Slides 18 Flashcards
What is a market?
A market is a group of buyers and sellers that exchange payment for goods or services.
Value is created for both the buyer (satisfying a need) and the seller (earning revenue).
What are the three factors of market segmentation?
Market segmentation can be divided into:
* Geographic
* Demographic
* Psychographic
These factors help identify specific needs and problems of individuals.
What is the significance of geographic location in market segmentation?
Needs and problems may vary between or be specific to geographic locations.
What demographic factors are considered in market segmentation?
Demographic factors include:
* Age
* Gender
* Income level
* Education
Different people encounter different needs and problems at different life stages.
What is psychographic segmentation?
Psychographic segmentation considers individual values and interests that drive consumers’ needs and wants.
How do you identify a competitive market?
Identify a competitive market by looking at how consumers are solving a problem, rather than product similarities.
What criteria do antitrust regulators use to identify a competitive market?
Antitrust regulators identify competitors based on pricing criteria and whether a merger would lead to a significant increase in price.
What is the definition of Net Profit Margin?
Net Profit Margin is a financial metric that shows the percentage of revenue remaining after all expenses have been deducted.
What is Return on Assets (ROA)?
Return on Assets (ROA) measures a company’s profitability relative to its total assets.
What does Asset Utilization refer to?
Asset Utilization refers to how effectively a company uses its assets to generate revenue.
What is the Asset Turnover Ratio?
The Asset Turnover Ratio measures the efficiency of a company’s use of its assets in generating sales revenue.
What is the Average Cost per Unit?
Average Cost per Unit is calculated by dividing total production costs by the number of units produced.
What is the Contribution Margin?
Contribution Margin is the difference between sales revenue and variable costs.
What is the Break-Even Point in Revenue?
The Break-Even Point in Revenue is the amount of revenue needed to cover total costs.
What is the Break-Even Point in Units?
The Break-Even Point in Units is the number of units that must be sold to cover total costs.
What is the expected life of the investment for Plants A, B, and C?
The expected life of the investment is 25 years.
True or False: The maximum capacity of Plant A is 2,500,000 units.
True.
True or False: The direct labor cost for Plant B is higher than for Plant A.
False.
What is the annual maintenance cost for Plant C?
The annual maintenance cost for Plant C is €7,300,000.
What is the direct materials cost for the supplier’s component parts in Plant C?
The direct materials cost for the supplier’s component parts in Plant C is €30.00.
In the context of competition, what does SSNIP stand for?
SSNIP stands for Small but Significant Nontransitory Increase in Price.
What was the outcome of Facebook’s acquisition of Instagram in 2012?
The government allowed the merger because the combined company would lack dominant market share in the ‘personal social networking’ market.
What was the government’s concern regarding the merger between DirecTV and DISH in 2002?
The government believed it would create a monopoly for rural consumers who had no other options.
In 2024, why did the government allow the merger between DirecTV and DISH?
Because these companies were now competing with online video streaming services, reducing the risk of a television monopoly.
What is the primary focus of the upcoming lectures?
The focus is on where firms compete and with whom, as well as how they compete against each other.
What do Siemens and Alstom represent in the context of European rail manufacturers?
They are Europe’s two largest rail manufacturers.
What was the EU Commission’s focus regarding the merger of Siemens and Alstom?
The EU Commission focused on Siemens and Alstom’s share in Europe.
Did the EU allow the merger between Siemens and Alstom?
No.
What did regulators consider when evaluating Six Flags and Cedar Fair?
Regulators considered the market for family entertainment.
Are Six Flags and Cedar Fair considered direct competitors?
No, they did not compete in the same city.
What is a competitor?
Firms whose strategic choices impact one another.
What are product performance characteristics?
What my product does for consumers and if there are similarly performing products.
What does the geographic market refer to?
Are there other similar products being sold in the same location?
Define direct competition.
Direct competitors operate within the same industry and offer similar products or services.
What is an example of direct competition?
Uber vs. Lyft vs. FreeNow.
What defines indirect competition?
Products that are fundamentally different but satisfy a similar need.
What is an example of indirect competition?
Different products that can satisfy thirst, such as water, soda, and beer.
True or False: Orange juice is a competitor for beer.
False.
What is diversion analysis?
Asking customers to identify their ‘second choice’ to identify direct competitors.
What is a catchment area?
The locations where a firm receives most of its customers.
Define market structure.
The number of individual firms and the distribution of firms in a market.
What does a lower Herfindahl Index indicate?
More perfect competition.
What is perfect competition?
Occurs when there are many producers selling easily substitutable products.
What are the necessary conditions for perfect competition?
Many sellers, perceived product homogeneity, and excess capacity.
Provide an example of perfect competition.
Agriculture with many farmers producing similar crops.
Define monopolistic competition.
A market with many sellers and buyers where products are differentiated.
What is monopoly power?
The ability to act in an unconstrained way, such as increasing price or reducing quality.
What happens to demand as a monopolist raises prices?
Demand decreases.
How do monopolies determine their prices?
By producing the quantity where Marginal Revenue equals Marginal Cost.
What is the primary goal of monopolists regarding pricing?
To maximize their own profit.
True or False: Monopolists can price discriminate.
False.
What is the typical outcome of monopolistic markets for consumers?
Higher prices and lower available supply.
What condition must be met to determine the production quantity in a monopoly?
Marginal Revenue = Marginal Cost.
What Herfindahl score indicates a monopoly?
> 0.63.
Provide an example of a monopoly.
De Beers.
What percentage of the world’s diamond mines does De Beers control?
85%.
What strategy does De Beers use to maximize profits?
Purposefully limits the supply of diamonds.
What are the barriers to entry in diamond mining?
Incredibly high barriers; all diamond mines are already owned.
What is the impact of lab-grown diamonds on De Beers?
They are cutting into De Beers’ market share.
Define oligopoly.
Markets with only a few sellers.
What is the typical Herfindahl score for an oligopoly?
0.2 < Oligopoly < 0.6.
What is a common characteristic of firms in an oligopoly?
They are highly aware of each other’s actions.
What is the profit comparison of an oligopoly to other market structures?
Greater than perfect or monopolistic competition, but lower than a monopoly.
Provide an example of an oligopoly.
Telecommunications Industry.
What keeps competitors out of the telecommunications market?
High capitalization costs.
What is Cournot Quantity Competition?
A model simulating a duopoly selling homogenous products.
What occurs at a Cournot-Nash Equilibrium?
Each firm’s output decision is the best response to the other’s output.
What is the Revenue Destruction Effect in Cournot competition?
The combined output of both firms determines the market price.
Provide an example of Cournot competition.
Global Oil Production.
What is the role of OPEC in oil production?
They coordinate on yearly production to maintain high prices.
What does the Bertrand Price Competition model emphasize?
Firms compete on price.
In the Bertrand model, what happens if prices are the same?
Companies will split demand 50/50.
What is the outcome when a firm lowers its price in the Bertrand model?
It captures 100% of the market.
What drives firms to reduce prices in the Bertrand model?
To reach Price = Marginal Cost.
What distinguishes Cournot from Bertrand competition?
Cournot focuses on capacity while Bertrand focuses on price.
In Cournot competition, firms are ______ constrained.
capacity.
In Bertrand competition, firms can service the entire market without being ______ constrained.
capacity.
What strategy can firms use to avoid Bertrand Price competition?
Diversifying their products horizontally.
What happens to prices when the number of firms increases in a market with undifferentiated products?
Prices decrease and the number of units sold increases.
What is the result of a reduction in the number of firms operating?
Price increases.
