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AREC 684 > Topics 11-15 > Flashcards

Topics 11-15 Flashcards

1
Q

What are the five key traits of strategic commitment?

A

Long-term
Costly reversal
Changes rival’s strategy
Limiting
Simultaneous game to sequential w/ 1st mover advantage

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2
Q

What are strategic compliments?
Bertrand or Cournot?

A

When a firm’s action induces the rival to take the SAME action. Bertrand model.

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3
Q

Will announcing intentions alter rivals’ actions?

A

No. Need to make a commitment of some kind (i.e. put some $ down)

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4
Q

What are the two key traits of a tactical decision?

A

Short term
Easily reversible

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5
Q

What are strategic substitutes?

A

When a firm’s action induces the rival to take the OPPOSITE action.
Cournot model.

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6
Q

What is the Lean and Hungry strategy?

A

Strategic substitutes - Cournot
Negative impact
Stage 1: incumbent plays soft, lowers q.
Stage 2: Cournot competition, entrant plays aggressive, increases q.

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7
Q

What is the Top Dog strategy?

A

Strategic substitute - Cournot
Positive impact.
Overinvesting to be tough
Stage 1: Incumbent plays tough, increases production.
Stage 2: simultaneous quantity choice.

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8
Q

What is the Puppy Dog Ploy?

A

Compliments - Bertrand
Negative impact
Stage 1: Incumbent plays aggressive, charges lower price.
Stage 2: Entrant also plays aggressive.

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9
Q

What is the Fat-Cat Effect?

A

Compliments - Bertrand
Positive impact
Stage 1: Incumbent plays soft by charging a high price
Stage 2: Entrant also charges a high price

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10
Q

How do we get some flexibility out of a strategic commitment?

A

Break it into smaller portions.

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11
Q

How do we do the tit-for-tat problem?

A
  • Q=q1+q2
  • NPV = coupon + coupon/r
  • First period the lower priced firm does Q(=q1+q2)
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12
Q

Why should firms choose tit-for-tat?

A

Does well in the long run against a variety of strategies.

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13
Q

What is the Grim Trigger Strategy?

A

Period 1: Firm 1 = Pmonopoly
Period 2+: If firm 2 = Pcompetitive, then firm 1 = P=MC FOREVER

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14
Q

What is the difference between Grim Trigger and Tit-for-Tat?

A

Tit-For-Tat = one period at a time
GT = Forever

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15
Q

What kind of returns to scale do we get when AC < MC?

A

Diseconomies of scale

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16
Q

What are the two determinants of the horizontal boundaries of the firm?

A

Economies of scale
Economies of scope

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17
Q

What is Minimum Efficient Scale?

A

The very first part of the flat bottom of the long run AC curve.

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18
Q

What are the four parts of the Long Run AC curve?

A

Economies of scale
Minimum efficient scale
Constant returns to scale
Diseconomies of scale

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19
Q

What kind of returns to scale do we get when MC < AC?

A

Economies of scale

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20
Q

What is the math for economies of scope?

A
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21
Q

What are two reasons to get economies of scope?

A

Leverage core competencies
Compete on capabilities

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22
Q

What are the three reasons economies of scale and scope occur?

A

Product-level economies
Plant-level economies
Firm-level economies

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23
Q

What are product-level economies of scale / scope?

A

Fixed costs setup
Specialization of inputs
Learning by doing
Cube square rule

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24
Q

What are plant-level economies of scale / scope?

A

inventories
meshing / indivisibilities

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25
Q

What are firm-level economies of scale / scope?

A

Multiple plant operations
Input procurement
Sales promotion

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26
Q

What is the cube square rule?

A

Output is proportional to volume of vessel
Costs are proportional to surface area of vessel

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27
Q

What are some sources of diseconomies of scale or scope?

A

Labour - lack of specialization
Spreading resources too thin
Bureaucracy

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28
Q

What are the 3 advantages of umbrella branding?

A

Transference
Brand recognition
New products easier to introduce

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29
Q

What are the 2 disadvantages of umbrella branding?

A

Transference
Dilution of brand

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30
Q

What is an indivisibility?

A

Certain inputs have a minimum level
= FC have economies of scale and scope

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31
Q

What are the levels of economies of scale and scope?

A

Product level
Plant level
Multi-plant level

32
Q

What are the 7 sources of economies of scale and scope?

A

Product-specific FC
Trade-offs among alternative production technologies
Cube-square rule
Purchasing
Advertising
Inventories
R & D

33
Q

Why diversify?

A

Slides:
- Increasing efficiency
- Economies of scale and scope
- Manager preferences to limit risk or increase social capital or - compensation
Class:
- Increased market = increased sales
- protection from market volatility
- Use excess capacity

34
Q

Why should we not diversify?

A

Slides:
- Influence costs
- Need elaborate control and reward systems
- Reduced functioning of internal capital markets
Class:
- Additional tools needed
- Dilution of expertise
- Dilution of brand
- Opportunity cost

35
Q

What do we consider when deciding to make vs buy?

A

Quality / process control
Cost
Reliability
Location
Patents

36
Q

Why might it be cheaper to buy?

A

supplier has economies of scale

37
Q

Why might it be cheaper to make?

A

supplier power is high

38
Q

Why might it be more reliable to make?

A

unreliable suppliers
concentrated supply market

39
Q

Why might it be just as reliable to buy?

A

Large number of backup suppliers

40
Q

Why might a patent mean we need to buy?

A

Supplier owns the patent

41
Q

Why might a patent mean we need to make?

A

We own the patent

42
Q

Why might we buy when looking at quality?

A

Specialized supplier with high quality

43
Q

Why might we make when looking at quality?

A

Process control

44
Q

What is the make-or-buy continuum?

A

Buy: market transactions
Buy: long-term contracts
strategic alliances and joint ventures
Subsidiaries
Make

45
Q

What are the benefits of buying?

A

Economies of scale
Market firms are more efficient and innovative

46
Q

What are the costs of buying?

A

Coordination of production flows
IP
Transaction costs

47
Q

What are the three reasons to buy?

A

IP for low-cost production held buy seller
Economies of scale of seller
Learning economies of seller

48
Q

What are the three efficiency and incentive concerns with regards to making?

A

Transfer pricing between divisions
Agency costs are internalized
Influence costs

49
Q

What are the two components of an effective contract?

A

Completeness
Body of contract law

50
Q

What is a complete contract?

A

Thorough:
- Responsibilities
- Rights

51
Q

What 3 things make a contract incomplete?

A
  • ambiguities
  • missing contingencies
  • incomplete explanation of rights and responsibilities
52
Q

What causes incomplete contracting?

A

Slides:
- Bounded rationality
- Difficulties specifying or measuring performance
- Asymmetric information
Class:
- Time

53
Q

What are some limitations of contract law?

A
  • broad language subject to interpretation
  • uncertainty due to ^^ increases transaction costs
54
Q

What are the reasons to make instead of buying?

A

Limitations of contracts
Coordination costs
Leakage of private information
Transaction costs
From class: flexibility

55
Q

What is the assignment problem?

A
  • issue with coordination
  • getting the right people to do the right jobs
  • easier to solve internally than with market
56
Q

What are the sources of transaction costs?

A
  • relationship-specific assets
  • holdup problem
  • quasi-rents
57
Q

What are the four forms of relationship-specific assets?

A

Dedicated assets
Specificity of:
- Site
- Physical asset
- Humans

58
Q

What is quasi-rent?

A

The excess economic profit (compared to alternative transactions)

59
Q

Why do quasi-rents occur?

A

Relationship-specific assets

60
Q

What can happen if there are quasi-rents?

A
  • Partners can be induced to build a relationship-specific asset by the potential for them
  • Other partners can exploit the quasi-rent through holdup. ***double check this with prof.
61
Q

What does quasi-rent show us?

A

The magnitude of the holdup problem

62
Q

What is the holdup problem?

A

One transactor takes advantage of another’s lack of comparably valued alternatives to insist on more favourable terms of trade.

63
Q

What usually leads to holdup problems?

A

Relationship-specific assets

64
Q

What is the principal-agent problem?

A
  • divergence in interests
  • Agent is acting simultaneously on the principal’s behalf and on their own behalf, which causes conflicts of interest.
65
Q

When do we get the principal-agent problem?

A
  • Objectives are different
  • actions or info of agent hard for principal to observe
66
Q

What are the main two ways of combatting the principal-agent problem?

A

Monitoring
Pay-for-performance

67
Q

What are the 3 limitations of monitoring?

A

Expensive
Imperfect
Extra layer in relationship

68
Q

What are the three things to consider when selecting performance measures?

A

Absolute vs Relative
Augment explicit incentive contracts with direct monitoring and subjective performance evaluations
Narrow vs broad measures

69
Q

What are the three things that make a good performance measure?

A
  • No random factors
  • doesn’t divert attention from important tasks
  • doesn’t motivate counterproductive actions
70
Q

What is a Certainty Equivalent?

A

the smallest amount the decision maker would be willing to accept in exchange for the risky payoff.

71
Q

What is a risk premium?

A

Risk premium = E-CE
(Expected - Certainty Equivalent)

72
Q

Is CE higher or lower when the variability is higher?

A

CE drops as variability increases

73
Q

What is risk sharing?

A

the cost of the consequence is distributed amongst parties

74
Q

Why should we pool risk?

A

Pooling and sharing can reduce the variability without decreasing the expected value.

75
Q

Does the CE increase or decrease when we pool risk?

A

Increases because we aren’t as scared.

AREC 684 (6 decks)

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