Deck 13: Advanced Topics in Business Strategy

Question 1

Vertical foreclosure is an example of a firm

A)raising its rivals' costs.
B)that merges with a rival firm with the intention of eliminating the rival firm's product from the market.
C)that controls an essential upstream input refusing to sell to other downstream firms that need the input.
D)raising its rivals' costs and that controls an essential upstream input refusing to sell to other downstream firms that need the input.

Answer 1

D

Question 2

Penetration pricing is

A)a way to raise a rival's marginal cost.
B)a way to raise a rival's fixed cost.
C)a way to overcome an incumbent's first-mover advantage.
D)ineffective in markets with strong networks.

Answer 2

C

Question 3

A potential entrant knows that it faces a (inverse) residual demand curve given by P = 50 - 4Q.While the entrant does not know the inverse market demand it does know that the incumbent committed to producing 150 units.Using this information, which of the following equations best summarizes the inverse market demand curve?

A)P = 200 - 4Q.
B)P = 200 - Q.
C)P = 150 - 4Q.
D)None of the statements associated with this question are correct.

Answer 3

D

Question 4

A network linking 6 users is typically

A)less likely to exhibit bottlenecks than a network linking 2 users.
B)three times as valuable as a network linking 2 users.
C)more than three times as valuable as a network linking 2 users.
D)less than three times as valuable as a network linking 2 users.

Question 5

In general, adding one more user to a two-way network tends to

A)benefit the new user more than the existing users.
B)benefit existing users more than the new user.
C)provide equal benefits to existing users and the new user.
D)does not provide any benefit to either new or existing users.

Question 6

Nodes are

A)examples of positive network externalities.
B)examples of negative network externalities.
C)different points in geographic or economic space linked by a network.
D)none of the statements associated with this question are correct.

Question 7

A two-way network linking 5 users creates how many potential network connections?

A)5.
B)10.
C)20.
D)30.

Question 8

Bottlenecks

A)occur only in one-way networks.
B)occur only in two-way networks.
C)occur in both one-way and two-way networks.
D)are a positive externality associated with networks.

Question 9

Which of the following is false?

A)It is always more profitable to engage in limit pricing than to permit entry.
B)Being the first-mover is always best.
C)Engaging in predatory pricing is always more profitable than permitting existing firms to remain in the market.
D)All of the statements associated with this question are false.

Question 10

Which of the following is an example of a network?

A)Wireless telephone service.
B)Railroads.
C)Internet.
D)All of the examples associated with this question are networks.

Question 11

Selling a product below cost to gain a foothold in the market in order to eliminate the inefficiencies introduced by lock-in is known as

A)predatory pricing.
B)limit pricing.
C)penetration pricing.
D)the price-cost squeeze.

Question 12

Which of the following is incorrect?

A)Predatory pricing is easy to prove in court.
B)Learning curve effects may enable an incumbent to produce at a lower cost than a potential entrant.
C)A firm can benefit from strategies that raise the marginal costs its rivals.
D)A firm can benefit from strategies that raise the fixed costs of all the firms in the industry.

Question 13

Which of the following makes it more difficult for an incumbent to successfully engage in limit pricing?

A)Complete information.
B)Commitment mechanisms.
C)Learning curve effects.
D)A firm's past reputation for being tough on entrants.

Question 14

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:

A)Firm 1 will reduce its output.
B)Firm 2 will gain market share.
C)Firm 2 will enjoy higher profits.
D)All of the statements associated with this question are correct.

Question 15

Limit pricing will effectively deter entry when

A)the incumbent links the pre-entry price to post-entry profits.
B)the incumbent has incomplete information.
C)the entrant must commit to enter the market.
D)all of the statements associated with this question are correct.

Question 16

Firms that can effectively price discriminate will increase profitability when they engage in

A)predatory pricing.
B)limit pricing.
C)strategies that raises rivals' costs.
D)any of the statements associated with this question are correct.

Question 17

Network externalities

A)may be positive.
B)may be direct.
C)may be indirect.
D)all of the of the statements associated with this question are correct.

Question 18

A firm that engages in predatory pricing benefits from

A)having deeper pockets than its prey.
B)building a reputation for taking tough actions to drive a competitor out of the market.
C)having its prey stockpile its product.
D)having deeper pockets than its prey and building a reputation for taking tough actions to drive a competitor out of the market.

Question 19

A single firm that charges the monopoly price in the market earns $500.If another firm successfully enters the market, the incumbent's profits fall to $325 and the entrant earns $250.If the incumbent engages in limit pricing, its profits are $400.For what interest rate, i, is limit pricing a profitable strategy for the incumbent?

A)i < 0.75.
B)0.75 < i < 1.0.
C)1.0 < i < 1.33.
D)i > 1.33.

Question 20

When the average cost curve lies above the entrant's residual demand curve, an entrant

A)can profitably enter the market.
B)cannot profitably enter the market.
C)is indifferent between entering and not entering the market.
D)lower the incumbent's average cost curve.

Question 21

Consider a monopolist attempting to engage in limit pricing with total costs, C(Q) = 100 + 2Q.The market (inverse) demand for its product is P = 100 - 2Q.Currently, monopolist produces 30 units of output.Assuming the potential entrant has the same cost structure as the incumbent monopolist, is it profitable for the entrant to produce 10 units of output?

A)Yes, since the market price of $20 is greater than the average total cost of producing 10 units.
B)No, since the market price of $20 is less than the average total cost of producing 10 units.
C)Yes, since the market price of $50 is greater than the average total cost of producing 10 units.
D)No, since the market price of $50 is less than the average total cost of producing 10 units.

Question 22

Firms that can effectively price discriminate will increase profitability when they engage in

A)limit pricing.
B)vertical foreclosure.
C)a price-cost squeeze.
D)any of the statements associated with this question are correct.

Question 23

Compute the present value of Smyth Industries' profits, if it could have remained a monopoly when the interest rate is 5 percent.

A)$100 million.
B)$200 million.
C)$210 million.
D)$1.05 billion.

Question 24

If one more user is added to a two-way network, it will generally

A)benefit the new user more than the existing users.
B)benefit existing users more than the new user.
C)provide equal benefits to existing users and the new user.
D)unable to tell, because this analysis depends on the type of industry.

Question 25

A single firm that charges the monopoly price in the market earns $600.If another firm successfully enters the market, the incumbent's profits fall to $350 and the entrant earns $275.If the incumbent engages in limit pricing, its profits are $400.For what interest rate, i, is limit pricing a profitable strategy for the incumbent?

A)i > 4.
B)i < 0.25.
C)0.75 < i < 4.
D)0.25 < i < 0.75.

Question 26

An example of vertical foreclosure is when a firm

A)temporarily prices below its marginal cost to close competitors out of the market.
B)merges with a rival firm with the intention of eliminating the rival firm's product from the market.
C)that controls an essential upstream input refuses to sell to other downstream firms that need the input.
D)merges with a rival firm with the intention of eliminating the rival firm's product from the market and that controls an essential upstream input refuses to sell to other downstream firms that need the input.

Question 27

A two-way network linking 9 users creates how many potential network connections?

A)72.
B)56.
C)90.
D)18.

Question 28

Limit pricing is

A)a strategy where a firm temporarily prices below its marginal costs to drive competitors out of the market.
B)a strategy used by a vertically integrated firm to raise rival's costs of inputs, while holding constant final product prices.
C)when an incumbent maintains a price below the monopoly price in order to prevent entry.
D)the act of charging a low price initially upon entering a market to gain market share.

Question 29

Effective limit pricing between one incumbent firm and one potential entrant involves

A)the incumbent linking the pre-entry price to post-entry profits.
B)the incumbent reducing price below the monopoly price to prevent entry.
C)the incumbent linking the pre-entry price to post-entry profits and the incumbent reducing price below the monopoly price to prevent entry.
D)none of the statements associated with this question are correct.

Question 30

Consider an incumbent that is a monopoly currently earning $1 million annually.Given the declining costs of raw materials, the incumbent believes a new firm may enter the market.If successful, a new entrant would reduce the incumbent's profits to $750,000 annually.To keep potential entrants out of the market, the incumbent lowers its price to the out where it is earning $850,000 annually for the indefinite future.If the interested rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?

A)No, since $2 million > $250,000.
B)Yes, since $2 million > $250,000.
C)No, since $5 million > $100,000.
D)Yes, since $250,000 > $5 million.

Question 31

Which of the following is an incorrect statement about predatory pricing?

A)It benefits the firm engaging in predatory pricing to have deeper pockets than its prey.
B)Reputation for taking tough actions to drive a competitor out of the market can enhance the benefits received from the firm engaging in the predatory pricing.
C)Having its prey stockpile its product, produces more benefits to the firm engaging in the predatory pricing.
D)None of the statements associated with this question are correct.

Question 32

Consider an incumbent successfully links the preentry price and postentry profit to prevent entry.The incumbent's monopoly profit is $10 million.If a rival successfully enters the market, the incumbent's profits will fall to $4 million.If the incumbent lowers output to 25,000 units, its rival will stay out of the market resulting in an infinite stream of profits of $8 annually.Due to a recent loan default, the current interest rate is whopping 210 percent.Is limit pricing profitable for the incumbent?

A)Yes, since $19.05 million is greater than $2 million.
B)No, since $1.91 million is less than $2 million.
C)No since $4 million is less than $4.2 million.
D)Linking the preentry price to the postentry profit is sufficient to guarantee the profitability of limit pricing.

Question 33

Suppose the inverse market demand is given by P = 20 - Q.If the incumbent continues to produce 8 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A)P = 12 - Q
B)P = 8 - Q
C)P = 20 - 12Q
D)P = 12 - 8Q

Question 34

A network linking 8 users is typically

A)less likely to exhibit bottlenecks than a network linking 2 users.
B)more than four times as valuable as a network linking 2 users.
C)four times as valuable as a network linking 2 users.
D)less than four times as valuable as a network linking 2 users.

Question 35

Penetration pricing is a way to

A)raise a rival's marginal cost.
B)lower a rival's input costs.
C)increase a rival's fixed costs.
D)gain a critical mass of customers.

Question 36

Firms 1 and 2 compete in a Cournot duopoly.If firm 1 adopts a strategy that raises firm 2's marginal cost

A)firm 2 will increase its output.
B)firm 1 will lose market share.
C)firm 1 will enjoy higher profits.
D)all of the statements associated with this question are correct.

Question 37

Which of the following is not an example of a network?

A)Airlines.
B)Trucking.
C)Telecommunications.
D)None of the statements associated with this question are correct.

Question 38

Under limit pricing, the incumbent will produce

A)more than the monopoly output and charge a price that is greater than the monopoly price.
B)less than the monopoly output and charge a price that is greater than the monopoly price.
C)more than the monopoly output and charge a price that is less than the monopoly price.
D)less than the monopoly output and charge a price that is less than the monopoly price.

Question 39

Which of the following is a correct statement?

A)Predatory pricing is easy to prove in the court of law.
B)An incumbent firm may experience a learning curve that allows it to produce at a lower cost than a potential entrant.
C)A firm receives no individual benefit from strategies that raise the marginal costs of its rivals.
D)No individual firm can benefit from strategies that raise the fixed costs of all the firms in the industry.

Question 40

The price-cost squeeze is

A)a tactic used by a vertically integrated firm to raise rival's costs of inputs, while maintaining final product prices.
B)a strategy where a firm temporarily prices below its marginal costs to drive competitors out of the market.
C)when an incumbent maintains a price below the monopoly price in order to prevent entry.
D)the act of charging a low price initially upon entering a market to gain market share.

Question 41

If Smyth Industries engages in predatory pricing by slashing its price 50 percent below marginal cost, the present value of current and future profits are

A)-$100 million.
B)$0.
C)$100 million.
D)$200 million.

Question 42

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that, inadvertently, lowers firm 1's marginal cost:

A)Firm 1's reaction function will shift up.
B)Firm 2's reaction function will shift up.
C)Firm 2's reaction function will shift down.
D)Firm 1's reaction function will shift down.

Question 43

A two-way network that links users and the per-unit value of the service increases as the size of the network increases is a

A)positive externality known as an indirect network externality.
B)negative externality known as an indirect network externality.
C)positive externality known as an direct network externality.
D)negative externality known as an direct network externality.

Question 44

Suppose the simultaneous-move game depicted above could be turned into a sequential-move game with player 1 moving first.In this case, a _____________ advantage exists and the equilibrium payoffs will be _____________.

A)first-mover; ($15,$30)
B)second-mover; ($50,$5)
C)first-mover; ($40,$2)
D)second-mover; ($15,$30)

Question 45

The Nash equilibrium to simultaneous-move game depicted in the above payoff matrix is

A){(A,a) and (A,b)}.
B){(A,a)}.
C){B,b)}.
D)There is no pure strategy Nash equilibrium to the above game.

Question 46

Consider a two-way network with 1,000 users.The number of potential connections is

A)999.
B)1,000.
C)2,000.
D)999,000.

Question 47

Suppose the production game depicted in the above payoff matrix is a sequential-move game.Identify the strategy leading to a first-mover advantage for player 2.

A)Player 2 moves first and plays Low Q.Observing player 2's move player 1's best response is to play Low Q.
B)Player 2 moves first and plays High Q.Observing player 2's move player 1's best response is to play Low Q.
C)Player 1 moves first and plays Low Q.Observing player 1's move player 2's best response is to play High Q.
D)Player 2 moves first and plays High Q.Observing player 2's move player 1's best response is to play High Q.

Question 48

Suppose the inverse market demand is given by P = 150 - 2Q.If the incumbent continues to produce 10 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A)P = 130 - 2Q
B)P = 150 - 4Q
C)P = 75 - 0.5Q
D)P = 130 - Q

Question 49

Consider a two-way network with 1,000 users.Adding one additional user to such a network benefits all users by adding

A)999 potential connections to the network.
B)1,000 potential connections to the network.
C)2,000 potential connections to the network.
D)999,000 potential connections to the network.

Question 50

Suppose that Microsoft and Netscape compete in the market for PC Internet browsers.Initially these firms compete as Cournot duopolies with symmetric reaction functions.If Microsoft enters into exclusive contracts with PC suppliers that preclude suppliers from loading Netscape's Internet browser on PCs loaded with the Windows operating system, then Netscape's marginal cost of distributing its browser would increase to $5 per unit. The new equilibrium would entail Microsoft supplying __________ browsers and Netscape supplying ____________ browsers to the market.The end result is ________ profits for Netscape.

A)more; fewer; lower.
B)fewer; more; higher.
C)more; more; lower.
D)fewer; fewer; higher.

Question 51

Compute the present value of Smyth Industries' profits if it remains a duopolist in this market when the interest rate is 5 percent.

A)$100 million.
B)$200 million.
C)$210 million.
D)$1.05 billion.

Question 52

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:

A)Firm 1's reaction function will shift up.
B)Firm 2's reaction function will shift up.
C)Firm 2's reaction function will shift down.
D)Firm 1's reaction function will shift down.

Question 53

If the above payoff matrix is a simultaneous-move production game, the Nash equilibrium is for

A)both players to produce low output.
B)both players to produce high output.
C)play 1 to produce low output and player 2 to produce high output.
D)play 1 to produce high output and player 2 to produce low output.

Question 54

Suppose that a one-way network leads to the development of a number of new complementary products and services.This phenomenon is known as

A)a direct network externality.
B)an indirect network externality.
C)a network complementarity.
D)an indirect network externality and network complementarity.

Question 55

Suppose the production game depicted in the above payoff matrix is a sequential-move game.Identify the strategy leading to a first-mover advantage for player 1.

A)Player 1 moves first and plays High Q.Observing player 1's move player 2's best response is to play Low Q.
B)Player 1 moves first and plays Low Q.Observing player 1's move player 2's best response is to play Low Q.
C)Player 1 moves first and plays High Q.Observing player 1's move player 2's best response is to play High Q.
D)Player 1 moves first and plays Low Q.Observing player 1's move player 2's best response is to play High Q.

Question 56

Which of the following is NOT an example of raising rivals' fixed costs?

A)Existing doctors in a particular medical field lobby to have new doctors to acquire new licenses.
B)Yellow Cab Company lobbying NYC Government officials that would require all taxi cab drivers to pay for a medallion - right to drive a cab in NYC.
C)Federal Express lobbying the U.S.Department of Transportation to increase annual terminal fees.
D)The New York Port authority lobbying to increase the tolls on NYC George Washington bridge.

Question 57

Which of the following is the best example of a one-way network?

A)The electricity that flows into residential areas.
B)The network of towers that connect cellular telephone users.
C)The network connect instant message users.
D)Network using optical fibers carrying signals to and from a subscriber's premise.

Question 58

A bottleneck is a

A)positive externality resulting from network complementarities.
B)negative externality resulting from indirect network externalities.
C)positive externality resulting from congestion beyond the infrastructure capacity.
D)negative externality resulting from congestion beyond the infrastructure capacity.

Question 59

Suppose the inverse market demand is given by P = 75 - 0.5Q.If the incumbent continues to produce 20 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A)P = 65 - 2Q
B)P = 20 - 0.5Q
C)P = 150 - 2Q
D)P = 65 - 0.5Q

Question 60

Is it Smyth Industries to remain as a duopolist or engage in predatory price?

A)Engage in predatory pricing since $210 million is greater than $200 million.
B)Remain as a duopolist since $210 million is greater than $0.
C)Engage in predatory pricing since $1.05 billion is greater than $1 billion.
D)Remain as a duopolist since $210 million is greater than $100 million.

Question 61

You are the owner of a new network that is superior to an existing two-way network.The network you aim to replace currently has 50 users, each of whom is willing to pay an average of $75,000 for each connection service within the network.You are confident that each user values connection services within your two-way network at an average of $100,000 per connection service.
a.What is the maximum price the existing network can charge each user for its services?
b.Devise a pricing strategy that will permit your firm to overcome the first-mover advantage enjoyed by the existing network.

Question 62

Predatory pricing is a strategy

A)where an incumbent maintains a price below the monopoly level to prevent entry by potential competitors.
B)where a firm enjoys lower costs due to knowledge gained from its past production decisions.
C)where a firm temporarily prices below its marginal cost to drive competitors out of the market.
D)used by a vertically integrated firm to squeeze margins of its competitors.

Question 63

Sanford Inc.currently competes in a duopoly.The market price is $10 and Sanford's annual profit is $10 million.If Sanford were the only firm in the market, it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time.By charging $5 per unit for one year, Sanford could drive its rival out of the market and maintain a monopoly position indefinitely.However, this strategy will result in a $20 million loss since its marginal cost is $8 per unit.
a.What pricing strategy is the manager considering?
b.Ignoring legal considerations, is this pricing strategy profitable? Assume the interest rate is 5 percent and, for simplicity, that any current period profits or losses occur immediately (at the beginning of the year).

Question 64

Use the accompanying graph to answer the following questions
B.
a.Increase.
b.Decrease.
c.Raise firm 2's marginal cost.

Question 65

SunCenter is the only firm in its industry.Currently, SunCenter charges $75 per unit, a price well in excess of its marginal cost of $5 per unit, and earns $70 million per year in profit.According to a trusted source, the manager of SunCenter learned that a new firm is contemplating entering the market.This would reduce its profit to $40 million per year.By expanding its output and lowering its price to $50, the entrant would find it unprofitable to enter the market and SunCenter would earn profits of $50 million per year for the indefinite future.
a.What pricing strategy is the manager of SunCenter considering?
b.If SunCenter was able to credibly commit to maintain a price of $50, would it be a profitable strategy? Explain.

Question 66

Using the following sequential-move production game, determine whether player B has a first-mover advantage and identify the strategy that leads to that advantage:

A)Player B has a first-mover advantage.The strategy leading to an advantage is {(low output), (if low output, high output), (if high output, high output).
B)Player B has a first-mover advantage.The strategy leading to an advantage is {(low output), (if low output, high output), (if high output, low output).
C)Player B has a first-mover advantage.The strategy leading to an advantage is {(high output), (if low output, high output), (if high output, low output).
D)Player B does not have a first-mover advantage in the above game.

Question 67

A price-cost squeeze is tactic used

A)to prevent potential competitors from entering a market.
B)by a vertically integrated firm to squeeze the margins of its competitors.
C)by a vertically integrated firm to charge downstream rivals a prohibitive price for an essential input; forcing rivals to use more costly substitutes or exit the industry.
D)to gain a critical mass of consumers by charging an initial low price.

Question 68

Consider the following normal-form game.
B.
b."Bottom," since player A should anticipate that B will play its dominant strategy.
c.($500, -$50)
d.See the extensive form game is shown in Figure 13-1.Notice that if player B moves first, its best response is "Right." To see this, notice that if B plays "Left," A will play "Bottom" since $500 is better than $100.If B plays "Right," A's best response is "Top" since -$10 is better than -$100.Thus, player B earns a payoff of $100 by moving first and playing "Right," compared to the payoff of -$50 that is achieved if it does not exercise this first-mover advantage.
Figure 13-1
e.Player B must be able to credibly commit to the strategy "Right" before player A has a chance to move.Furthermore, this choice must be known by A before it makes its own move.

Question 69

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:

A)Firm 1 will increase its output.
B)Firm 2 will gain market share.
C)Firm 2 will enjoy lower profits.
D)All of the statements associated with this question are correct.

Question 70

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:

A)Firm 1 will increase its output.
B)Firm 2 will lose market share.
C)Firm 2 will enjoy lower profits.
D)None of the statements associated with this question are correct.

Question 71

As a newly hired stock analyst, your first job is determining the value of a company that sells a service that has extremely strong network effects.Essentially, this firm sells a two-way network that links users and currently comprises 50,000 nodes.Each connection service within the network has a value of $10.Estimate the total value of the firm.

Question 72

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:

A)Firm 1 will reduce its output.
B)Firm 2 will gain lose share.
C)Firm 1 will enjoy higher profits.
D)None of the statements associated with this question are correct.

Question 73

Which of the following is not a strategy for vertically integrated firms?

A)Vertical foreclosure.
B)Predatory pricing.
C)Limit pricing.
D)Penetration pricing.

Question 74

A monopolist's demand curve is given by D^M and its average cost curve is AC in the accompanying figure.Suppose a potential entrant can produce at the same cost as the monopolist.
a.What level of output does the monopolist have to produce in order for the entrant to face the residual demand curve, D^R?
b.How much profit will the monopolist earn if it commits to the output that generates the residual demand curve, D^R?
c.Is the level of output that generates the residual demand curve, D^R, enough for the monopolist to deter entry?