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AREC 684 > Topics 4-7 > Flashcards

Topics 4-7 Flashcards

Problem Set 2

1
Q

According to class slides, what are the two types of Broad Strategic Positions?

A

Cost advantage
Benefits advantage

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2
Q

According to Gray, what are the three strategic position options?

A

Product and Process Innovation
Operational Excellence / Cost Leadership
Customer Intimacy

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3
Q

What is cost advantage and to which type of good does it apply?

A

Can produce the good or service at a lower cost than competitors
Often applies to search goods

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4
Q

What is benefits advantage and to which type of good does it apply?

A

Can produce a better quality product, thereby increasing the price
Often applies to experience goods

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5
Q

According to class slides, what is the one narrow type of strategic position?

A

Focus strategy

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6
Q

What are the two subgroups of cost leadership strategy?

A

Benefits parity
Benefits proximity

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7
Q

What are the two subgroups of benefits leadership strategy?

A

Cost parity
Cost proximity

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8
Q

What is a value map?

A

Price and cost on the Y axis, quality on the x axis.

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9
Q

Is this value map for cost leadership or benefits leadership?

A

Cost leadership

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10
Q

Is this value map for cost leadership or benefits leadership?

A

Benefits leadership

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11
Q

How can a firm capture the market with an undifferentiated strategy?

A

Either cost or benefits leadership.

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12
Q

What is horizontal differentiation?

A

Differentiation that is not based on price or quality. Generally has price and quality parity.

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13
Q

What is vertical differentiation?

A

Differentiation that is based on both quality and price.

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14
Q

What is a competitive advantage with respect to B/C?

A

The firm with the greatest (Benefits - Costs) wins.

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15
Q

Which two things must a firm do to achieve competitive advantage?

A
  • Creating and delivering greater economic value.
  • Capturing a portion of that value in profits.
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16
Q

What does economic profitability depend on?

A

Market economics
Value created relative to competitors

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17
Q

What dictates value created relative to competitors?

A

Benefits
Cost

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18
Q

When does cost leadership make sense?

A

Consumers are price-sensitive
Search good

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19
Q

When does benefits leadership make sense?

A

Price premiums are possible
Experience good

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20
Q

What are the three types of focus strategies?

A

Customer specialization
Product specialization
Geographic specialization

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21
Q

What is the short version of the value creation equation?

A

WTP - C = B - C
where:
WTP = Willingness to Pay
B = Benefits
C = Cost

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22
Q

What is the Consumer Surplus equation?

A

CS = WTP - P
where
WTP = Willingness To Pay
P = Price
CS = Consumer Surplus

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23
Q

What is the long version of the value creation equation?

A

Value created = CS + Profit = (B-P)+(P-C) = B-C

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24
Q

What are the four horizontal parts of the value chain on the arrow diagram?

A

Infrastructure
Human Resources
Technology
Procurement

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25
Q

What are the five vertical sections of the value chain arrow?

A

Inbound logistics
Production/ops
Outbound
Marketing/Sales
Service

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26
Q

What are the four sources of competitive advantage sustainability stemming from customers?

A
  • Taste-based loyalty
  • Uninformed consumers
  • Switching costs
  • Network effects
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27
Q

What are the three sources of sustainability of competitive advantage stemming from firm factors?

A
  • Learning
  • Economies of scale
  • Intellectual property rights
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28
Q

What are the three types of network effects?

A
  • Direct
  • Indirect
  • Cross-side
29
Q

What are direct network effects?

A

Product works better because more users.

30
Q

What are indirect network effects?

A

Use of complimentary goods.

31
Q

What are cross-side network effects?

A

Serving two interacting groups (i.e. Etsy: shoppers and merchants)

32
Q

What are the top three threats to sustainability of competitive advantage?

A

Market structure
Government intervention
Systemic challenges

33
Q

What is game theory?

A

Using math to predict decisions of rival firms

34
Q

What are the three main elements of a strategic game?

A

Players
Strategies
Payoffs

35
Q

What is the Nash Equilibrium?

A

Each strategy is a best reply to the other. No player can improve their situation by taking a different strategy based on the actions of the other players.

36
Q

What is a dominant strategy

A

Best response no matter what the other player does

37
Q

What is a pure strategy

A

A strategic decision made with 100% certainty.

38
Q

What is a mixed strategy?

A

Probability of using a variety of strategies.

39
Q

What is the prisoner’s dilemma?

A

Dominant strategies lead to a Nash Equilibrium that is not the most efficient outcome.

40
Q

What does an oval or dotted line mean on a tree diagram?

A

The choices are made simultaneously.

41
Q

What is a subgame?

A

part of the extensive form beginning with a decision point & including everything below

42
Q

What is a PROPER subgame?

A

A subgame that isn’t connected to another oval and everything below that.

43
Q

Reminder

A

Make sure you can do the two proofs he asked

44
Q

What is the difference between SPNE and NE?

A

SPNE is the NE of a subgame.

45
Q

What are the three hallmarks of a competitor? (what, not how to identify)

A

Their strategic choices affect your outcomes.
Compete to control market share.
Constrain each other’s ability to raise price.

46
Q

What is a market?

A

The interaction of firms and consumers.

47
Q

How can we tell for sure if a product is a substitute?

A

Cross-price elasticity.

48
Q

Is the industry or the position more important?

A

Trick question: BOTH are important.

49
Q

What are the two broad things we look at to define the relevant market?

A

Industry
Geography

50
Q

What is SSNIP?

A

What is the smallest relevant market within which a monopolist could sustain a Small but Significant Non-transitory Increase in Price (5%-10%, >1yr)

51
Q

Which 3 things makes two products close substitutes?

A
  • performance
  • occasion for use
  • geographic area
52
Q

What are five ways we empirically identify competitors?

A
  • Cross-price elasticity
  • Pattern of price changes over time
  • Standard Industrial Classification (SIC) or North American Industry Classification System (NAICS)
  • SSNIP test
  • Flow-limiting geographic demarcations (borders)
53
Q

What is the equation for cross-price elasticity?

A
54
Q

Is x-P elasticity positive or negative for substitutes?

A

Positive for substitutes; normal n is negative, so for a substitute it has to be positive.

55
Q

What is the main goal of competitor analysis?

A

To understand their strategies so that we can outcompete them.

56
Q

What is the range of market structures?

A
57
Q

What is the n-firm concentration ratio?

A

The combined market share of the N largest firms in the market:
(company sales/total market sales) *100%

58
Q

How do we calculate the Herfindahl Index?

A

sum of squared market shares

59
Q

What is the CR4?

A

Concentration ratio of the top 4 (n) firms. CR=S1+S2+S3+S4

60
Q

What is the CR4 or 8 in perfect competition?

A

0%

61
Q

What is the CR in a monopoly?

A

~100%

62
Q

What is the CR in an oligopoly?

A

~50%< CR <~100%

63
Q

What is a Herfindahl Index in perfect competition?

A

<0.2 (same as monopolistic competition)

64
Q

What is the Herfindahl Index in Monopolistic competition?

A

<0.2 (same as perfect competition)

65
Q

What is the Herfindahl Index in an oligopoly?

A

0.2 to 0.6

66
Q

What is the Herfindahl Index in a monopoly?

A

> 0.6

67
Q

What are the 4 characteristics of perfect competition?

A
  • Many buyers and sellers
  • Homogenous good
  • No barriers to entry/exit
  • Buyers and sellers are price takers (Individual firms face infinitely elastic demand)
68
Q

How do we prove:
MR = P(1-(1/n))

A
  • MR=dTR/dQ
    =P(dQ/dQ)+Q(dP/dQ)
  • P/P=1
  • separate P
  • 1/n = Q/P*dP/dQ
  • n = P/Q*dQ/dP
  • n is NEGATIVE (don’t forget the minus sign)
69
Q

How do we prove that PCM = 1/n?

A

PCM= (P-MC)/P
MR=MC
MR=d(P* Q)/dQ
MR=P(dQ/dQ)+Q(dP/dQ)
1/n=-Q/P* dP/dQ
n=P/Q* dQ/dP
- n is negative (don’t forget the minus sign)

AREC 684 (6 decks)

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