Competition in

concentrated markets
 Introduction

• Industries containing firms with substantial market share

are called concentrated industries because market share
is concentrated in the hands of a few firms.

• Its interesting to study how these major players can affect

industry outcomes.
 Continued
• A manager at a leading firm in a concentrated industry knows
that her decisions about price or product characteristics will
affect all the other players in the industry.

• If one leading firm competes aggressively, competition will

intensify for all firms in the industry.

• Manager of a major firm in a concentrated industry must

recognize that its competitors will respond to any strategic
choice she makes, just as she will have to respond to the
decisions they make because those decisions will affect her
firm’s performance.

 Continued
• A few firms hold a large share of industry sales, but no
firm, by itself, dominates the industry - oligopolies

• Less common are dominant firm industries in which a

large firm competes with many, much smaller firms.

• Sometimes, the dominant firm serves most of the

market, and a raft of niche firms compete for small
segments of the rest of the market. Kodak, for
example, had been the dominant seller of photographic
film in the United States until the 1990s.

 Continued…
• These two market structures, oligopoly and dominant
firm, can be much less competitive than perfectly
competitive markets.

• If high entry barriers protect the industries, and powerful

buyers or suppliers are unable to capture any PIE, the
firms in these industries may be extremely profitable.
Even under these favorable circumstances, however,
competitive forces among the incumbent firms can
dissipate a large share of potential industry earnings.

 Oligopoly at work
• Think about an industry that only has two firms (a “duopoly”),
each of which has half the market.

• If one of the firms in the market increases its output by 10

percent and the other firm holds its output constant, indus-
try output will increase by 5 percent, and prices will have to
fall to induce buyers to purchase the expanded supply.

• This will cause the profits at the firm that did not increase its
output to fall. The actions of one firm in an oligopoly affect
market out- comes—price and market shares in this case—
and they also affect the profits of its competitors.

 Oligopoly at work 2
• A firm anticipating a demand increase may announce a
large addition to its capacity. If its rivals respond by
aggressively adding capacity, the entire industry may
experience excess capacity even if demand increases as
expected. If, however, its rivals respond to this
announcement by curtailing their own capacity expansion
plans, the industry may not experience excess capacity.
In this case, the first mover will have a large increase in
market share, but prices will not be depressed by
competition among firms holding excess capacity.

Oligopoly Strategic
Interaction
 Characteristics
• First, to formulate strategy for a firm in an oligopoly a
manager must anticipate how rival firms will respond

• Second, a manager should recognize that all firms will act

in their own best inter- ests. This means that when
assessing how a rival firm will respond, a manager should
adopt its perspective and ask, “If I had the internal
context of Firm Y, what response would be optimal?”

 Continued…
• Third, a manager must recognize that managers at rival firms are
thinking the same way about her firm.

• For example, to convince competitors that her firm is committed to

maintaining market share, a manager may announce that she will
match any price cut a rival makes even if it bankrupts her firm.

• If her rivals believe this, they will have good reason to avoid price
cuts that she will match at any cost.

• But if they believe that she has an alternative course of action that
will be more profitable for her firm, they will not take this threat
seriously. They know that, when faced with tremendous losses, she
will withdraw from the market segment that is most costly for her to
serve
 Continued…

• Finally, no firm can make choices for the other firms. he

only effective way to influence the behavior of rivals is to
act in a way makes it profitable for them to do what you
want them to do.

 Competitive environment
and Intensity
• We consider two different examples to drive the point home

• Fishing - In this industry each of the two competing firms owns one
boat.

• Each firm chooses how many pounds of fish to catch, and each
incurs the same cost no matter how many it catches.

• The boats leave from the same dock in the morning, spend all day at
sea working separate fishing grounds, return at the same time to the
same dock, and sell their entire catch to wholesalers on the dock.

• Table shows demand for fish at their dock. Even though catching
more fish does not affect cost, bringing more fish to market reduces
the margin per pound of fish by driving down the market price.
 Continued….
• Apple Selling - In this industry, two farmers each own an apple
orchard. Their efforts during the growing season have been
very productive, for their trees are now laden with apples.

• The farmers have nothing to do now but sit at their respective

stalls selling apples. The orchards are situated near a train
station. The farmers post their prices on a board at the station,
and travelers can shop at the stall of their choice.

• Demand is exactly the same as that for fish in the preceding

example (simply replace “fish” with “apples”). Apples not sold
on the one day our industry “exists” are worthless.

 Continued

Competition dissipates PIE because competing firms maximize only their

individual profits and do so at the expense of their rivals.
Outcome in Apple Industry
• Here, each farmer only has to decide the price at which he is willing
to sell his apples.

• What price should we expect the farmers to charge? Suppose

they each thought of charging $15 a pound. If they both charged
$15, each would sell 7.5 pounds and each would earn profits of
$112.50.3

• Together, the firms earn the monopoly profit with these choices.
In assessing this outcome, however, one of the farmers ought to
reason that if he cut his price to $14 when his rival is charging
$15, he would attract all of the buyers and sell 16 pounds of
apples for revenue of $224

 Outcome in the Fishing

Industry
• In the orchard example, one farmer realized he could do
better by undercutting the monopoly price.

• Here, one firm will consider deviating from the monopoly

outcome by catching and selling one more pound of fish.
If one of the firms decides to catch 8.5 rather than 7.5
pounds, the total catch rises to 16 pounds and the price
falls to $14. Industry profit falls to $224, but the profit of
the firm producing the larger output rises from $112.5 to
$119.

 Continued
• Each fishing firm has an incentive to deviate from the outcome that maximizes the
combined profits of the two firms. It is willing to do so because each firm cares only
about its own profit.

• In both cases, as one firm “undercuts” the other by shaving the price on apples or
increasing the quantity of fish it brings to market, its gain is smaller than the losses
this action imposes on the other firm.

• When, for example, one boat decides to catch 8.5 rather than 7.5 pounds, the gain
in its profit is $6.50, and the rival firm loses $7.50 in profit.

• Clearly, if the same firm owned both boats, it would take into account the impact of
the increased catch by one boat on total firm revenues and would not expand the
catch above a total of 15 pounds of fish. Competition dissipates PIE because
5

competing firms maximize only their individual profits and do so at the expense of
their rivals.

 Continued…
• Suppose that each fishing firm plans to catch 15 pounds of fish, so that
total output will be 30 pounds.

• The market price would be $0 as in the orchard example, and each boat
would then earn a profit of $0.

• But now if one boat unilaterally decides to cut back and catch only 14
pounds of fish, the price for all the fish caught would rise to $1 and that
boat’s profit would increase to $14! Since each firm can do better by
unilaterally changing its output, each firm will catch less than 15 pounds
of fish.

• The fishing firms are going to do better than the perfectly competitive
equilibrium.

 Difference between the two

markets
• In both markets, the products are undifferentiated;

• the firms have marginal costs of zero;

• the products they bring to market cannot be stored;

• Industry demand is the same.

• The only difference between them is that the farmers have no capacity constraint when
they sell their apples; each has enough apples to supply total industry demand. As a
result, when one firm has a lower price than the other, it captures the entire market.

• The fishing firms, however, are essentially choosing capacity by choosing what
quantities to bring to market. Once the boat arrives at the dock, it will offer its entire
catch for sale, but the total catch limits the total amount sold. If one firm expands its
output, it thereby reduces the market price but does not capture the entire market. The
rival firm still sells its output.

 Continued
• When one of the farmers unilaterally drops his price, two things
happen: The two firms together sell more apples, and the firm that
cuts its price gets all of the market. The incentive to cut price, then, is
large.

• When a fisher unilaterally increases output, the price falls, and the two
firms together sell more fish. But the firm that expands its output
doesn’t capture the entire market because its rival still sells the output
it was selling before. The incentive to “cut price” by expanding output
is therefore smaller.

• Competition is more intense in the orchards because each firm can

steal its rival’s entire share. Competition is less intense at the docks
because the rival firm continues to sell whatever output it brings to the
market.
\
 Continued
• The detail that matters in these two examples is whether
firms are choosing what price to charge or what quantity to
sell.

• The apple growers can only compete by choosing price

because they have enough capacity to supply the entire
market and nothing else to do with their apples.

• The fishing firms, on the other hand, are choosing capacity

and then selling all they produce.

 …..
• On the other hand, the gain from increasing capacity is
small. Increasing capacity does not allow the firm to
“steal” share the way cutting price does.

• To sell another pound of fish, the firm must add one

pound to the total catch, thereby depressing the overall
market price by $1 and selling only one more pound of
fish.

• The fishers gain much less than the apple farmer who
reduces price by $1 and gains the entire market. And the
cost in lost revenue on current sales is the same
 Continued….
• Its more than price and quantities

• Does Timing matter?

• Suppose a manager knows she can move first. She also knows that her competitor
will respond to what- ever she does and that this response will affect her profits.

• Any manager who knows that her rivals’ actions will affect her bottom line wants
to anticipate them. To do this, she looks at the problem from her competitor’s
perspective and figures out what its profit-maximizing response would be.

• Her profit calculations will take her action and her rival’s response into account.
She has a first-mover advantage if she can do better by moving first.

 Continued.
• If boat 1 moves first and catches 15 pounds, boat 2 will
respond by catching 7 pounds.

• Does it really need to catch 15 pounds?

• Is it enough to just commit to catch?

• Issue of credibility.Boat 1 needs to be able to commit to

catching 15 pounds. When it moves first, it has the power
to commit. When the boats move simultaneously, it does
not
 Continued….
• The issue of being a “credible first mover” often arises when
firms think about adding capacity.

• They frequently announce capacity increases well ahead of time,

hoping that their rivals will take the planned capacity (which does
not yet exist) into account when making their capacity decisions.

• If they do, the first firm to announce will have a first-mover

advantage.

• Because a mere announcement is not a credible commitment,

rivals may respond that they, too, will install additional capacity.
In this case, we are back to the initial problem facing the fishing
firms: Each is choosing capacity, and the choice is simultaneous.
First mover advantage?
• What happens if one of the farmers posts his price at the
station first and is unable to change the price once it is
posted.

• If he posts a price above $0, the second farmer will sim- ply
undercut his price and take the entire market.

• The only price he can post that will not be undercut is $0.
Moving first confers no advantage and has no effect on the
market outcome.

• The first mover Vs flexibility conundrum

 Continued….
• Total industry revenue will be lower (by a dollar), but the low-
price farmer expects to do better by undercutting his rival’s
price and getting all the sales than he would by holding to
the monopoly price and getting only half the sales.

• But anticipating this incentive to undercut his price, the

other farmer ought to charge $13, and so on. The only
prices at which neither farmer would have an incentive to
cut price further is $0. The market price will be $0, and 30
pounds of apples will be sold

 Players
• Oligopolies become more competitive as the number of
incumbent firms increases (holding constant industry
demand). This is primarily because each firm’s incentive
to steal market share is greater when more firms are in the
industry.

• To see why, consider what happens if our fishing industry

example had, say, 20 firms. Could they sustain an
equilibrium in which the price is as high as it is with only
two firms? They could not; the price would be lower.

 ……
• As the number of firms in an industry increases (holding
the size of the market constant), there are more firms with
smaller market shares.

• As a result, a reduction in price costs them less in lost

revenue from existing customers (of whom they have
fewer) compared to the potential increase in revenue they
hope to gain from new customers.

• However the logic does not always work

 ……

• In our apple- growing industry, adding more firms does

not affect competitive intensity because competition is
already intense with just two firms.

 Information
• Many types of information can affect competitive
intensity.

• One type is what the firms know or believe about each

other.

• Suppose you know that a rival firm is on the verge of

bankruptcy. You should then anticipate that the firm might
be desperate for cash flow and will price aggressively to
build short-run revenue.

 ……
• A low-cost firm will generally be willing to produce more than
its higher-cost rivals because it has attractive margins even at
lower prices.

• If its competitors know that its costs are lower than theirs,
they will rationally reduce their output to maintain higher
prices.

• This will happen only if they have information about their

competitor’s costs. Otherwise they might interpret the low
price as just an attempt to steal market share by sacrificing
margin and will respond with their own price cuts.

 …..
• Information about action other firms have taken

• Information about market conditions

• Assume that demand for fish could be either high or low when the boats
come in with their catch.

• If both boats know that demand will be high, they will catch more fish.
However, if only one boat knows demand will be high and believes that the
other boat will decide to catch only enough to satisfy average demand, it
might want to catch even more.

• So not only does the state of market demand matter, but the information
that each firm has about demand, about the other’s information about
demand, and so on, all affects competitive intensity.

 ……
• Firms sometimes try to influence a rival’s actions by
providing information

• For example, if you and I are locked in a battle in which

only one of us can win, and if I can convince you that I will
never give up, you will choose to abandon the fight
immediately because fighting is costly, and if I never give
up, you can never win. You have a similar incentive to
make me believe that you will never give up. Indeed, we
would both like to communicate our determination to fight
forever even if we really plan to capitulate tomorrow.
 …..
• In this example, we both want to communicate something that is not true but that
we would each like the other to believe. In other cases, a firm wants to
communicate something that is true but may be difficult for the rival to observe and
believe.

• This is called “signaling.”

• Signaling is necessary only if the rival would not normally see the true information. If
the firm can reveal the information directly, it may want to do so.

• For example, if I want to convey that I have a lower cost production process, I can
invite your engineers into my plant and show them exactly why my costs are lower
than yours. Of course, that would also teach your engineers how to lower your
costs. So, I may prefer to find some way to signal that my costs are low without
revealing exactly why they are low. My problem is how to communicate information
in a credible way.

 Continued….
• Assuming that the firms can solve the communication problem, they still
have to solve the credibility problem.

• Suppose the firm wants to convey the following to its rivals: “I have lower
production costs than the rest of you. My profit-maximizing price is
therefore lower than yours. So the low price you observe is not a
temporary grab for market share. It is the price I will charge in equilibrium.
You have no reason to respond by cutting your price to punish me. You
should accept that I will be the low- price firm and make your decisions
accordingly.”

• Remember that in this example the signaling firm really has low costs and
is trying to convey information that its rivals want to have. The problem is
that a firm that is not low cost would like to convey the same message.

 Continued…
• To summarize, the low-cost firm has information about its cost that its rival
can- not observe.

• Both firms would be better off if the information could be credibly

communicated.

• The low-cost firm would be better off because its rival would withdraw, and
it could then behave as a monopolist. The rival would be better off because
it would incur losses as long as it remained in the market; it is better off
withdrawing sooner rather than later.

• Unfortunately, a firm that does not have low costs has an incentive to claim
that it does have low costs in order to bluff its rival into withdrawing. As a
result, the simple claim that “I have low costs” is insufficient. Even charging
a low price may not be sufficient. It has to do do something drastic like offer
a deep price cut.
 Repitition
• In the drive to increase its profits, each competitor acts to
maximize its profits at the expense of its competitors’
profits.

• Because all firms engage in this activity, profitability at all

of them declines.

• Each firm knows that all of them would all be better off if

they could all agree to be less competitive. Why can’t
they just say “no” to competition?

…..
 Continued….
• The problem that firms face in this example is that the value of cheating is
greater than the value of cooperating. To sustain cooperation, they must
somehow reengineer the world to make the value of cooperation greater than
the value of cheating.

• Sign a contract with a large penalty for breach.

• Repeated Interaction makes cooperation possible.

• Firms must somehow come to a common understanding of what price to

charge without directly communicating with each other.

• Monitor compliance and punish deviations (Discounts)

• Cooperation is less likely when future is uncertain.

 Continued…
• The point here is that avoiding competition through more cooperative behavior is
difficult at best.

• The problems the OPEC cartel faces are instructive.

• The OPEC countries can and do negotiate openly and enter into explicit agreements to
cut back production in order to maintain the targeted price for crude oil.

• They decide who can sell how much, and they have established procedures for
monitoring compliance. The member countries also know that they will be competing
against each other for a long time.

• Their product is fairly homogeneous, and there are many ways to estimate world
demand.

• Even under these unusually favorable conditions, however, member coun- tries have
repeatedly violated the various agreements because it was in their best inter- est to do
so.
 Dominant Firms
• Unlike oligopoly markets, which have at least two major
players, the classic dominant firm structure has a single
large firm and a number of much smaller firms.

• When the firms’ offerings are differentiated, the dominant

firm produces the leading products targeted to a broad
spectrum of buyers.

• In contrast, each of the small firms plays a niche strategy

in which it targets a small subset of buyers.

 Continued….
• The dominant firm functions as the industry leader. It sets a
price for its product, for example, knowing the smaller
firms will take that price as the industry standard,
benchmarking their prices to it.

• In this type of market, the behavior of the large firm

determines competitive intensity. If it has a substantial
competitive advantage over its smaller competitors, it can
act much like a monopolist. By not pricing aggressively, for
example, it will cede some share to the smaller firms, but it
will have a large gain from “milking” its customer base.

 Continued…
• For the dominant firm structure to persist, the dominant firm must
have some advantage over its much smaller competitors.

• The incentive to do so is enormous given the share they would gain.

• The answer is that something usually differentiates the product of

the dominant firm from those of the small firms.

• For more than 20 years, for example, Coca-Cola dominated the

U.S. market for soft drinks; no competitor had a significant
market share. Supporting Coke’s dominance was the fact that it
was the first firm to build a national brand name in soft drinks
and have a national distribution network.

 Continued….
• As long as the dominant firm is setting a price “umbrella” that
allows the fringe firm to make more profit than it would if there
were no dominant firm, the incentive to attack is diminished.

• If the dominant firm is setting a high price, the smaller firms

may be more profitable than they would be if competition
among the many small firms set the market price. Being the
dominant firm is better than being a firm that lives in the
shadow of the elephant. But living in the shadow of an
elephant is better than living in the glare of unprotected
competition.

 Continued…

• A dominant firm that drops its price to attack a small firm

gives up revenue on its large customer base to gain a
small market share. There may be exceptions
 Summary

• When an industry includes large firms, competitive

intensity will be determined by the details of how those
firms compete.

• The actions the firms can take, the information they have,
the number and characteristics of the large players, the
timing of moves, and the time horizon over which firms
compete can all affect competitive intensity.

 …..

• In concentrated industries, a manager’s understanding of

precisely how competition works in the industry is most
critical. A manager must not only understand how the
actions his firm takes will affect the industry, but must
also anticipate the reactions of rival firms.

Entry and the advantage

of incumbency
 Incumbents and entry
• Incumbents dislike entry for two reasons.

• Successful entry implies that the incumbents’ share of industry profits

must decline.

• Some incumbents may lose more share from entry than others, but,
as a group, their share must decline.

• Entry frequently leads to greater competitive intensity within an

industry because competition usually increases as the number of
firms in an industry increases.
1

• As the industry becomes more competitive, the combined profit the

incumbent firms earn declines

 Types of incumbency
advantage
• Economies of scale - average costs decline as firm produces more
output. Unit cost declines

• Cumulative investment - Firms in the industry make investment spread

over a period of time.

• Learning economies - Basically cost savings which come from

experience. With learning economies, a new entrant has to catch
up with the incumbent who has a cost advantage through
cumulative output

• This depends on output and size of cost reduction

Learning Economies as
barrier to entry
• For both the shallow curve
(A) and the steep curve (B),
the incumbent’s aggregate
cost advantage is not great,
although for different reasons
in the two cases.

• The curve with the moderate

slope (C) represents the
greatest barrier to entry
because the incumbent’s
cost advantage is greater for
every unit of the entrant’s
output (before Q ) than in
A

either of the other two cases.

 Continued

• Research & Development

• Promotion - brands are built over time, and a firm cannot

replicate the effects of five years of advertising by
spending the same total amount in one year because the
effect takes time as well as dollars. Coca-Cola and Pepsi-
Cola have the benefits of decades of cumulative brand
advertising

 Continued
• Incumbency advantage from Loyalty

• Incumbency Advantage from Switching Costs and Demand-Side Increasing

Returns

• Incumbents can also be advantaged when it is costly for buyers to switch to

the entrant’s product.

• Switching costs might exist because complementary products are compatible

only with the buyer’s current product

• Sources of Switching costs - durable assets, training, complementary assets,

Loyalty programs

• Network Effects

• Incumbency advantages from sunk costs

Entry barriers at work…
• Successful entry

• Reduces share of profit

• Increases competition that reduces aggregate profit

• A second firm will enter only when the market conditions are
considerably more favorable than those under which the first firm
would enter, presumably because it expects a competitive response
from the incumbent. These data also imply that the first mover may
gain significant incumbency advantages because there is a range of
market size where incumbency is profitable and yet entry does not
occur.

 Incumbency advantage

• Packing the product space

• Investing to block entry is costly

• The entrant can always choose to stay out, earning whatever profit
it can gain by deploying its resources in the next best alternative.

• It is important that the incumbent make its investment decision

before entry occurs

• Incumbent firms should be proactive in thinking about entry.

Incumbency lets them erect entry barriers, but they can waste this
opportunity if they wait to act until entry has occurred
 Continued

• Blocking entry through contract or Vertical integration

• Signalling to prevent Entry

• Limit Pricing
Creating and Capturing
Value in the Value Chain
 Introduction
• How the characteristics of segments in the value chain
and the links among them affect the division of value
(PIE).

• For example :- Consider an industry that manufactures

consumer goods that a separate retail industry
distributes.

• We want to determine what determines the value that the

manufacturing, retailing and the final consumers in this
chain each capture

 The Walmart Example

• Value Capture

• Mass Market

• Minimize Cost

• Large Quantity Buyer…. Preferred by sellers

• Own store brands to increase bargaining power

• Value Creation

• Innovative partnership with suppliers

• Supplier access to sales and inventory data - reduce logistic costs

• Suppliers time delivery and production minimising cost of serving Walmart

• Basically suppliers handle the logistics problem

• Increased the value that Walmart and its suppliers capture

 Value Chain and Buyer or
Supplier power
• Buyer power” is the ability to capture value by demanding to
pay less than the price one is willing to pay.

• “Supplier power” is the ability to capture PIE by demanding

a payment in excess of opportunity cost.

• The key characteristic of buyer or supplier power is the

ability to affect the terms at which the parties exchange
goods.

• A powerful supplying firm can demand a price greater than

the minimum price at which it is willing to supply the input.

• A powerful buying firm can demand a price lower than the

price it is willing to pay for the input.
 Capturing Value
• Any buyer who is purchasing from firms in an intensely competitive
industry need not be concerned about falling victim to supplier
power. A firm must have market power to have supplier power.

• Analogously, any supplier selling to firms in an intensely

competitive industry need not be concerned about falling victim to
buyer power. A firm can only exert buyer power when it can affect
the price at which it purchases inputs.

• Any firm participating in an intensely competitive industry can exert

little supplier or buyer power in its interactions with other
segments.

Value capture without buyer

or supplier power
 Continued….
• Each firm has a marginal cost of Rs1.

• It costs each of them $1 per unit to transform its inputs to outputs. Thus each unit delivered to
consumers has used $3 worth of resource

• All the value goes to the final consumers because the firms in the other segments compete
vigorously. At any point in this value chain, the buyers benefit from the com- petition that
occurs in the levels upstream from them.

• A firm in segment 2, for example, gets inputs at their opportunity costs because the firms in
segment 1 are competing intensely with each other, and the outcome of the competition
determines the price to the firms in segment 2.

• In turn, competition in its segment drives the firm in segment 2 to sell its product at a price no
greater than its opportunity cost. The final buyers, however, compete with no one. Consumers,
therefore, buy the product at its market price but consume its full value. They therefore get all
the value the chain creates.

 Value Capture by a Single

Buyer or Supplier
• Assume that segments 1 and 3 are perfectly competitive
industries.

• Segment 2, however, is now a monopoly industry.

• Since all the segment 1 firms have a single customer, our

monopolist will have substantial buyer power.

• Similarly, it will have substantial supplier power over the firms

in segment 3 because it is their only supplier.

• Example - OPEC

 Continued….

Consumers, however, are worse off because both their share of the value created and the total value created have declined. The
monopoly firm has captured value by reducing output from the competitive level (compare these results with those in Table 10-1).
As a result, some consumers who are willing to pay more than the cost of providing the good cannot buy it
 When both buyer and
supplier are powerful
• Double Marginalization - suppose segment 1 is competitive and segment
2 is a monopoly, but segment 3 is now a niche market.

• For example :- A manufacturing firm in segment 2 sells its products to

consumers through many local retailers.

• Firms in segment 3 have some supplier power but no buyer power. -

Fast food franchisee

• Now, however, each firm in segment 3 will add a markup greater than
$1; its supplier power will allow it to add a positive price–cost margin
on top of the margin our monopolist creates. These two margins are
the source of the name “double maginalization

• The monopolist share has declined.

 Creating Value
• The value a chain creates depends on the investments made by
the firms in the chain.

• Firms can invest in cost reduction or product development

activities to increase the value they create.

• Firms can create tremendous value by working closely with their

buyers and suppliers. Japanese manufacturers across a variety
of industries—such as automobiles and electronic devices—
generally develop strong cooperative relationships with their
suppliers.

Opportunities for creating value

- The coordination problem

• Relationships can create value by encouraging the

companies to make investments that are valuable only if
the relationship continues.

• For example :- The time a procurement staff spends

getting to know the marketing people at another firm is
useful only if the firms continue to interact
 Contracting to create value
- The incentive problem

• Explicit Contracts

• Implicit Contracts