Competitive Strategy Flashcards - Quizlet PDF

11/2/2018 Competitive Strategy Flashcards | Quizlet
Competitive Strategy 92 terms marielle010
Terms in this set (92)

Assume the current -2 cents
price of electricity is 10
cents per kwH and the
current price of one
unit of aluminum is 8
cents. What is the
economic profit on
each unit of aluminum?
Assume the current If you were to make aluminum, the accounting profit would
price of electricity is 10 be 3 cents. However, from an economic perspective, you'd
cents per kwH and the be better off buying electricity at 5 cents and selling it at
current price of one the current market price of 10 cents, giving you a profit of
unit of aluminum is 8 5 cents. Your ECONOMIC profit from continuing to make
cents. Now, suppose aluminum remains at -2 cents, because it is calculated as
last year, the plant the following: -5 cents of electricity + 8 cents of aluminum
bought futures of -5 cents opportunity cost from NOT seling the electricity =
electricity at 5 cents per -2 cents
kWh. What is the profit
if you were to produce
aluminum? What is your
best option overall?
Name Porter's five Bargaining power of suppliers, competition of firms

forces. already in the industry, substitutes and complements,
https://quizlet.com/8556134/competitive-strategy-flash-cards/ 1/23
potential entrants, and leverage of buyers
Provide the equation E = -dD/dP * (P/D) or % change in D divided by % change

for the elasticity of in P. Alternatively, mark-up (or (P-MC)/P) = 1 / elasticity
demand.
There is a road with 2 1) Product differentiation - use advertising/branding,

gas stations. The gas literally separate the road, increase switching costs
stations have the same 2) Capacity constraints - say 100 cars go through the road,
marginal cost, same but we can only serve 70
product and set their 3) Dynamics and collusion
prices simultaneously.
In this case, profits = 0.
Describe three ways
you can change the
model to generate
profit.
Define minimum The smallest output a plant (or firm) can produce such that
efficient scale. its long-run average costs are minimized.
Define economies of The cost of producing more goods decreases as a firm

scale. produces more. If the cost never increases, the firm is a
natural monopoly; however, in many cases the price
increases after a given point.
T/F: The lower the mark- True. This holds regardless of the assumptions we may
up of the firm, the want to make about the market and the number of players.
higher the elasticity of
demand.
_________ is the key to Differentiation

profit-making.
What are two things Predatory pricing and product proliferation

firms can do to make
barriers to entry high in
their industry?
______ is something that Advertising

creates product
differentiation.
How do Coke and Pepsi Advertising

differentiate from each
other?
T/F Intra-industry profits True.

vary more than inter-
industry profits.
For a firm to be unique, valuable; unique

profitable in the short
or long run, it must
create something _____
and _______. Which of the
two is harder to sustain
in the long run?
Firm differentiation heterogeneity in consumers' tastes.

requires _________.
Profits require _______, firm differentiation; heterogeneity in consumers' tastes

which requires _______,
T/F: As a monopolist, False; in fact, you might prefer that people have th same
your profits require tastes.
heterogeneity in
consumers' tastes.
You can categorize all Horizontal, vertical

heterogeneity in
consumer tastes into
two types: _______ and
________.
Define horizontal If all firms charge the same price, consumers DISAGREE
differentiation. on which is best. Like vanilla vs. chocolate ice cream. or
Coke and Pepsi.
Define ordered cases. Ordered cases is a special type of horizontal

differentiation. In the case where, if I live closest to ice
cream store A, then B, then C, and either they are the same
other than their distance or I don't care about their other
differences, I prefer A to B to C. This is probably not true,
however, for some things like colors. Ordered cases can

also be depicted via a HOTELLING LINE.
If there are two firms, They would locate on the diameter, as far away from each
and they have to other as possible.
choose where to
locate, where would
they locate?
If two firms are located infinitely elastic. Their mark-up is 1/infinity, or virtually zero.
at the same place,
charge the same price
and make the same
product, their demands
are _________ and their
mark-up is
Define vertical If all firms charge the same price, consumers AGREE on
differentiation. which product is best. I.e., there is a natural meaning of
quality. This is DIFFERENT from a Hotelling line.
If consumers agree on Because there's heterogeneity in willingness to pay for

which product is best, quality. Higher quality goods will be more expensive.
why don't they all buy People will differ in their willingness to pay for quality.
the best product?
T/F: In the same market, True.

there could be both
vertical and horizontal
integration
T/F. If resin prices Uncertain. The fact that something is a commodity does
permanently increased, not actually govern whether producers of plastic
the increase in prices containers will be able to pass the price of resin off to
could be passed onto consumers. That entirely depends on the elasticity of
consumers. demand for the plastic products.
Can a firm sustain its The fact that you're currently ahead might mean that you
competitive advantage can stay ahead because by the time people catch up, you
if that advantage comes will have moved forward from where you were before. So
to the extent that there's some sustainability of
from technological technologically-based competitive advantage, it's

innovations? probably driven by the fact that it takes time to catch up
T/F: In analyzing a True.

company from a
competitive strategy
standpoint, you assume
that company is as
operationally efficient
as it can be.
You are one of two No. The reason why both of you are making some money
firms in some industry, is because you are doing different things. Example from
and you make 30% less class: UPS's attempt to copy FedEx
than the other
competitor. Should you
re-vamp and do what
the competitor does?
Explain.
Why would Airborne A bad answer to this question that contractors are cheaper
use contractors? or cheaper and less reliable. The answer is that the
contractors and cheaper and less reliable, AND Airborne
cares less about reliability and more about keeping costs
low.
Differentiation should consumers' tastes

be based on ___________.
What characterizes high High barriers to entry, intense price competition.

fixed cost / low Managing rivalry and/or differentiating products becomes
marginal cost especially important. Main threats come from existing
industries? competitors expanding into new segments, not de novo
entrants
If two firms are on a OK

line, there is a trade-off.
Firms are incentivized
to move toward each
other to increase
demand, but price will
fall. There will be an

optimal point when
both firms earn
maximum profits.
Ask what are the assets OK

that allow the firm to
serve a particular set of
customers well, and
why do we think these
assets will be hard for
other firms to
obtain/imitate in the
long run.
Describe the issue To get data on users, you have to have users, and you have
online advertising to have them use your engine instead of Google. It's a
agencies would have in bootstrapping problem, where you can't have the data
competing with unless you have users, and it's hard to draw users unless
Google. you maybe have the data. So this is an example of kind of a
pair of assets which are highly complementary and sort of
feed on each other over time
how do you approach create a list of assets that might be hard for others to
the question of whether generate. So if you have a hard time coming up with this
a firm is profitable in the kind of list for a company, you might question its viability in
long run? the long run.
Describe the difference suppose that what a firm has is not a brand they can
between brand and consume directly, but they have a brand that you like only
reputation. because it's associated with high quality, and all you care
about is quality. You don't care about the brand. So, if in
fact there was another product which you knew was as
high quality and was five cents cheaper, you'd switch.
When is reputation So reputation is helpful only if it is either expensive to try

helpful? something else, or even if you try something else, you
don't know which is better. If it doesn't cost anything to try
something else and it's easy to distinguish what is better,
reputation is not helpful.
T/F: The longer time T.

horizon you're looking
at, the less sustainable
any competitive
advantage is.
T/F: Reputation for Generally, no. If people can easily observe prices (and
lower prices is a source thus, which are lower), and can costlessly switch, no. If they
of competitive can't observe prices and it costs something for them to
advantage. switch, then maybe.
Name the two tests to Immobile and difficult to imitate. Or certain assets that are
determine whether an valued more in your firm than in others, or you have a set
asset is sustainable. of assets that are complementary and a firm would need to
have all of these assets to compete with you. You need to
have all these things come together to have really
productive things. And even if each of them is individually
mobile, no firm would be willing to transfer them unless
they can get all 10 of them, and that might be much harder
to get than it otherwise might be if the firm just wanted to
get one thing. So, complementarity in a way, serves as
protection in the long run.
Name advantages to prime location, sunk costs, learning curves, consumers'

being the first mover. switching costs
Name advantages to you can learn from the first mover's mistakes, since it can
being the second be unclear to determine what the best way of operating in
mover. an industry is. also it could be that the first mover has to
incur costs that benefit the whole industry
Define straddling costs. imitating my position forces the competitor to compromise

its existing position. Trying to run two different businesses
with one set of assets creats inefficiencies
What is the difference When we think about barriers to entry, we're really thinking
between barriers to about how easily a new firm can be formed and enter into
entry and barriers to the current space. When we think about barriers to
imitation? imitation, we're more worried about thet existing firms in
the industry, and I have my position and they have theirs,
well what if they slide over into my space and try to just
push me out? e.g., FedEx might worry about Airborne

trying to imitate it, but if Airborne did, it would pay
straddling costs.
what is it that Enterprise It's relationships, which are embodied in the people, which
has that Hertz doesn't stay internal because they want the internal chance of
have promotion (so they are more likely to stay), their skills are
uniquely suited to Enterprise (so they are more valued by
Enterprise), and their skills and promotion aren't as
valuable at other companies. I structure everything around
making these people less mobile.
What are the general First, look for skillsets that can create high value in your
two ways to build firm but have low value elsewhere. This is very important -
human capital as a base it's about finding the best people for your firm, not
of competitive necessarily for others. Once employees are hired, you
advantage? want to focus on building human capital that's firm-
specific.
T/F: An employee will T

always be less
motivated than the
owner.
Name a benefit for when there's strong incentives for individual owner-
independence -- i.e., managers. Now, sometimes incentivizing employees is not
locally owned shops. so important. For example, suppose the employee's job is
to - he works at an airport - he needs to take your driver's
license and input it and give you a key. You don't need a
lot of incentives for that. It's such a well-defined job and
your effort is so easy to monitor.
Reputation for quality is OK

much more important
when you don't have
discipline coming from
repeated interactions.
Define reputation. Consumers' belief about the quality or attributes of my

goods relative to alternatives based on their and others'
experiences.
When can reputation 1) if it can be observed and 2) if it can be sampled

be a source of inexpensively.
sustainable competitive
advantage?
Name several barriers 1) Can't get the resource due to literal scarcity or legal
to imitation. restrictions
2) Casual ambiguity -- hard to figure out with so many
pieces to imitate and hard to test, e.g. WalMart may answer
that definition
3) Economies of scale and sunk costs -- e.g., Comcast, its
marginal costs become small after installing the wires in
the ground. Competitors don't have the same incentives to
make a similar investment
4) Strategic barriers -- can imitate but expect harsh
retaliation
5) Imitation takes time
6) Learning curve -- marginal cost decrease in the number
of products made int he past, e.g., Boeing makes airplanes
that cost less and less to manufacture
7) Brand equity and reputation - tied to cost of
experimentation
8) Relationships
What three kinds of 1) Literal immobility -- e.g., land/location

traits make assets less 2) Less valued outside of the firm -- asset not as
mobile? productive elsewhere, e.g. operator gets very skilled to
operate a certain set of machines unique to a firm. If
operator moves outside the firm, he will not be as valuable
because his skills developed do not apply to other
machines.
3) Complementarities -- e.g., there are 10 assets that fit
perfectly together and produce a lot. Taking a subset of
these assets will not be as productive. Even if each of
these assets is individually mobile, no firm will be willing to
transfer just one of them. e.g., Booth is known for its faculty
and engaging students. Relocating the school to a warmer
city in the winter will be difficult because it requires all

students and professors to move as well.
Name a benefit of Can spread fixed costs over different establishments.

chains. Economies of scale in reputation for quality (no mom-and-
pop banks (reputation matters since you are giving them
your money) (McDs and infrequent customer interaction
with individual stores)), marketing, proprietary business
formats, supplier power
Name a benefit of a Owner-employee alignment. Key when profit is driven by:

locally-owned effort which is hard to monitor, customization to local
establishment. needs, and human capital of local managers
if a firm is engaged in is whether the firm has assets that make doing activity B
some activity A, we of better than if there were separate firms doing separate
course know there must activities? Our answer in short will be it depends on
be some assets that whether it has some assets that make engaging in these
allow it to do that, two activities together more effective than two separate
better than others. firms that would be engaging in them separately. even if
Question is, is there any there are some assets that you could perhaps use
reason for some firm to effectively by spreading them across various activities, do
be doing activity B you really need to merge to achieve that, or can you
instead? achieve it through contracts?
T/F Pepsi should F. don't really speak at all to the argument of why any firm
expand into bottled should engage in these two activities at all rather than
water because the having two firms engaging in these activities separately.
carbonated segment is Another way to say this is suppose that this logic were
stagnating. coherent, that if what you were currently selling is
stagnating, and there's something else poised for growth,
that you should think about expanding, if that were the
case, then by the same logic, the New York Times
Company should think about expanding to sale of
newspapers into sale of bottled water. You can say, well
the sale of print newspapers is stagnating, while the sale of
bottled water is growing. That doesn't make any sense,
because there's no assets that the New York Times has that
links it to this other activity. to ask whether there is some
reason why combining these two activities and

manufacturing two different kinds of products creates
more benefits relative to the costs than what you would
get if you engaged in these two activities separately when
you have two separate firms
What argument do you PIab has to be strictly bigger than PIa + PIb. And this
always have to prove if inequality always has to be satisfied if you wanna tell me
you want to say that why this firm should engage in some other industry.
firm A should engage in Whether its industry is somewhat stagnating or whether it
activity B in addition to wants to expand into something that's growing, is totally
activity A? besides the point. The profit inequality is going to be the
ONLY inequality we care about. We're not going to care
about smoothing risk, we're going to care about
maximizing profits
So one thing firms There's no need for such drastic, expensive changes, like
sometimes say and do integrating firms, to combine two streams of cash flows.
is we're going to There's a very simple way, if someone prefers this cash flow
combine these two to either of these two, which is firm A issues share A, firm B
firms so as to diversify issues share B, and if you prefer this cash flow, well please
this risk away have a balanced portfolio and keep one share of firm A
and one share of firm B.
Why might Piab be 1) When two firms that produce substitutes merge, Piab will
greater than Pia + Pib? always > Pia + Pib. Because the merged firm will raise
prices above marginal cost. Now, suppose you wanted to
do this today, what would stand in your way? Government.
It's illegal to merge for this reason. So, even if you want to
merge for this reason, you're going to need another
excuse. You're going to need to tell some story basically
that you're merging to create value.
A key reason why Economies of scope.

mergers might create
value is because of
________.
Distinguish the Ecoomies of scale, you spread the fixed cost across many
difference between units, so average cost goes down with production.
economies of scope Economies of scope you spread the fixed cost across
and economies of many USES.
scale.
the key thing of synergies of cost reduction, I'm still waiting. What am I
economies of scope is waiting for - I'm waiting for you to name some asset or
going to come from an capability which in fact the company will pay for once but
asset that can be used will get to use twice.
for multiple activities,
and using it for multiple
activities does not harm
your primary position
T/F Managers can be True. There's a lot of evidence that suggests that managers
incentivized to merge like running big companies. The probability a company will
other than for reasons survive is bigger when there is a merger. Companies that
of profit maximization. are merger targets tend to be particularly appeal to CEOs
are growing companies - companies where B is actually in
an expanding market that could be appealing to the CEOs.
The CEOs might also like being on the covers of
magazines, diversify personal financial risks, ensure firms'
survival
On average, since the ...

1970s to 2000 which is
the span of time
covered by the article,
when one firm acquires
another, on average,
the acquiring firm loses
value. So the market
does not think the
merger was a good
idea. If this inequality
were to hold, we would
not expect the share
price of A to go down.
But typically in mergers,
it goes down when A

buys B. This is over all
the mergers in the U.S.
or in the course of 30
years. There's particular
kind of mergers where
the share price of A
drops down even more.
It drops down the most
when company B is a
growth firm. Which is
exactly what you'd
expect if you thought
that this misalignment of
CEOs and owners was
important. And there's a
third and perhaps the
most subtle reason why
CEOs might want to
merge even when
shareholders wouldn't -
and this is not as
important as previous
reasons - but CEOS
actually don't have an
easy way to diversify
their personal financial
portfolios
What are the So the first component is that it's hard to judge whether
prerequisites that make someone else's quality is different from yours, and the
quality a potential second is the cost of experimenting is high. It's very costly
source of competitive for a consumer to sample another product, and if they do
advantage? sample it, it's hard to judge whether it's better. If those two
things are true, then reputation for quality can be a source
of sustainable comparative advantage.
What are two reasons Economies of scale and scope.

why firms should
merge?
What are reasons often 1) Go to another sector because your sector is no longer
used for merging, that profitable (e.g., NY Times and carbonated drinks)
are WRONG? 2) Go to another sector because another product has a
very big demand, and profits can be made there.
Neither of these arguments explains why we should have
one firm doing BOTH activities.
What are two cases 1) Merging to capture value. If A and B are substitutes, this
when the inequality happens. However, this is ILLEGAL!
Piab > Pia + Pb might 2) Merging to create value through either of the following
hold? two ways:
a) Economies of scale: the average cost declines as the
quantity produced increases
b) Economies of scope: allows you to decrease costs by
spreading fixed costs over multiple products: e.g., using
Gleacher for conference during the day. But not for night
clubs after classes.
Assets that might be able to be spread: technology,

relationships, reputation/brand equity (an asset can be
used in the sale of another product or activity when the
product or activity is similar enough so that the reputation
extends to the new good -- e.g., Coke doesn't brand its
water as Coke water).
Also, internal capital markets: combining an

asset/technology-rich and idea-poor with an asset-poor
and idea-rich to enable new, profitable projects.
T/F If we can write a T

detilaed enough
contract, then there is
no reason to integrate.
T/F: A medical You should think about under what circumstances would
equipment allow you to say this is s sustainable competitive
manufacturer employs a advantage. So before we even get to whether there's a
number of highly-skilled source of competitive advantage, we have to discuss

engineers. Their skills whether these are engineers that others can't have. That's
allow the manufacturer the first part. Second, can it be part of sustainable
to produce higher competitive advantage? That depends on barriers to
quality machines and imitation and whether these assets are transferable. So you
lower cost than it could might think there are barriers to imitation - for some
without them. These reason, it may be difficult to employ the same type of
employees are likely to workers. And then, obviously the key part is to talk about
be a source of transferability. It really matters of whether these
sustainable competitive employees can be hired away from another company. That
advantage. is likely to depend on whether they have firm-specific
human capital. As I mentioned you want to make links to
other cases.
Two gas stations So if you do not mention the concept of capacity

compete in a small constraints and that capacity constraints soften pricing
town. The town rivalry, you have answered this question poorly. Discussing
coordinates designed how capacity constraints make it less tempting for me to
to preserve the beauty cut my prices which in turn make it less tempting for you to
of the downtown cut your prices, which in turn, makes us both better off, is
shopping area currently the key to answering this question.
limits each gas station
to a max of three
pumps. Demand has
grown recently so all
the pumps are full and
lines sometimes form at
both stations. Should
the station owners
lobby aggressively to
have the ordinance
repealed?
What are two reasons 1) Observable but not verifiable traits. So cheerfulness
for incomplete could be something that's observable but not verifiable.
contracts (and So there could be lots of examples of variables that you
therefore, reasons to can see but you can't write contracts about. And if you
merge)? can't write contracts about them, it might be that you really
need to merge.
2) Unforeseen contingencies
What is the difference Vertical integration is when firms join and one is buying an
between horizontal and input from the other. Horizontal integration is like when
vertical integration? two firms sell the same type of goods at the same level of
the value chain merge.
long as the ...

manufacturer has any
market power
whatsoever, and this is
where the term double
marginalization comes
from, and we're going
to suppose that both
the manufacturer and
the retailer have some
market power, they
don't have perfectly
elastic demand, what
we know is going to
happen is w is going to
be strictly bigger than
cm. Their profits are
lower than if they were
to merge. The intuition
is the retailer, when
thinking about raising
the price, has a tradeoff
.So in particular, if you
wanted to merge for
this reason, you might
not get in trouble with
the regulators because
you're trying to lower
prices.
Define two-part tariffs Contractual solutions to double marginalization. Let's first

think about something called two-part tariffs. Now we'll
have a two-part tariff, it's going to be a fixed fee f and a
per-unit price w. The idea is that the manufacturer will get
some fixed amount of money from the retailer regardless
of how many units the retailer buys, plus is going to sell the
good at some price.I'll see you things at a lower price per
unit, but you have to get me a fixed payment in exchange
for my lowering my price. That's a contract. the contract
effectively says let's integrate
If effort is observable No, because we'll get effort with and without a merger.
and verifiable, will a
merger increase value
in this case?
Mergers only provide observable but NOT verifiable. In this case, there's effort
value in the case where ONLY with a merger.
effort is .......
In the case where effort No. Whether you merge or not will be irrelevant, since you
is unobservable, will a can't observe effort and you obviously can't verify it.
merger increase value?
the power plant buys ...

the coal mine or the
coal mine buys the
power plant. And this is
the only thing you can
do here to eliminate
what's known as the
hold-up problem. The
hold-up problem is
once you make a sunk-
cost investment that's
relationship-specific,
any contractual
relationship puts you in
a very bad spot,
because I can then

extract all of your sunk
costs. Now notice that
this could be very
inefficient - the fact that
the power plant buys
the coal mine. The
power plant could be
very bad at managing
the coal mine. It could
be they have no skill in
managing the coal
mine. It could be that
they don't know how to
run them, or the original
person could have
done it better. But that
cost of inefficient
conduction of the coal
mine might be dwarfed
by the inefficiency to
put the power plant
somewhere exactly in
between two coal
mines so no one can
extract the power plant
excess. So this is, by far,
the single most
important reason for
vertical integration. This
depends entirely on
contractual
incompleteness. If there
WERE no contractual
incompleteness, there
WOULD be no hold-up
problem. If we could
REALLY think of all the

contingencies that
come up and specify
what we could do, what
could happen, we
could possibly remain
separate companies.
The special thing with
the hold-up problem is
that there's some
relationship-specific
investment. This is about
trying to convince
someone to spend a lot
of money irreversibly
on something that is
only helpful in the
context of our
relationship. just an
example, since these
things are so expensive
to build and coal mines
can't move. There are
lots of examples that
are less stark that relate
to relationship-specific
investments and a hold-
up problem. Be aware,
if you're going to spend
some sunk cost that will
be useless outside of
this relationship, you
have to be aware that
that exposes you to a
very bad negotiating
position vis-à-vis that
relationship.
. In the context of ...

vertical integration, the
reason you might want
to buy some building or
build something in-
house rather than buy it,
is you don't have to
worry about contractual
incompleteness, you
can have much more
coordination between
your in-house
production team and so
on. The trouble is you
lose certain economies
of scale. So here, it
would be a very bad
idea, like it would be for
Booth to build our own
whiteboards.
Define investment A firm invests in people to explain to customers how

externalities something works or what product is best for them, and the
customer goes and buys that product elsewhere, say, for a
lower price. the trouble is, it's not just that this is bad for a
brick and mortar store. It's bad for everyone because if this
becomes rampant, then no company offers the investment
needed to get good salespeople, and consumers won't
necessarily get this benefit.
What is a way to deal Exclusive territories and resale price maintenace.

with investment
externalities?
T/F: A car company False. This has nothing to do with a reason to integrate.
should integrate with a You're not saying anything about whether a car company
steel producer to and a steel production company should be joined
eliminate fluctuation in because its profits will be higher. That's nowhere in this
its input prices. argument. Fluctuation in input prices is not some bad thing
- it's normal. Even if you didn't have fluctuation in input

prices because you somehow owned the steel company,
what would be the fluctuations in your own economic
cost? You would still be subject to the price of steel.
T/F: GAP should open No, because assuming that color is verifiable, there's no
its own factory to dye reason to integrate because we could contract that. Under
fabric in order to ensure the plausible assumption that color is not verifiable, then
a consistency in its this might make sense if it's important to GAP.
colors.
T/F: IBM should merge What is not a good answer is that assuming Intel doesn't
with Intel to eliminate have supplier power. Suppose for a moment, if I could get
Intel's supplier power. widgets for free, I could generate $70mm of profits per
year. However, I really need this widget, there's a lot of
supplier power, suppose you are a company that owns
them, how much would you charge them? You would
extract all my surplus because I entirely rely on you. Now
suppose I'm really upset about this, and I say I'd like to buy
your company. What is the minimum price at which you'll
sell? The NPV of those $70mm of annual profits. There's just
no reason why profits here would increase. You don't
somehow eliminate supplier power.
T/F: Coke should own a When you pour soda into a can, that happens at a place
can company so the called a bottling plant. A bottling plant puts soda into
can company will bottles and cans. A good answer to this question would
locate close to Coke's certainly mention the power plant/coal mine example
major bottling plant. because it's a similar type of situation. And then it would
discuss what are some of the features of this that were
crucial and discuss whether they are likely to be here. For
example, we need that the cans are expensive to move. So
suppose that it's costly to ship cans. If it's costly to ship
cans, then there's great efficiencies in locating close, but if
the major bottling plant is far from other bottling plants,
then this investment of building the can company right
there is a relationship-specific investment and might lead
to the hold-up problem because of the incompleteness of
contracts. Link to this example and point out the features
of the example that would make it apply to this case.

Under the assumption that it's a sunk investment (which is
obvious) and assuming that cans are expensive to ship,
which I think is right, and assuming bottling plants are far
away from each other, and assuming there's contractual
incompleteness, then the answer is yes. Because of
contractual incompleteness, buying the company might
make sense because it will eliminate the hold-up problem.
The key thing is to get at what truly matters.
Should transportation One factor which pushes toward driver-owner which is

trucks be owned by the there will be better incentives to take care of the truck.
driver or by a larger There will be some losses probably, as well, due to worse
company that owns economies of scale - e.g., repairing, managing fleet costs,
trucks? so there might be a trade-off. Also, how easy is it to
monitor whether the driver will do a good job? If it's easy
to monitor, then we expect to have corporations own
trucks. If it's very hard to monitor people doing a good job,
and doing a good job is very important, then the
incentives of the driver might swamp the increased
economies of scale associated with a corporation owning
the trucks. For example, if you can put a computer chip in
the truck, as soon as that came out, all of those owner-
operators got replaced by large corporations because the
effort could be observed.
So whenever human OK
capital is the main input,
we see not
corporations but
partnerships. This is not
true only in design, but
also in law firms.
What factors make tacit 1) players care about the future

collusion easier? 2) there are a small number of firms
3) prices are transparent
4) demand is stable
5) multi-market contact (makes it possible for me to punish
you if you deviate)

6) symmetric firms (e.g., if there were a big and a small firm,
this means the firms are NOT symmetric. The small firm may
have an easier time deviating.)
Name strategic ways to Producing excess capacity, proliferation (e.g., Starbucks

deter entry. locations), predatory pricing. So it's really important in all
of these examples that your actions be irreversible,
otherwise, they can never have strategic consequences.
Therefore, I might price lower than I would so as to signal
to the world that my costs are low so do not come in. I'm
broadcasting this. In general, it's my judgment that this is
much less common as a way to successfully deter entry
compared to things like proliferation. Proliferation is really
common and not just in terms of location but also in
product space.
YOU M I G H T A L S O LIKE...
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Startup Jargon Words eee 370
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Chapter Two: Strategy and MHR midterm 1
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11/2/2018 Competitive Strategy Flashcards | Quizlet

Competitive Strategy 92 terms marielle010

Terms in this set (92)

Name Porter's five Bargaining power of suppliers, competition of firms

potential entrants, and leverage of buyers

Provide the equation E = -dD/dP * (P/D) or % change in D divided by % change

There is a road with 2 1) Product differentiation - use advertising/branding,

Define economies of The cost of producing more goods decreases as a firm

_________ is the key to Differentiation

What are two things Predatory pricing and product proliferation

______ is something that Advertising

How do Coke and Pepsi Advertising

T/F Intra-industry profits True.

For a firm to be unique, valuable; unique

Firm differentiation heterogeneity in consumers' tastes.

Profits require _______, firm differentiation; heterogeneity in consumers' tastes

You can categorize all Horizontal, vertical

Define ordered cases. Ordered cases is a special type of horizontal

however, for some things like colors. Ordered cases can

If consumers agree on Because there's heterogeneity in willingness to pay for

T/F: In the same market, True.

from technological technologically-based competitive advantage, it's

T/F: In analyzing a True.

Differentiation should consumers' tastes

What characterizes high High barriers to entry, intense price competition.

If two firms are on a OK

fall. There will be an

Ask what are the assets OK

When is reputation So reputation is helpful only if it is either expensive to try

T/F: The longer time T.

Name advantages to prime location, sunk costs, learning curves, consumers'

Define straddling costs. imitating my position forces the competitor to compromise

push me out? e.g., FedEx might worry about Airborne

T/F: An employee will T

Reputation for quality is OK

Define reputation. Consumers' belief about the quality or attributes of my

When can reputation 1) if it can be observed and 2) if it can be sampled

What three kinds of 1) Literal immobility -- e.g., land/location

city in the winter will be difficult because it requires all

Name a benefit of Can spread fixed costs over different establishments.

Name a benefit of a Owner-employee alignment. Key when profit is driven by:

reason why combining these two activities and

A key reason why Economies of scope.

On average, since the ...

it goes down when A

What are two reasons Economies of scale and scope.

Assets that might be able to be spread: technology,

Also, internal capital markets: combining an

T/F If we can write a T

number of highly-skilled source of competitive advantage, we have to discuss

Two gas stations So if you do not mention the concept of capacity

long as the ...

Define two-part tariffs Contractual solutions to double marginalization. Let's first

the power plant buys ...

because I can then

REALLY think of all the

. In the context of ...

Define investment A firm invests in people to explain to customers how

What is a way to deal Exclusive territories and resale price maintenace.

- it's normal. Even if you didn't have fluctuation in input

of the example that would make it apply to this case.

Should transportation One factor which pushes toward driver-owner which is

What factors make tacit 1) players care about the future