Strategy - Final Exam – December 2020

Strategies for Competing in Industries & Markets

Academic Year 2020 - 2021

December, 11th 2020

Final Exam
Duration: 80 minutes

- The exam consists of 3 Sections:

o SECTION 1: A business reading from The Economist with related questions apt to test
your theoretical understanding and ability to apply and elaborate content
o SECTION 2: A set of guided questions and exercises apt to test the level of your analytical
thinking and ability to logically connect the content of the course
o SECTION 3: A set of True or False questions with justified answers to check the breadth
of your preparation for different parts of the course
- All questions are compulsory and each one reports the max. points that you can be given if you
reply correctly.
- Please reply to each question keeping their order and report the number of the question answered
in the beginning of your answer.
- Please submit your exam online via the OnlineCampus platform by the 80 minutes. Each exam
submitted late will be discarded and not evaluated.
- The exam is individual, and will be subject to a Turnitin check. Every forms of violations of the
IE ethical conduct will be sanctioned.

Before starting, indicate your name, surname, BBA group.

NAME
SURNAME
BBA GROUP

‘Delivery of this material constitutes my affirmation that I have not violated the IE University Code of Ethics
during this examination. I have neither given nor received help nor used any illicit means in the preparation and
execution of this task’

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 Strategy - Final Exam – December 2020

SECTION 1 (6 questions, Total Points 35)

Please read the following article from The Economist (Nov. 2014) and then
reply to the questions.

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Strategy - Final Exam – December 2020

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 Strategy - Final Exam – December 2020

1) Using the information from the article, please state i) whether the legalized cannabis
market seems attractive (Market =Legalized Cannabis industry) and ii) in support
of your answer give at least three arguments to explain why the market may or may
not be attractive (5 points)
Yes (1 point)
Some of the explanations below (1.5 point for each for a max of 3 points)
• lots of potential for demand growth
• no big players, many small entrants
• Product differentiation possibility
• No dominant product category, room for experimentation on product offerings
• Capital requirement is not very high
• Low exit barriers
• Competition is likely to be on quality rather than price
• Potential for economies of scope

2) Which stage of the Industry Life Cycle (ILC) is the industry in? Which are the two
main factors by which we can identify an ILC stage? Please highlight them referring
to this industry and to the reading. (6 points)
[Depends on how students define the industry; we can differentiate between legal
pot industry and the black market: The legal one is in the introduction/growth,
whereas the illegal one is a stable one in the maturity with big drug dealers running
it.] (1 point)

The factors are usually innovation (stage of knowledge development) and demand
diffusion (1 point – 0.5 for each factor)

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 Strategy - Final Exam – December 2020

Change in demand: Legalization of cannabis affected the legal demand, both for
smokers and non-smokers. Based on the matching stage in the industry, lot of new
small entrepreneurial firms joining the market. (2 points)

Change in firms’ knowledge: not much changes in terms of new tech or innovative
activity [what about new strategies for growth or product delivery?]. Product
Standardization: experimentation on product offerings v. emergence of dominant
design (or product categories) (2 points)

3) Please select an example discussed during class (or in the reading) and define and
explain the concept of Dominant Design, the timing of its emergence, highlight its
relationship to innovation, demand and network externalities, and its difference
compared to technical standards. (6 points)
Standard answer
1 point for the definition
1 point for the emergence dynamic (which stage)
1 point for the description of process & product innovation
1 point for the demand (mass market begin)
1 point for the role of network externalities
1 point for the difference compared to technical standards

[solutions are in the slides of the ILF or the Grant Textbook]

4) Given the information in the article, which main corporate strategy is necessary to
build a “Marlboro of Marijuana”? Please indicate i) the corporate strategy and ii)
explain why you recommend this strategy based on the concepts of the course and
the reading. (6 points)
Vertical Integration because control of the value chain is essential to achieving
success in this industry. (2 points)

Determinants: a) Coordination necessity – coordinating production, storage and sale

b) Market uncertainty – changes in regulation create market uncertainty (1 point for
each determinant (total of 2 points); plus explanation (1 point for each explanation,
total of 2 points). [total 4 points if the answer is complete]

5) Imagine that Marijuana companies decide to diversify and build a “PepsiCo of

Marijuana”? Please describe the type of diversification and highlight at least 2 types
of costs & 2 types of benefits of this decision. (6 points)
Diversification because Pepsi's strategy is to be present in many different markets
or industries under the same brand. This is suggested by expansion into related
products like choco-marijuna etc. (2 points)

Costs & Benefits are standard:

cost of coordination, agency, adjustment (list 2 of them – 1 point each, total 2 points)
Benefits: economies of scope & synergies, market growth (size, revenues) – 1 point
each, total 2 points

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 Strategy - Final Exam – December 2020

6) The reading by Brahms et al. (2017) discussed costs arising from friction: routine
execution costs. How do you define these costs and when would Marijuana
companies experience these costs? (6 points)
Definition of the frictional costs = they are the costs of routines executions
(2 points)

Costs – they increase with the higher number of the products, they increase also if
the products are more unrelated (2 points for each explanations or example; total of
4 points)

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 Strategy - Final Exam – December 2020

SECTION 2 (11 questions, Total points 35)

Please read these guided questions, reply to them and solve the exercises
when it is requested.

(I) Coke is a an incumbent in the US beverage industry. MRJuice is a new entrant

launching a new protein soda in the US market to compete against a similar product
released by Coke in the US market segment of healthy drinks (i.e. the two products
can be considered as substitutes).
MRJuice launches the product with the final unit price equal to $ 1.80, while the final
price of the product from Coke is $ 2.50 per unit.

1) Which typology of entry strategy is MrJuice adopting? Which are the conditions under
which this entry dynamics is recommendable? (4 points)
MrJ is adopting an aggressive / Deterring Strategy to enter the market (1point)
Deterring Strategies according the Bain’s conditions: entry is not blockade (1 point),
deterring is the only condition (1 point) and the most cost effective strategy to pay off
the rivals.(1 point)
SLIDE #13 sess.17

2) In class we discussed the Fudenberg & Tirole matrix. Which scenario can be associated
with the competition above? Why? Which are its characteristics? (4 points)
In the slides of Session 17 we reported the examples of Coke and Pepsi. For analogy
students should use the example and assuming that there are high entry barrier and the
behavior is aggressive, the typology of strategy is TOP DOG.
- TOP DOG (1 point); - (why) because we assume High Entry Barriers (1 point) –
Strategy characterized by Price wars & Ec Scales (industry concentrated and large
firms) (2 points, one for each condition)
SLIDE 21 #sess17

(II) Imagine a one shot simultaneous game between Coke (Player 1) and MRJuice (Player
2) where the two companies must search for an equilibrium of price. Both companies
have symmetric choices, either set a HIGH or a LOW price. If both companies charge
HIGH prices, Coke has a pay-off of 1000 and MRJuice earns 300. If both companies
charge LOW prices, Coke has a pay-off of 700 and MRJuice earns 500. Differently, if
the Player 1 sets the price HIGH and Player 2 sets the price LOW, they get a pay-off
equal to 600 (Player 1) and 800 (Player2). The other way around, if Player 1 sets a
LOW price and Player 2 sets a HIGH price, they get a pay-off equal to 1500 (Player1)
and 400 (Player 2).
[pay-offs are expressed in millions of USD]

3) Please sketch the game in a normal form and determine the Nash Equilibrium (NE) of
the one shot simultaneous game described above (section II)? Please explain you
answer briefly in words. (4 points)
Drawing 1 point
The Nash Equilibrium is (Low, Low) – 1 point
Justification / Explanation if right NE is the set of best responses – 2 point

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 Strategy - Final Exam – December 2020

4) Is the NE Pareto efficient? Why? (2 points)

Here we have counted all answers that make sense correct

5) Assume that the game is sequential now and Coke enters as first mover. Please turn the
game into an extensive form and determine the Subgame Perfect Nash Equilibrium
(SPNE) explaining via the assumptions why this is the equilibrium (2 points)
The Subgame Nash Equilibrium is (Low, Low) – 1 point
This is computed via backward induction – 1 point
Answers are in session 13 and 16

6) Can we claim that Coke has a first mover advantage from a game theoretical
perspective? Please base your argument on your results for questions (3) and (5). (2
points)
No –(1 point)
Why: (1 point) because NE and SPNE coincide, thus timing of choice does not
matter

7) Please assume that this game is not a finite sequential game and MRJuice on purpose
limited its price below marginal cost. According to limit price theory, are the equilibria
above sustainable in the long run? Why (there are 3 reasons) ? (4 points)
No, the equilibrium is not sustainable because being aggressive does not pay off
(slides 18-19 of Sess 17 explains this) 1 point
Slides 19 for the 3 explanations – 1 point for each of them

(III) Assume that with respect to the situation described in the scenario (I), Coke and
MRJuice compete in the market for the quantity of products offered. Assume that i)
both companies have the same costs, ii) both companies have linear marginal costs
and iii) companies’ products are substitute.

8) Does this entry strategy differ compared to the one of scenario (I)? Why? Which type of
entry strategy is this (according to the classification by Joseph Bain)? (3 points)
This entry strategy DOES NOT DIFFER, because from a behavioral standpoint is
still an aggressive strategy (2 points)
This strategy is called Strategic Bundling (1 point)

9) Imagine that MRJuice uses the same brand for both soda and snack to enter the market,
this means that Costs (snack + soda) < Costs (snack) + Costs (soda). Please explain
which type of economies can be exploited MRJuice based on this information and give
at least 3 concrete examples how these economies can be developed. (4 points)
Example economies of scope given from the brand (1 point)
3 Examples that make sense retrieved from the Sess 23 on diversification and slides
of source of economies of scope (3 points – 1 point for example)

(IV) Now, assume that Coke and MRJuice compete in a duopoly where the equilibrium is
the a Cournot equilibrium. [All the Cournot model assumptions hold

10) Are the two players making decisions about the price in a Cournot situation ? Why?
(2points)

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 Strategy - Final Exam – December 2020

Cournot is a model on quantity (not like Bertrand). So here the companies make
decisions on the quantities to produce (like the lobster quantity in the Lobster). (1
point)
The price is the market price determined by the total Q=q1+q2 of the quantity in the
market.(1 point)

11)Keep assuming a competition à la Cournot, but with a larger number of firms > 2 (a
situation comparable to our Lobster Game). What are the strategic recommendations
that you could give to both companies to find an Equilibrium and be profitable after
years of competition (list at least 4 points)? (4 points)

All the take ways of Cournot and lobster game hold

- Not aggressive / be accommodating
- do not deviate too much from NE (not too low, not too high)
- History of repetition matters
- Reputation / signals matter

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 Strategy - Final Exam – December 2020

SECTION 3 (15 questions, Total Points 30)

TRUE or FALSE?
Please HIGHLIGHT the selected answer and then JUSTIFY it (i.e.
why the statement is either true or false, avoiding tautologizes)
(complete and right answers give 2 points each)
1. In a Cournot situation, firms produce less output when they maximize their profits
independently rather than if they collusively maximize industry profits
TRUE or FALSE
True. Counrot quantity is in between monopoly and perfect competition

2. The Bertrand paradox describes that firms in duopolies make higher profits than in
industries with perfect competition
TRUE or FALSE
False. Bertarnd paradox is the opposite. Profit is not existing becs companies
(symmetric) share (1/2) the market

3. For an entrant, a ‘Fat Cat’ situation is more competitive than a ‘Top Dog’ situation
TRUE or FALSE
False, bcs fat Cat is an accomodating strategy

4. Differentiation is not possible in mature industries

TRUE or FALSE
False. Whn technology cannot be developed further, differentiation via complemntary
service, the reinvention of the experience etc is a strategy in mature industry

5. The number of firms constantly increases over the industry life cycle
TRUE or FALSE
False. This happens until the growth pase when there is the shakeout

6. Transaction costs include searching costs for suitable market counterparties

TRUE or FALSE
True. Transactions costs are costs of writing contracts, therefore the search for the
counterpart is a source of them

7. Vertical integration decreased American Apparel’s control over their production and
design
TRUE or FALSE
AA is fully integrated to control all the steps of the value chain from the raw material to
the retailing

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 Strategy - Final Exam – December 2020

8. A firm’s growth strategies are especially successful if they are consistent with a firm’s
business strategy
TRUE or FALSE
We learnt this concept from the case of AA, the vertical supply chain is fully integrated
to maintain diff advantage (quality and retail experience, mkt activities customized)

9. In the textile and clothing sector, like in the case of American Apparel, the upstream
market stages of the supply chain are not vertically integrated because there are no
transaction-specific investments.
TRUE or FALSE
See Slide 15 Sess 21

10. The application of a scale-free resource in one product niche limits options to use the
resource in another niche
TRUE or FALSE
No, the scale free reosurces are technology brands and their use is nott taxed on their
applications and for this they créate synergies.

11. Diversification via portfolio breadth increases exclusively economies of scope within a
company
TRUE or FALSE
The paper by Brahms shows that when producto variety increases also frictional costs
increses (not only economies of scope)

12. The level of experiential learning and the level of unrelatedness moderate respectively
the relationship between the level of product variety and the routine execution costs
TRUE or FALSE
The experiential learning interact positively; while, the unrelatedness interacts
negatively.

13. The competition between HBO and Netflix is characterized by price wars
TRUE or FALSE
From the articles of sess 20 and the interview to Elana, it comes up that HBO is not
competing on Price – its recognition is the Brand and quality

14. In diversification theory, the attractiveness of the industry targeted is sufficient to

justify diversifying into another industry
TRUE or FALSE

False – need of the three Porter’s essentail tests

15. HBO is defending its advantage with ex-ante endogenous barriers

TRUE or FALSE

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 Strategy - Final Exam – December 2020

Accomodating strategy based on Brand reputation and quality

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