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# 18/08/13

## Feedback Final-exam quiz

You submitted this exam on Sun 18 Aug 2013 12:38 PM PDT (UTC -0700). You got a score of 20.75 out of 25.00. You can attempt again in 60 minutes.

Welcome to the final-exam quiz of Competitive Strategy! The questions in this exam are based on the material we have discussed in the past six weeks. Some questions are easy; others might be a bit more challenging. We highly encourage you to try to answer all of the questions. Please take care: You have two possible attempts for this final-exam quiz. We kindly ask you to wait for 60 minutes before retaking the quiz. If you retake the quiz, the questions will not stay exactly the same but be slightly or even substantially different. For each attempt, you have 90 minutes to answer all the questions. If you do not submit your answers after 90 minutes, the system will automatically lock the screen and the last saved answers will be submitted automatically. 90 minutes should be more than enough to answer all the questions. Nevertheless, please keep in mind the timing. We wish you good luck and great fun!

Question 1
A strategy in the game theoretic sense is Your Answer the description of the actions a player will undertake in any possible circumstance. the behaviour of a firm in a certain setting. the determination of basic long-term goals and objectives of a firm. Total Score 0.33 Explanation

0.33 0.33

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## Exam Feedback | Competitive Strategy

Question Explanation In game theory, a strategy describes the actions a player will undertake in any possible circumstance. Lets take the following game matrix as an example.

Here, the strategy of City Cuts is: - Set a low price if Tobys Hairstyle sets a high price (payoffs of 135 instead of payoffs of 130). - Set a high price if Tobys Hairstyle sets a low price (payoffs of 120 instead of payoffs of 115).

Question 2
A Nash Equilibrium usually contains dominated strategies. Your Answer True False Total 0.00 / 1.00 Score 0.00 Explanation

Question Explanation False. A strategy is dominated if, regardless of what the other player does, the strategy earns
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## Exam Feedback | Competitive Strategy

the player a smaller payoff than some other strategy. Hence, a strategy is dominated if it is always better to play some other strategy, regardless of what the opponent may do. A Nash Equilibrium is a set of strategies, one for the player and one for his/her opponent that represents the best responses to each other. As we have just seen a dominated strategy can never be the best response to the opponent's action.

Question 3
Applied research is more risky than basic research as a general rule. Your Answer True False Total 1.00 1.00 / 1.00 Score Explanation

Question Explanation False. It is often uncertain whether investments in basic research lead to a marketable product. Furthermore, basic research is harder to protect by patents, hence spillovers between firms are more likely to occur.

Question 4
Which of the following statements are true? Your Answer In repeated interactions between companies, cooperation is more likely if ceteris paribus the Score Explanation

0.00

False. In a situation with high interest rates, you get higher paybacks in the future for the money that you invest today. In other words, it is cheaper to replicate future payoffs with todays payoffs than to replicate todays payoffs with future payoffs. The players have to decide between high payoffs today and no payoffs in the future OR low payoffs today and low payoffs in the futures (given that the game goes on). In a situation with high interest rates, today's payoffs are weighted higher and hence the players are more tempted to deviate. Hence, the likelihood of cooperation is lower in a situation with high interest rates and
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## Exam Feedback | Competitive Strategy

interest rate is high. In a Prisoners Dilemma the players opt for the strategies that maximize joint payoffs. Playing a game repeatedly always avoids inefficient solutions. Total 0.67 / 1.00 0.33 0.33

## higher in a situation with low interest rates.

False. In a Prisoners Dilemma the players opt to deviate even though they could both achieve higher payoffs through cooperating.

False. Playing a game repeatedly can help avoiding inefficient solutions like Prisoners Dilemmas. Not every Prisoners Dilemma, however, can be resolved through being played repeatedly. Imagine a Prisoners Dilemma that is repeated three times. It is clear to all players that the game ends for sure after these three rounds. We can solve this game by backward induction. It is best for all players to deviate in all stages / repetitions.

Question 5
Pizza Hut and Dominos Pizza bot sell pizzas at the city centre in Munich. Some consumers only like Pizza Hut, others prefer Dominos Pizza. Most of the consumers make their choice dependent on prices. Each pizza stall can charge low, medium or high prices. The responding payoffs are illustrated in the payoff matrix below.

Which prices will the pizza stalls set, assuming that they are rational and profit maximizing?

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## Exam Feedback | Competitive Strategy

Your Answer Pizza Hut - High Price / Domino's Pizza - High Price Pizza Hut - High Price / Dominos Pizza - Medium Price Pizza Hut - High Price / Domino's Pizza - Low Price Pizza Hut - Medium Price / Domino's Pizza - High Price Pizza Hut - Medium Price / Domino's Pizza - Medium Price Pizza Hut - Medium Price / Domino's Pizza - Low Price Pizza Hut - Low Price / Domino's Pizza - High Price Pizza Hut - Low Price / Domino's Pizza - Medium Price Pizza Hut - Low Price / Domino's Pizza - Low Price Total

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Question Explanation We can solve this game through the elimination of dominated strategies. A) Dominos Pizza High Price is a dominated strategy. - If Pizza Hut charges a high price, it is best for Dominos Pizza to charge a medium price
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## Exam Feedback | Competitive Strategy

- If Pizza Hut charges a medium price, it is best for Dominos Pizza to charge a medium price - If Pizza Hut charges a low price, it is best for Dominos Pizza to charge a low price Hence, it is never optimal for Dominos Pizza to charge a high price. B) Pizza Hut Low Price is a dominated strategy. - If Dominos Pizza charges a high price, it is best for Pizza Hut to charge a high price - If Dominos Pizza charges a medium price, it is best for Pizza Hut to charge a medium price - If Dominos Pizza charges a low price, it is best for Pizza Hut to charge a medium price Hence, it is never optimal for Pizza Hut to charge a low price. C) We are now left with Dominos Pizza charging a medium or a low price and Pizza Hut charging a high or medium price. Here, we can find dominant strategies. D) Pizza Hut Medium Price is a dominant strategy - If Dominos Pizza charges a medium price, it is best for Pizza Hut to charge a medium price - If Dominos Pizza charges a low price, it is best for Pizza Hut to charge a medium price E) Dominos Pizza Medium Price is a dominant strategy - If Pizza Hut charges a high price, it is best for Dominos Pizza to charge a medium price - If Pizza Hut charges a medium price, it is best for Dominos Pizza to charge a medium price F) Hence, the pizza stalls will both charge medium prices.

Question 6
Apple (A) and Blackberry (B) compete in the market for smartphones. Both firms have to decide whether they want to engage in R&D for a new type of device with a 3D enabled haptic touchscreen. Because A is relatively more efficient in R&D, fixed costs for this R&D project are \$10mn for A and \$15mn for B. Both firms are equally likely to come up with a marketable innovation (probability p). Expected profits from the new technology are \$15mn if one firm manages to be alone in the market and \$5mn each if both firms come up with a product.

What is the expected payoff for A if both firms engage in R&D? Your Answer p(1-p)15+5p-10 15p-10p-10 Score 0.25 0.00 Explanation

p(1-p)10+5p-15 15p-10

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## Exam Feedback | Competitive Strategy

Total

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Question Explanation We need to distinguish the three possible scenarios and subtract fixed cost. Scenario 1: A is successful, B is not successful -> p * (1-p) * \$15mn Scenario 2: A and B are successful -> p * p * \$5mn Scenario 3: A is unsuccessfu -> (1-p) * \$0 p (1-p) * \$15mn + p * p * \$5mn + (1-p) * \$0 - \$10mn = p(1-p)15 + 5p - 10 (Solution d) = 15p - 15p + 5p - 10 = 15p - 10p - 10 (Solution c) Solution b is just another way of writing the same expression as in solution d.

Question 7
An incumbent firm may prevent entry of a competitor by Your Answer raising prices. Score 0.33 Explanation Raising prices won't keep an entrant out of the market. decreasing the cost of imitation. changing the entrants expectations about postentry competition. Total 1.00 / 1.00 0.33 0.33 If it is cheaper/ easier to imitate the products, this favours the entry of additional companies. An example of how the incumbent can change the entrants expectations about post-entry competition is to invest in excess capacity.

Question 8
Imagine Coca Cola and Pepsi produce soft drinks of equal taste and quality. They are the only suppliers of soft drinks to the Olympic Games. They have a stall next to each other where they sell their soft drinks in cans that are specially designed for the event. The Olympic Games last
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## Exam Feedback | Competitive Strategy

for one week and both companies have to decide once and at the same time how many cans they want to sell.

In competition Coca Cola and Pepsi make each profits of 180k. Instead of competing against each other Coca Cola and Pepsi could also cooperate and set monopoly quantities as if they would be an integrated monopolist. If both companies cooperate and set monopoly quantities they equally share the monopoly profits. A monopolist would achieve profits of 855 k. If one company is cooperative and the other one deviates, the cooperating company will achieve profits of 160 k whereas the deviating company will get profits of 530k.

What will be the outcome of the game? Your Answer Coca Cola will cooperate / Pepsi will cooperate Coca Cola will cooperate / Pepsi will deviate Coca Cola will deviate / Pepsi will cooperate Coca Cola will deviate / Pepsi will deviate Total 1.00 1.00 / 1.00 Score Explanation

Question Explanation With the information provided, we can draw the payoff matrix to the game.

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## Exam Feedback | Competitive Strategy

We can now use this payoff matrix to identify the Nash Equilibrium. a) Lets analyse Coca Colas optimal strategy If Pepsi cooperates, it is best for Coca Cola to deviate (payoffs of 530k instead of payoffs of 427.4k) If Pepsi deviates, it is best for Coca Cola to deviate (payoffs of 180k instead of payoffs of 160k) b) Lets analyse Pepsis optimal strategy If Coca Cola cooperates, it is best for Pepsi to deviate (payoffs of 530k instead of payoffs of 427.4k) If Coca Cola deviates, it is best for Pepsi to deviate (payoffs of 180k instead of payoffs of 160k) The Nash Equilibrium in this game is that Coca Cola and Pepsi both deviate and receive payoffs of 180. This is a classical Prisoners Dilemma. Both could achieve higher payoffs if they would cooperate.

Question 9
Imagine now that there is really bad weather in the first week. The organizing committee decides to prolong the Olympic Games. Nobody really knows at any point how many weeks the Olympic Games will last. It totally depends on the weather conditions.

Coca Cola and Pepsi have to decide once at the beginning of each week at the same time how many cans they want to sell in the following week. The storage space on site is limited, so that
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## Exam Feedback | Competitive Strategy

they have to sell all the produced cans in the respective week.

Can this change the outcome of the game described in Question 8? Your Answer Yes No Total 1.00 / 1.00 Score 1.00 Explanation

Question Explanation Yes! Here, we have a repeated game where there is no clear endpoint. This is technically the same as a repeated game with infinite repetition. In such a situation, it is possible that the players achieve cooperation. Certain factors influence the likelihood that cooperation can be achieved. These include the probability that the Olympic Games last for another round, the relative importance of future payoffs / the interest rate, etc.

Question 10
Lets get back to the one period competition case (question 8). Imagine now that the stalls of Coca Cola and Pepsi are not located next to each other but at opposite ends of the Olympic Games site.

Does this change the companies profits compared to the situation in question 8? Your Answer No Yes, the profits of both companies decrease. Yes, the profits of both companies increase. Yes, while the profits of Coca Cola decrease and the profits of Pepsi increase. Total 1.00 / 1.00
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## Exam Feedback | Competitive Strategy

Question Explanation Coca Cola and Pepsi are no longer homogeneous products but horizontally differentiated by the different locations. This lowers competition: Consumers that are located close to one stall will hardly ever buy from the other stall. Regarding these consumers, the stalls can behave as monopolists. Hence they will each set a quantity that is closer to the monopoly optimum than previously. This yields higher profits for both stalls.

Question 11
Niche entry is an effective entry strategy if Your Answer products are sufficiently differentiated. the entrant has a short-run perspective. incumbent and entrant are comparably large firms. Total 0.33 / 1.00 0.33 0.00 Score 0.00 Explanation Almost by definition, niche markets offer different products (either vertically or horizontally differentiated) compared to mainstream markets. It does not make sense that a company enters a market just for the short run. A large entrant won't be satisfied with focusing on a niche of the market but would rather want to take over larger shares of the market.

Question 12
Which of the following statements are false? Your Answer Firms can use process innovation to stimulate demand. Score 0.00 Explanation This stamenet is false. Process innovation reduces production cost, while product innovation may stimulate demand.

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## Exam Feedback | Competitive Strategy

Only under threat of entry, a monopolist may invest in innovation. The value of innovation can be calculated by comparing profits with and without innovation. A monopolists has always higher incentives to innovate than firms in a competitive environment. Total

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## This stamenet is true.

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This stamenet is false. Because of the replacement effect, a monopolist (that does not face the threat of an entrant) has lower incentives to innovate than firms in a competitive environment that have lower (zero) profit margins.

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Question 13
Two products A and B are complements if Your Answer the demand for B increases when the price of A drops. the demand for A decreases when the price of B drops. B increases the users utility from A. A decreases the users utility from B. Total Score 0.25 0.00 Explanation

## 0.00 0.25 0.50 / 1.00

Question Explanation By definition, products A and B are complements if the utility from consuming A and B together is higher than the utility from consuming them separately. Put it differently, if you use B already and now additionally consume A, you derive a higher utility from B than just its standalone utility. .
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## Exam Feedback | Competitive Strategy

Complementary products are dependent on each other in terms of demand. A price drop for product A most likely leads to higher demand for this product. Since there is more demand for product A, there is also higher demand for the complementary product B. Example: Imagine MP3 players and earphones. If MP3 players become cheaper, more people will buy them. To make use of an MP3 player you need earphones. Hence, all the people that buy additional MP3 players will also buy earphones.

Question 14
Imagine you are head of Sony Entertainment and responsible for the PlayStation game console. You have the chance to buy Arts Electronic, a company that sells a sports game for your console.

Should you agree to this acquisition? Your Answer Yes. You could now sell your console exclusively in a package with the sports game. Assuming that there is high competition for video consoles and video games, this increases the sales for the sports game and hence maximizes the overall profits of the combined company. Score 0.50 Explanation The game console and the sports game are complements. One way of internalizing the positive externalities of two complementary products is to produce the two products under one roof and implement a bundling strategy. This way, the firm sells the two products combined as a package. This strategy only works if there is low competition / low demand elasticity for one of the products. Otherwise, the consumers wouldnt buy the package but opt for an alternative product that is sold separately / not in a package. Yes. You could now decrease the price for your game console and sell more devices which raises demand for the sports game. This cross-subsidizing strategy may maximize the overall profits of the combined company. 0.50 The game console and the sports game are complements. One way of internalizing the positive externalities of two complementary products is to produce the two products under one roof and implement a cross-subsidizing strategy. This way, the firm sells one product at small margins (even loss) to increase sales of the other product with high margins.

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## Exam Feedback | Competitive Strategy

1.00

Question 15
Which of the following statements are false? Your Answer Using pre-emption, incumbents can prevent a niche entry. Predatory pricing only works in markets with horizontal product differentiation. Limit pricing only works in the presence of incomplete information. Total 1.00 / 1.00 0.33 0.33 Predatory pricing is about lowering prices, and therefore independent on the types of products on the market. Score 0.33 Explanation

Question 16
Imagine McDonalds and Burger King operate fast food restaurants in New York City. The restaurants are located close to each other and are in fierce competition.

To decrease competition and improve profitability Your Answer Burger King could focus on offering beef burgers whereas McDonalds only sells chicken burgers. This is called Score 0.33 Explanation Splitting the market and offering tailored products can reduce price competition substantially. If Burger King sells beef burgers and McDonalds sells chicken burgers this is horizontal differentiation. It is reasonable to assume that there is no clear ranking between beef and chicken but some consumer prefer
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## Exam Feedback | Competitive Strategy

horizontal differentiation. Burger King could sell premium burgers from organic sources whereas McDonalds offers ordinary burgers of standard quality. This is called vertical differentiation. Burger King and McDonalds could reduce the density of their restaurants. This is called vertical differentiation. Total 1.00 / 1.00 0.33 0.33

chicken whereas others prefer beef. The products are horizontally differentiated. Splitting the market and offering tailored products can reduce price competition substantially. If Burger King sells premium burgers from organic sources and McDonalds sells ordinary burgers of standard quality this is vertical differentiation. It is reasonable to assume that every consumer (keeping prices aside) would prefer premium burgers from organic sources over ordinary burgers of standard quality. The products are vertically differentiated. Reducing the density of the restaurants might have an impact on competition, but is not related to the concept of horizontal / vertical differentiation.

Question 17
Firms use patents to decrease competition, especially with sleeping patents. Your Answer True False Total 1.00 / 1.00 Score 1.00 Explanation

Question Explanation True. Patents lend (temporary) monopoly rights to innovating companies. Even though sleeping patents are not used to protect inventions that are meant to be commercialized, they can help firms to secure a monopoly position by hindering other firms to invent around.

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## Exam Feedback | Competitive Strategy

Question 18
Imagine Sony and Philips are working on a new optical disc storage medium designed to supersede the DVD and the Blu-Ray Disc. Each company develops its own technical standard. The companys payoffs from the new product depend on which technical standard succeeds in the end. They are illustrated in the following payoff matrix.

Sony has now the chance to speed up the construction of its production plant so that it will be ready earlier than Philips construction plant.

What will be the outcome of the game? Your Answer Score Explanation

Sony receives payoffs of 2mn / Philips receives payoffs of 4mn Sony receives payoffs of 4mn / Philips receives payoffs of 2mn Sony receives payoffs of 1mn / Philips receives payoffs of 1mn Total
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1.00

Question Explanation With speeding up the construction process, Sony can be the first on the market and commit to its technical standard. This changes the game from a simultaneous game to a sequential game. The respective payoffs are illustrated in the following game tree.

If Sony commits to its own standard (Standard S), Philips will also choose to use the Sony standard (payoffs of 2mn instead of payoffs of 1mn). This yield Sony payoffs of 4mn. It makes sense for Sony to commit to its standard. - If Sony moves first but commits to the standard of Philips, Philips will also commit to its own standard. This yields profits of 4mn for Philips and 2mn for Sony. - If Sony does not move first and decides simultaneously with Philips, there will be a coordination problem (two Nash Equilibria).

Question 19

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The Bertrand model describes the supply side competition in an industry and does not take costs for input goods into consideration. These would be influenced by the bargaining
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## Exam Feedback | Competitive Strategy

power of the suppliers. Infinite price elasticity 0.25 One assumption of the Bertrand Paradox is that consumers are infinitely price elastic. This means that all consumers just care about prices and switch to the firm that charges the lowest price. This makes it very attractive for firms to charge prices that are just a bit lower than the ones of their competitors, because they will get all consumers. In reality, consumers experience some costs associated with switching to another seller. Imagine a consumer takes part in a loyalty programme of the initial seller. When switching to another seller who charges lower prices, the consumer has to give up all the privileges related to the initial seller. Maybe it may not be worth for the consumer to switch even if the other seller charges a much lower price. In this context, switching costs such as loyalty programmes lower competition and enable firms to achieve positive profits. Identical products 0.25 One assumption of the Bertrand Paradox is that the firms products are identical. Hence, the consumers just buy from the company with the lowest prices. This leads to fierce price competition since every firm has an interest to undercut the others and serve the whole market. The firms end up charging prices equal to costs. In reality, consumers have different tastes and products are differentiated. This substantially weakens competition so that the firms are able to achieve positive profits. Imperfect market transparency 0.25 One assumption of the Bertrand Paradox is that the market is perfectly transparent, e.g. the consumers always know the prices of all firms. As soon as one firm lowers its price, all consumers will know this instantly and buy from this firm only. This strengthens price competition. In reality, markets are often imperfectly transparent and not all consumers can observe the prices of all firms. Hence, undercutting prices has only a marginal effect on some consumers. This weakens competition since firms are less eager on lowering prices. This subsequently enables firms to achieve positive profits.

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Question 20
Imagine Telecom Argentina is the monopolist for landline phone calls in Argentina. Every day, 100,000 minutes of landline phone calls are sold within Argentina. Telecom Argentina charges 5 Pesos per minute. Now a small company called Telefonica Buenos Aires enters the market. Telefonica Buenos Aires charges 3 Pesos per minute and limits its network to the Buenos Aires metropolitan area where 25% of Argentina's overall landline phone call minutes are sold. Telefonica Buenos Aires can convince Telecom Argentina that it will not extend its network further.

Assume that the phone call services of Telefonica Buenos Aires and Telecom Argentina have the same quality. All consumers will switch to the supplier with the lower prices. There are no switching costs. The companies cannot charge different prices for different regions.

Will Telecom Argentina attack Telefonica Buenos Aires? Your Answer Yes No Total 1.00 1.00 / 1.00 Score Explanation

Question Explanation After the market entry of Telefonica Buenos Aires, the company will take over all the Buenos Aires metropolitan area which is 25,000 mintues per day (25% of 100,000 = 25,000). This is because Telefonica Buenos Aires charges a lower price than Telecom Argentina (3 Pesos instead of 5 Pesos). Under these circumstances, Telecom Argentina has two options: a) Telecom Argentina can attack Telefonica Buenos Aires and set a price for its phone services that is marginally below 3 Pesos. This way, Telecom Argentina would win back all 100,000 minutes per day but lose 2 Pesos per minute (5 Pesos - 3 Pesos). The overall loss would be 100,000 * 2 Pesos = 200,000 Pesos. b) Alternatively, Telecom Argentina could accommodate the entry and leave the 25,000 mintues to Telefonica Buenos Aires. In this case, the overall loss would be 25,000 * 5 Pesos = 125,000 Pesos. Since the losses form accommodating Telefonica Buenos Aires's market entry (125,000 Pesos) are lower than the losses from attacking Telefonica Buenos Aires (200,000 Pesos), Telecom Argentina will accommodate the market entry of Telefonica Buenos Aires.
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## Exam Feedback | Competitive Strategy

Question 21
Which of the following statements are true? Your Answer The patent office explicitly invites firms to present sleeping patents because they usually provide welfare to consumers. Product innovation comes at a fixed cost but usually decreases marginal cost. 0.25 Score 0.00 Explanation Sleeping patents are per definition those patents which are never implemented. Hence, they do not provide any value to consumers. Product innovations are about improving / inventing new products but are less cost related. Process innovations are usually related to lowering costs. 0.25 If the risk of entry is high enough, a monopolist will invest in innovation; otherwise the value of innovation is higher in a competitive market, because a monopolist would face the replacement effect. In special situations monopolists can have high incentives to invest in R&D. 0.25 If the risk of entry is high enough, a monopolist will invest in innovation; otherwise the value of innovation is higher in a competitive market, because a monopolist would face the replacement effect. Total 0.75 / 1.00

The value of innovation can be higher for firms in a competitive market than for a monopolist.

Question 22
Empirical research can show that predatory pricing is always more effective than preemption. Your Answer True
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False Total

## 1.00 1.00 / 1.00

Question Explanation False. The fact that we dont observe entry could mean that an incumbent was successful in deterring, but it could also mean that there was no attempt at entry. It is impossible to observe a counterfactual situation.

Question 23
Imagine you are the CEO of Breitling. Your company and Rolex are the leading manufacturers of luxury watches. A UK based film production studio plans a new James Bond action movie and approaches you with a product placement offer: If you pay 4mn, James Bond will wear a Breitling watch in the movie. The production studio makes clear that they will make the same offer to Rolex if you dont accept the deal.

You receive the following information from your market research department: If you accept the deal, you can achieve additional revenues of 3mn. Rolexs revenues decrease by 1mn. If Rolex accepts the deal and is unlucky (probability = 50%), Rolex can achieve additional revenues of 4mn. Your revenues decrease by 1mn. If Rolex accepts the deal and is lucky (probability = 50%), Rolex can achieve additional revenues of 6mn. Your revenues decrease by 3mn. If neither Rolex nor you accept the deal, there is no change in revenues.

Should you accept the deal? Your Answer Yes No Total 1.00 / 1.00 Score 1.00 Explanation

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## Exam Feedback | Competitive Strategy

Question Explanation We can solve this sequential game by backward induction. a) Lets have a look at what happens when Breitling does not accept the deal. Then Rolex can decide about whether to accept the deal or not. If Rolex accepts the deal, they can be lucky or unlucky. - If Rolex is lucky (probability = 50%), they make additional revenues of 6mn and pay 4mn for the product placement, so their payoffs from the deal are 2mn. - If Rolex is unlucky (probability = 50%), they make additional revenues of 4mn and pay 4mn for the product placement, so their payoffs from the deal are 0. Rolexs expected payoffs from the deal are 0.5 * 2mn + 0.5 * 0 = 1mn. If Rolex does not accept the deal, their payoffs will be 0. Knowing this, Breitling should anticipate that Rolex will accept the deal (expected payoffs of 1mn instead of payoffs of 0). b) Breitling now knows that Rolex will accept the deal if they get the offer. In this case, the payoffs for Breitling will be 0.5 * (- 3mn) + 0.5 * (- 1mn) = (- 2mn). Hence, Breitling knows that if they do not accept the deal, they will lose 2mn. If Breitling accepts the deal, they will make additional revenues of 3mn and have to pay 4mn for the product placement. Hence, if Rolex accepts the deal, the will lose 1mn. Taking this into account, Rolex should accept the deal to minimize the losses.

Question 24
The existence of substitutes makes a market less attractive, because Your Answer the crossprice elasticity of substitutes is negative. there are more firms in
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## Exam Feedback | Competitive Strategy

the market. it affects the elasticity of demand of the focal product. 1.00 If there is a substitute product in the market, consumers will may think of choosing this substitute product if the focal product's price increases. Hence, the consumers are no longer willing to accept as high price increases as without the existence of the substitute product. This is reflected in a change in the price elasticity of demand of the focal product. Since consumers are now more price sensitive in the market of the focal product, this market gets less attractive. Total 1.00 / 1.00

Question 25
Which of the following statements are true? Your Answer Cooperation between competitors in a market is more likely to be stable if ceteris paribus there are many competitors. Games with infinite repetitions can be solved via backwards induction. 0.12 Score 0.12 Explanation False. If there are many companies in the market and they cooperate (charge the monopoly price), each company gets only a small share of the monopoly profit. This is relatively unattractive compared to the payoffs from deviating. Hence, cooperation is less likely. False. Games with infinite repetitions can never be solved via backward because there is no clear end point to the game. The solve a game via backward induction, you need a clear end point. This is the case in games with finite repetitions. True. If it does not change the entrants expectations and does not keep him out of the market, there is no need to engage in entry deterrence from the incumbents point of view.

A monopolist in a market will consider deterring entry if this strategy changes the entrant's expectations about the nature of post-entry competition. A self-binding

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## False. A self-binding commitment is about convincing

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18/08/13

## commitment changes a game from a simultaneous game to a sequential game.

potential partners that one is committed to act cooperatively. This is not about changing the game form a simultaneous game to a sequential game. The idea of aggressive commitment is to eliminate those moves which lead to unattractive equilibria. This incorporates changing the game for a simultaneous game to a sequential game.

In repeated interactions between companies, cooperation is more likely if ceteris paribus future payments are more important. Playing a commitment strategy always keeps a potential entrant out of the market.

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True. If players cooperate, they receive relatively low payoffs today and in all future periods (given that the game goes on). If the players deviate, they receive high payoffs today but zero payoffs in the future. If future payoffs are important, there is a higher likelihood of cooperation.

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False. If the commitment is not credible / not costly enough, this has no influence on the decision of the entrant.

Strategic entry barriers arise from the nature of the industry and / or from the position of the incumbent within the industry. If two horizontally differentiated products have the same price, all consumers will prefer the same product. Total

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False. Structural entry barriers arise from the nature of the industry and / or from the position of the incumbent within the industry. Strategic entry barriers are the outcome of an intended aggressive action of the incumbent to keep the entrant out of the market.

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False. This holds for vertically differentiated products but not for products that are horizontally differentiated. In the latter case, some consumers prefer product A whereas other prefer product B.

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