WEEK 9 - Competitive Advantage and Principle Agent Problem Flashcards
Why is it difficult for a firm to maintain a competitive advantage?
- Rivals can imitate the formula for success
- Rivals can use new tech, products and business practises to erode comp adv of industry leaders
How have companies like Coca cola and Dell been able to maintain their advantage?
Using strategies like patents, trademarks and industrial secrets
What play a large role in maintaining comp advantage?
Market structure
In a perfectly competitive market does competitive advantage exist?
No, not while firms are price takers
In imperfect competition, does competitive advantage exist?
- Firms sell horizontally differentiated products to consumers who differ in their tastes.
- Each seller faces a downward sloping demand curve due to product differentiation
- Sellers get to set the price above marginal cost but there is no guarantee of economic profits.
- Entrants can slightly differentiate their products from the incumbents’ and create their own niche.
What does the resource based theory of the firm explain?
Explains sustained comp advantage in terms of heterogeneity in resources and capabilities
What do resources and capabilities have to be to maintain comp advantage?
- Scarce
- Imperfectly Mobile
- Unavailable in the open market
What are Isolating Mechanisms?
They limit the rivals from eroding firm’s competitive advantage
What are the two distinct types of isolating mechanisms?
- Impediments to imitation
- Early mover advantage
What exactly are impediments to innovation?
These mechanisms impede the potential entrants from duplicating the resources and capabilities of the incumbent firm
What are the 4 types of impediment?
- Legal Restriction
(Patents, Copyrights, Govt regulation like Licensing) - Superior access to inputs/customers
- Market size and scale economies
(Scale based barriers may come down if market experiences growth and entry becomes profitable) - Intangible Barriers
(Barriers to imitation, intangible if firm’s advantage lies in distinctive organisational capabilities)
Why is Innovation so important?
Increasing importance of intangible assets (Human knowledge/IP)
- Knowledge may also be created collectively (Open Source software
- Innovation = Source of econ growth
How does market structure affect incentives for R&D?
• Nature of technical progress: R&D investment
determines (instantaneously and for sure) the
size of the innovation; only a single firm ends up
using the innovation.
How is the incentives for R&D measured?
-Measured by the profit increase gained from the
innovation
How can innovation influence market structure?
• Races to be the first to innovate
• Nature of technical progress: ‘tournament
technical progress’; timing of innovation is
uncertain and depends on the R&D investments
of all firms; size of the innovation is fixed.
How do firms use R&D strategically?
Nature of technical progress: like 1st issue + size of innovation depends on the intensity of the firm’s
R&D investment (and potentially on the other
firms’ investments as well); firms have simultaneous opportunities to achieve competing innovations.
What are the two types of innovative environments?
- Ideas are scarce
- No substitute idea addresses the same econ need - Ideas are common knowledge
- Any good idea is likely to be had and implemented by someone else
What is Product Innovation?
Introduces new products or changes outward character of an old one
What is Process Innovation?
Reduces the cost of turning out an existing product