a cost advantage over rival firms requires controlling cost drivers better than competitors are able to do.
true false
false
False. Controlling cost drivers is only one of the two ways to achieve a cost advantage. A firm may also achieve such an advantage by revamping the makeup of the production cost chain.
The slogan “Budget Price/Good Value” is an example of a focus or specialization strategy.
true false
false
This is an example of low-cost producer. A focus or specialization strategy would use a slogan indicating the differentiation characteristic used to appeal to the selected market segment.
A competitive strategy based on focusing has merit when
a firm’s skills and resources don’t permit it to go after the total market
the five competitive forces are weak
the industry’s product is highly standardized
many other rivals are also using a focused approach
a
The price premium that a differentiation strategy may be able to command is
a function of the difference between the actual value to the buyer and the buyer’s perceived value
a reflection of the value actually delivered to the buyer or perceived by the buyer
dependent on how many firms are using a differentiation strategy
dependent upon whether buyers have a clear idea of what they should be looking for in a supplier
not sure I put b
This option suggests a belief that buyers can be fooled. If repeat buying is the requirement for long-term profit performance, a firm had better not rely on this notion.
When price is aggressively used by rivals, which strategy affords the best protection for the firm?
differentiation
focus or specialization
low-cost
All of the above are equally good.
c
Differentiation and focus may require higher-cost efforts to be achieved as ways are found to deliver appealing product characteristics rather than a low-cost product.
A focus strategy is made more attractive when the
activity-cost chain designed to serve the target segment is also optimally suited to serving most of the other buyer segments as well
target buyer segments have good potential for growth
focuser’s skills are more suitable for achieving low-cost leadership than they are for achieving differentiation
target segments are crucial to the success of major competitors
b
Achieving a cost advantage over rival firms requires, finally, that the buyer’s risk be lowered and the performance the buyer gets be increased.
true false
false
If risk and performance need to be emphasized to conquer a market, the correct strategy will probably not be low-cost producer but differentiation. Achieving these things will sometimes preclude low-cost performance.
A major risk of developing a focused based strategy is that the market is too small to provide sufficient profits for defense against competitors.
true false
a
The chosen segment must be large enough to provide for growth of the firm and to finance the differentiation and marketing efforts that will win brand identification, consumer loyalty, etc.
