Strategic behaviour

Question 1

Describe the 4 elements of strategic move

Answer 1

1. Sequential moves
2. Communication
3. Affect incentives
4. Rational expectations

Question 2

Strategic vs. Tactical choices

Answer 2

TIMING - strategic choices must occur prior to tactical choices
COMMITMENT - it must not be possible to change decisions when tactical choices are being made
Therefore, strategic choices condition future tactical choices

Question 3

Explain the decision horizons of a firm

Answer 3

In the short run firms can easily adjust prices and quantities
Capacity adjustments take more time
Initiating and bringing to fruition R&D projects takes even longer
Commitment value of LR decisions arises due to sunk costs

Question 4

Describe the role of commitment

Answer 4

Without commitment a threat from firm two is not credible since firm one can change their move, whilst if there is commitment, firm 2’s threat is credible
FIRST MOVER ADVANTAGE

Question 5

What is the minimum level of output that deters entry from firm two

Answer 5

LIMIT OUTPUT, q^l

Question 6

When is entry blockaded

Answer 6

When q^l is less than q^m

Question 7

When is entry deterred

Answer 7

When q^l greater than q^m and profitability of entry deterrence depends on economies of scale

Question 8

When is entry deterrence profitable for firm 1?

Answer 8

When fixed costs are high

Question 9

How to calculate limit output

Answer 9

Firm 2’s profit function with respect to q1, including f - EQUAL TO 0