Question 1

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 are correct.

Accepted Answer

Nodes typically refer to different points in geographic or economic space that are connected by a network. Therefore, option C is the correct answer. Option A is not accurate because positive network externalities refer to situations where the value of a product or service increases as more people use it, whereas nodes do not necessarily have this characteristic. Option B is also not accurate because negative network externalities refer to situations where the value of a product or service decreases as more people use it, which is also not necessarily a characteristic of nodes. Option D is incorrect because option C is correct.

Question 2

A firm that engages in predatory pricing benefits from:
A) building a reputation of accommodating future entrants.
B) building a reputation for taking tough actions to drive a competitor out of the market.
C) having its prey stockpile its product.
D) full protection from the courts.

Accepted Answer

Predatory pricing involves selling products or services at a very low price to drive out competitors. The primary benefit of this strategy is that it helps the firm build a reputation for taking tough actions to drive out competitors. This could deter potential entrants from entering the market, as they would be discouraged by the risk of being outcompeted. Additionally, once competitors are driven out of the market, the predatory firm can increase prices and regain lost revenue. However, there is no full protection from the courts for such practices.

Question 3

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.

Accepted Answer

Bottlenecks can occur in both one-way and two-way networks. A bottleneck is a point in the network where the flow of information or goods is limited or slowed down, which can happen in any type of network.

Question 4

Vertical foreclosure is an example of a firm:
A) engaging in a price-cost squeeze.
B) that merges with a rival firm with the intention of eliminating the rival firm's product from the market.
C) engaging in penetration pricing.
D) that controls an essential upstream input and raises rivals' costs by refusing to sell to other downstream firms that need the input.

Accepted Answer

Vertical foreclosure occurs when a firm controls an essential input and raises the costs of its downstream rivals by refusing to sell to them. This limits competition in the downstream market and can harm consumers by reducing choice and raising prices.

Question 5

A network linking six users is typically:
A) less likely to exhibit bottlenecks than a network linking two users.
B) three times as valuable as a network linking two users.
C) more than three times as valuable as a network linking two users.
D) less than three times as valuable as a network linking two users.

Accepted Answer

The value of a network increases exponentially as more users are added. With six users, there are more potential connections and collaborations, and the network becomes more valuable than a network linking just two users. Therefore, a network linking six users is more than three times as valuable as a network linking two users.

Question 6

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

Accepted Answer

Complete information makes it more difficult for an incumbent to engage in limit pricing because potential entrants can accurately assess the incumbent's costs and pricing strategy, reducing the uncertainty that limit pricing relies on to deter entry.

Question 7

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.

Accepted Answer

Each of the statements A, B, and C makes an absolute claim about business strategies (limit pricing, first-mover advantage, and predatory pricing) that does not hold true in all circumstances. The effectiveness of these strategies can vary based on market conditions, regulatory environments, and the specific dynamics of competition within an industry. Therefore, claiming any of these strategies is "always" the best or most profitable is incorrect, making D the correct answer as it states all associated statements are false.

Question 8

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.

Accepted Answer

Penetration pricing is a pricing strategy in which a company sets a low price for its products or services initially to gain market share and overcome an incumbent's first-mover advantage. It aims to attract customers away from competitors and encourage them to switch to the new product. Therefore, option C is the best choice. Option A and B are incorrect as penetration pricing does not aim to raise a rival's marginal or fixed cost, respectively. Option D is partially correct, as penetration pricing may not be effective in markets with strong network effects, but it is not an absolute rule.

Question 9

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) lowers the incumbent's average cost curve.

Accepted Answer

When the average cost curve lies above the entrant's residual demand curve, it means that the entrant cannot produce at a cost lower than the price it would have to charge to sell all of its output. In other words, the entrant would have to charge a price higher than the market price, which would result in a lower quantity demanded and sales. This makes it impossible for the entrant to compete with the incumbent firms and make a profit, thus the entrant cannot profitably enter the market.

Question 10

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.

Accepted Answer

Limit pricing deters entry when the incumbent sets a pre-entry price low enough to make post-entry profits unattractive for potential entrants.

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.

Accepted Answer

Penetration pricing is a pricing strategy in which a product is sold below its cost to gain a foothold in the market. The aim is to attract customers and gain market share, after which the company can gradually increase the price. This approach helps to eliminate inefficiencies introduced by lock-in, which is a phenomenon where customers stick with a particular product or service due to the high cost of switching to another option. Predatory pricing refers to the practice of selling goods below cost to drive competitors out of business, while limit pricing and price-cost squeeze are strategies used by dominant firms to discourage entry or competition.

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 of its rivals.
D) A firm can benefit from strategies that raise the fixed costs of all the firms in the industry.

Accepted Answer

Predatory pricing is difficult to prove in court as it requires proving intent to eliminate competition, which is often difficult to establish.

Question 13

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.

Accepted Answer

All the examples given in the question are networks. Wireless telephone service and railroads are examples of communication and transportation networks respectively, while the internet is a global computer network.

Question 14

A two-way network linking five users creates how many potential network connections?
A) 5
B) 10
C) 20
D) 30

Accepted Answer

A two-way network means that each user can connect to four other users. Therefore, we need to use the combination formula, which is nCr = n! / r!(n-r)! where n is the total number of users and r is the number of users that can connect to each other. In this case, n=5 and r=2 (since we want to connect two users at a time). Thus, 5C2 = 5! / 2!(5-2)! = 10. However, we also need to account for the fact that each connection can be made in two directions (e.g. user A can connect with user B, and user B can connect with user A). Therefore, we need to multiply 10 by 2, giving us a total of 20 potential network connections. Therefore, the correct answer is C.

Question 15

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.

Accepted Answer

In a Cournot duopoly, firms decide on their output levels simultaneously, taking into account the other firm's output. If Firm 2 adopts a strategy that increases Firm 1's marginal cost, Firm 1 will indeed reduce its output to maximize its profit given the higher cost of production. This reduction in output by Firm 1 allows Firm 2 to gain market share, as it can now supply a larger portion of the market's demand. Consequently, with a larger market share and potentially higher sales volume at competitive prices, Firm 2 will enjoy higher profits. Therefore, all the statements are correct in the context of the Cournot duopoly model.

Question 16

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) not provide any benefit to either new or existing users.

Accepted Answer

Adding a new user to a two-way network may benefit existing users more than the new user because it increases the reach and connectivity of the network, which can lead to more opportunities for the existing users to interact and exchange information with each other. The new user may benefit from the network as well, but they may not initially have as many connections or opportunities as the existing users.

Question 17

Firms that can effectively price discriminate can 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.

Accepted Answer

Price discrimination involves charging different prices to different consumers for the same product, based on their willingness to pay. This can increase profitability by capturing more consumer surplus. Predatory pricing, limit pricing, and strategies that raise rivals' costs can all be part of broader competitive strategies to increase market share or deter entry, which, when combined with effective price discrimination, can further enhance a firm's profitability.

Question 18

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

Accepted Answer

If the incumbent engages in limit pricing, it earns $400 instead of $325. The difference in profit is $75. The interest rate at which the present value of the $75 difference is equal to the $500 monopoly profit is when $75/i = $500, which simplifies to i < 0.75.

Question 19

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 are correct.

Accepted Answer

The answer of A potential entrant knows that it faces...

Question 20

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

Accepted Answer

Network externalities can be positive, direct or indirect. Therefore, all the statements associated with this question are correct.

Quiz 13: Advanced Topics in Business Strategy

Nodes are:

A firm that engages in predatory pricing benefits from:

Bottlenecks:

Vertical foreclosure is an example of a firm:

A network linking six users is typically:

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

Which of the following is FALSE?

Penetration pricing is:

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

Limit pricing will effectively deter entry when:

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:

Which of the following is incorrect?

Which of the following is an example of a network?

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

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

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

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

Network externalities: