Business Economics and Industrial Organization

Seminar VI — Strategic Position and Dynamics
1. Indicate whether the strategic effects of the following competitive moves are likely to be a positive
(beneficial to the firm making them) or negative (harmful to the firm making them).
a) Two horizontally differentiated producers of diesel railroad engines – one located in the U.S.
and other located in Europe – compete in European markets as Bertrand price competitors.
The U.S. manufacturer lobbies the U.S. government to give it an export subsidy, the amount of
which is directly proportional to the amount of output the firm sells in the European market.
b) A Cournot duopolist issues new debt to repurchase shares of its stock. The new debt issue
will preclude the firm from raising additional debt in the foreseeable future, and is expected to
constrain the firm from modernizing existing production facilities
2. Suppose that you were an industry analyst trying to determine whether the leading firms in the
automobile manufacturing industry are playing tit-for-tat pricing game. What real world data would
you want to examine? What would you consider to be evidence of tit-for-tat pricing?
3. An incumbent is considering expanding its capacity. It can do so in one of two ways. It can purchase
fungible, general purpose equipment and machinery that can be resold at close to its original value.
Or it can invest in highly specialized machinery that, once it is put in place, has virtually no salvage
value. Assuming that each choice results in the same production costs once installed, under which
choice is the incumbent likely to encounter a greater likelihood of entry and why?
4. Comment on the following: “All of Porter’s wisdom contained in the five – forces framework is reflected
in the economic identity: Profit=(Price-Average Cost)×Quantity”
5. Do you agree or disagree with the following statements about sustaining advantage? Explain why
a) In a market with network externalities, the product that would potentially offer consumers the
highest“B-C” inevitably comes to dominate
b) Usually high-performing firms may get that way either by out-positioning their competitors,
belonging to high-performing industries, or both.
c) If the sunk cost of entering Industry A exceed the sunk cost of entering Industry B, there will
certainly be fewer firms in Industry A than in Industry B
d) The Kronos Quartet (a popular classical string quartet) provides an example of co-specialized
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