Exam Feedback _ Competitive Strategy

18/08/13 Exam Feedback | Competitive Strategy

https://class.coursera.org/compstrategy-001/quiz/feedback?submission_id=900233 1/24

Feedback — Final-exam quiz

You submitted this exam on Sun 18 Aug 2013 12:38 PM PDT (UTC -0700). Yougot a score of 20.75 out of 25.00. You can attempt again in 60 minutes.

Welcome to the final-exam quiz of Competitive Strategy!

The questions in this exam are based on the material we have discussed in the past sixweeks. Some questions are easy; others might be a bit more challenging. We highlyencourage you to try to answer all of the questions.

Please take care: You have two possible attempts for this final-exam quiz. We kindly ask youto wait for 60 minutes before retaking the quiz. If you retake the quiz, the questions will notstay exactly the same but be slightly or even substantially different.

For each attempt, you have 90 minutes to answer all the questions. If you do not submit youranswers after 90 minutes, the system will automatically lock the screen and the last savedanswers will be submitted automatically. 90 minutes should be more than enough to answerall the questions. Nevertheless, please keep in mind the timing.

We wish you good luck and great fun!

Question 1A strategy in the game theoretic sense is…

Your Answer Score Explanation

…the description of the actions a player will undertake inany possible circumstance.

0.33

…the behaviour of a firm in a certain setting. 0.33

…the determination of basic long-term goals and objectivesof a firm.

0.33

Total 1.00 /

1.00

https://class.coursera.org/compstrategy-001/quiz/start?quiz_id=207



Question Explanation

In game theory, a strategy describes the actions a player will undertake in any possiblecircumstance.

Let’s take the following game matrix as an example.

Here, the strategy of City Cuts is:- Set a low price if Toby’s Hairstyle sets a high price (payoffs of £ 135 instead of payoffs of £130).- Set a high price if Toby’s Hairstyle sets a low price (payoffs of £ 120 instead of payoffs of £115).

Question 2A Nash Equilibrium usually contains dominated strategies.


True 0.00

False

Total 0.00 / 1.00


False. A strategy is dominated if, regardless of what the other player does, the strategy earns



the player a smaller payoff than some other strategy. Hence, a strategy is dominated if it isalways better to play some other strategy, regardless of what the opponent may do. A NashEquilibrium is a set of strategies, one for the player and one for his/her opponent thatrepresents the best responses to each other. As we have just seen a dominated strategy cannever be the best response to the opponent's action.

Question 3Applied research is more risky than basic research as a general rule.


True

False 1.00

Total 1.00 / 1.00


False. It is often uncertain whether investments in basic research lead to a marketableproduct. Furthermore, basic research is harder to protect by patents, hence spilloversbetween firms are more likely to occur.

Question 4Which of the following statements are true?

YourAnswer

Score Explanation

Inrepeatedinteractionsbetweencompanies,cooperationis morelikely ifceterisparibus the

0.00 False. In a situation with high interest rates, you get higherpaybacks in the future for the money that you invest today. Inother words, it is cheaper to replicate future payoffs with today’spayoffs than to replicate today’s payoffs with future payoffs. Theplayers have to decide between high payoffs today and nopayoffs in the future OR low payoffs today and low payoffs in thefutures (given that the game goes on). In a situation with highinterest rates, today's payoffs are weighted higher and hence theplayers are more tempted to deviate. Hence, the likelihood ofcooperation is lower in a situation with high interest rates and



interest rateis high.

higher in a situation with low interest rates.

In aPrisoner’sDilemmathe playersopt for thestrategiesthatmaximizejointpayoffs.

0.33 False. In a Prisoner’s Dilemma the players opt to deviate eventhough they could both achieve higher payoffs throughcooperating.

Playing agamerepeatedlyalwaysavoidsinefficientsolutions.

0.33 False. Playing a game repeatedly can help avoiding inefficientsolutions like Prisoners Dilemmas. Not every Prisoners Dilemma,however, can be “resolved” through being played repeatedly.Imagine a Prisoners Dilemma that is repeated three times. It isclear to all players that the game ends for sure after these threerounds. We can solve this game by backward induction. It is bestfor all players to deviate in all stages / repetitions.

Total 0.67 /1.00

Question 5Pizza Hut and Domino’s Pizza bot sell pizzas at the city centre in Munich. Some consumers

only like Pizza Hut, others prefer Domino’s Pizza. Most of the consumers make their choice

dependent on prices. Each pizza stall can charge low, medium or high prices. The responding

payoffs are illustrated in the payoff matrix below.

Which prices will the pizza stalls set, assuming that they are rational and profit maximizing?




Pizza Hut - High Price / Domino's Pizza - High Price

Pizza Hut - High Price / Domino’s Pizza - Medium Price

Pizza Hut - High Price / Domino's Pizza - Low Price

Pizza Hut - Medium Price / Domino's Pizza - High Price

Pizza Hut - Medium Price / Domino's Pizza - MediumPrice

1.00

Pizza Hut - Medium Price / Domino's Pizza - Low Price

Pizza Hut - Low Price / Domino's Pizza - High Price

Pizza Hut - Low Price / Domino's Pizza - Medium Price

Pizza Hut - Low Price / Domino's Pizza - Low Price

Total 1.00 /1.00


We can solve this game through the elimination of dominated strategies.

A) Domino’s Pizza – High Price is a dominated strategy.- If Pizza Hut charges a high price, it is best for Domino’s Pizza to charge a medium price



- If Pizza Hut charges a medium price, it is best for Domino’s Pizza to charge a medium price- If Pizza Hut charges a low price, it is best for Domino’s Pizza to charge a low priceHence, it is never optimal for Domino’s Pizza to charge a high price.

B) Pizza Hut – Low Price is a dominated strategy.- If Domino’s Pizza charges a high price, it is best for Pizza Hut to charge a high price- If Domino’s Pizza charges a medium price, it is best for Pizza Hut to charge a medium price- If Domino’s Pizza charges a low price, it is best for Pizza Hut to charge a medium priceHence, it is never optimal for Pizza Hut to charge a low price.

C) We are now left with Domino’s Pizza charging a medium or a low price and Pizza Hutcharging a high or medium price. Here, we can find dominant strategies.

D) Pizza Hut – Medium Price is a dominant strategy- If Domino’s Pizza charges a medium price, it is best for Pizza Hut to charge a medium price- If Domino’s Pizza charges a low price, it is best for Pizza Hut to charge a medium price

E) Domino’s Pizza – Medium Price is a dominant strategy- If Pizza Hut charges a high price, it is best for Domino’s Pizza to charge a medium price- If Pizza Hut charges a medium price, it is best for Domino’s Pizza to charge a medium price

F) Hence, the pizza stalls will both charge medium prices.

Question 6Apple (A) and Blackberry (B) compete in the market for smartphones. Both firms have to decide

whether they want to engage in R&D for a new type of device with a 3D enabled haptic

touchscreen. Because A is relatively more efficient in R&D, fixed costs for this R&D project are

$10mn for A and $15mn for B. Both firms are equally likely to come up with a marketable

innovation (probability p). Expected profits from the new technology are $15mn if one firm

manages to be alone in the market and $5mn each if both firms come up with a product.

What is the expected payoff for A if both firms engage in R&D?


p(1-p)15+5p²-10 0.25

15p-10p²-10 0.00

p(1-p)10+5p²-15 0.25

15p-10 0.25



Total 0.75 / 1.00


We need to distinguish the three possible scenarios and subtract fixed cost. Scenario 1: A is successful, B is not successful -> p * (1-p) * $15mn Scenario 2: A and B are successful -> p * p * $5mn Scenario 3: A is unsuccessfu -> (1-p) * $0

p (1-p) * $15mn + p * p * $5mn + (1-p) * $0 - $10mn = p(1-p)15 + 5p² - 10 (Solution d) = 15p - 15p² + 5p² - 10 = 15p - 10p² - 10 (Solution c)

Solution b is just another way of writing the same expression as in solution d.

Question 7An incumbent firm may prevent entry of a competitor by…


…raising prices. 0.33 Raising prices won't keep an entrant out of themarket.

…decreasing the cost ofimitation.

0.33 If it is cheaper/ easier to imitate the products,this favours the entry of additional companies.

…changing the entrant’sexpectations about post-entry competition.

0.33 An example of how the incumbent can changethe entrant’s expectations about post-entrycompetition is to invest in excess capacity.

Total 1.00 /1.00

Question 8Imagine Coca Cola and Pepsi produce soft drinks of equal taste and quality. They are the only

suppliers of soft drinks to the Olympic Games. They have a stall next to each other where they

sell their soft drinks in cans that are specially designed for the event. The Olympic Games last



for one week and both companies have to decide once and at the same time how many cans

they want to sell.

In competition Coca Cola and Pepsi make each profits of € 180k. Instead of competing against

each other Coca Cola and Pepsi could also cooperate and set monopoly quantities as if they

would be an integrated monopolist. If both companies cooperate and set monopoly quantities

they equally share the monopoly profits. A monopolist would achieve profits of €855 k. If one

company is cooperative and the other one deviates, the cooperating company will achieve

profits of €160 k whereas the deviating company will get profits of € 530k.

What will be the outcome of the game?


Coca Cola will cooperate / Pepsi will cooperate

Coca Cola will cooperate / Pepsi will deviate

Coca Cola will deviate / Pepsi will cooperate

Coca Cola will deviate / Pepsi will deviate 1.00

Total 1.00 / 1.00


With the information provided, we can draw the payoff matrix to the game.



We can now use this payoff matrix to identify the Nash Equilibrium.

a) Let’s analyse Coca Cola’s optimal strategy• If Pepsi cooperates, it is best for Coca Cola to deviate (payoffs of € 530k instead of payoffsof € 427.4k)• If Pepsi deviates, it is best for Coca Cola to deviate (payoffs of € 180k instead of payoffs of €160k)

b) Let’s analyse Pepsi’s optimal strategy• If Coca Cola cooperates, it is best for Pepsi to deviate (payoffs of € 530k instead of payoffsof € 427.4k)• If Coca Cola deviates, it is best for Pepsi to deviate (payoffs of € 180k instead of payoffs of €160k)

The Nash Equilibrium in this game is that Coca Cola and Pepsi both deviate and receivepayoffs of 180. This is a classical Prisoners’ Dilemma. Both could achieve higher payoffs ifthey would cooperate.

Question 9Imagine now that there is really bad weather in the first week. The organizing committee

decides to prolong the Olympic Games. Nobody really knows at any point how many weeks the

Olympic Games will last. It totally depends on the weather conditions.

Coca Cola and Pepsi have to decide once at the beginning of each week at the same time how

many cans they want to sell in the following week. The storage space on site is limited, so that



they have to sell all the produced cans in the respective week.

Can this change the outcome of the game described in Question 8?


Yes 1.00

No

Total 1.00 / 1.00


Yes!Here, we have a repeated game where there is no clear endpoint. This is technically thesame as a repeated game with infinite repetition. In such a situation, it is possible that theplayers achieve cooperation. Certain factors influence the likelihood that cooperation can beachieved. These include the probability that the Olympic Games last for another round, therelative importance of future payoffs / the interest rate, etc.

Question 10Let’s get back to the one period competition case (question 8). Imagine now that the stalls of

Coca Cola and Pepsi are not located next to each other but at opposite ends of the Olympic

Games site.

Does this change the companies’ profits compared to the situation in question 8?


No

Yes, the profits of both companies decrease.

Yes, the profits of both companies increase. 1.00

Yes, while the profits of Coca Cola decrease and the profitsof Pepsi increase.

Total 1.00 /1.00




Coca Cola and Pepsi are no longer homogeneous products but horizontally differentiated bythe different locations. This lowers competition: Consumers that are located close to one stallwill hardly ever buy from the other stall. Regarding these consumers, the stalls can behave asmonopolists. Hence they will each set a quantity that is closer to the monopoly optimum thanpreviously. This yields higher profits for both stalls.

Question 11Niche entry is an effective entry strategy if…


…products aresufficientlydifferentiated.

0.00 Almost by definition, niche markets offer differentproducts (either vertically or horizontally differentiated)compared to ‘mainstream’ markets.

…the entrant has ashort-run perspective.

0.00 It does not make sense that a company enters amarket just for the short run.

…incumbent andentrant arecomparably largefirms.

0.33 A large entrant won't be satisfied with focusing on aniche of the market but would rather want to take overlarger shares of the market.

Total 0.33 /1.00

Question 12Which of the following statements are false?


Firms can useprocess innovation tostimulate demand.

0.00 This stamenet is false. Process innovation reducesproduction cost, while product innovation maystimulate demand.



Only under threat ofentry, a monopolist mayinvest in innovation.

0.00 This stamenet is true.

The value ofinnovation can becalculated by comparingprofits with and withoutinnovation.

0.00 This stamenet is true.

A monopolists hasalways higher incentivesto innovate than firms ina competitiveenvironment.

0.00 This stamenet is false. Because of the replacementeffect, a monopolist (that does not face the threat ofan entrant) has lower incentives to innovate thanfirms in a competitive environment that have lower(zero) profit margins.

Total 0.00 /1.00

Question 13Two products A and B are complements if…


…the demand for B increases when the price of A drops. 0.25

…the demand for A decreases when the price of Bdrops.

0.00

…B increases the users’ utility from A. 0.00

…A decreases the users’ utility from B. 0.25

Total 0.50 /1.00


By definition, products A and B are complements if the utility from consuming A and Btogether is higher than the utility from consuming them separately. Put it differently, if you useB already and now additionally consume A, you derive a higher utility from B than just itsstandalone utility. .



Complementary products are dependent on each other in terms of demand. A price drop forproduct A most likely leads to higher demand for this product. Since there is more demand forproduct A, there is also higher demand for the complementary product B. Example: ImagineMP3 players and earphones. If MP3 players become cheaper, more people will buy them. Tomake use of an MP3 player you need earphones. Hence, all the people that buy additionalMP3 players will also buy earphones.

Question 14Imagine you are head of Sony Entertainment and responsible for the PlayStation game console.

You have the chance to buy Arts Electronic, a company that sells a sports game for your

console.

Should you agree to this acquisition?


Yes. You could now sellyour console exclusively in apackage with the sportsgame. Assuming that there ishigh competition for videoconsoles and video games,this increases the sales forthe sports game and hencemaximizes the overall profitsof the combined company.

0.50 The game console and the sports game arecomplements. One way of internalizing thepositive externalities of two complementaryproducts is to produce the two products underone roof and implement a bundling strategy.This way, the firm sells the two productscombined as a package. This strategy onlyworks if there is low competition / low demandelasticity for one of the products. Otherwise,the consumers wouldn’t buy the package butopt for an alternative product that is soldseparately / not in a package.

Yes. You could nowdecrease the price for yourgame console and sell moredevices which raises demandfor the sports game. Thiscross-subsidizing strategymay maximize the overallprofits of the combinedcompany.

0.50 The game console and the sports game arecomplements. One way of internalizing thepositive externalities of two complementaryproducts is to produce the two products underone roof and implement a cross-subsidizingstrategy. This way, the firm sells one productat small margins (even loss) to increase salesof the other product with high margins.

Total 1.00 /



1.00

Question 15Which of the following statements are false?


Using pre-emption, incumbentscan prevent a niche entry.

0.33

Predatory pricing only works inmarkets with horizontal productdifferentiation.

0.33 Predatory pricing is about lowering prices,and therefore independent on the types ofproducts on the market.

Limit pricing only works in thepresence of incompleteinformation.

0.33

Total 1.00 /1.00

Question 16Imagine McDonalds and Burger King operate fast food restaurants in New York City. The

restaurants are located close to each other and are in fierce competition.

To decrease competition and improve profitability…


…Burger Kingcould focus onoffering beef burgerswhereas McDonaldsonly sells chickenburgers. This is called

0.33 “Splitting” the market and offering tailored productscan reduce price competition substantially. If BurgerKing sells beef burgers and McDonalds sells chickenburgers this is horizontal differentiation. It isreasonable to assume that there is no clear rankingbetween beef and chicken but some consumer prefer



horizontaldifferentiation.

chicken whereas others prefer beef. The products arehorizontally differentiated.

…Burger Kingcould sell premiumburgers from organicsources whereasMcDonalds offersordinary burgers ofstandard quality. Thisis called verticaldifferentiation.

0.33 “Splitting” the market and offering tailored productscan reduce price competition substantially. If BurgerKing sells premium burgers from organic sources andMcDonalds sells ordinary burgers of standard qualitythis is vertical differentiation. It is reasonable toassume that every consumer (keeping prices aside)would prefer premium burgers from organic sourcesover ordinary burgers of standard quality. Theproducts are vertically differentiated.

…Burger King andMcDonalds couldreduce the density oftheir restaurants. Thisis called verticaldifferentiation.

0.33 Reducing the density of the restaurants might have animpact on competition, but is not related to theconcept of horizontal / vertical differentiation.

Total 1.00 /1.00

Question 17Firms use patents to decrease competition, especially with sleeping patents.


True 1.00

False

Total 1.00 / 1.00


True. Patents lend (temporary) monopoly rights to innovating companies. Even thoughsleeping patents are not used to protect inventions that are meant to be commercialized, theycan help firms to secure a monopoly position by hindering other firms to “invent around”.



Question 18Imagine Sony and Philips are working on a new optical disc storage medium designed to

supersede the DVD and the Blu-Ray Disc. Each company develops its own technical standard.

The company’s payoffs from the new product depend on which technical standard succeeds in

the end. They are illustrated in the following payoff matrix.

Sony has now the chance to speed up the construction of its production plant so that it will be

ready earlier than Philips’ construction plant.

What will be the outcome of the game?


Sony receives payoffs of € 2mn / Philips receives payoffsof € 4mn


1.00


Total 1.00 /



1.00


With speeding up the construction process, Sony can be the first on the market and committo its technical standard. This changes the game from a simultaneous game to a sequentialgame. The respective payoffs are illustrated in the following game tree.

If Sony commits to its own standard (Standard S), Philips will also choose to use the Sonystandard (payoffs of € 2mn instead of payoffs of € 1mn). This yield Sony payoffs of € 4mn.

It makes sense for Sony to commit to its standard.- If Sony moves first but commits to the standard of Philips, Philips will also commit to its ownstandard. This yields profits of € 4mn for Philips and € 2mn for Sony. - If Sony does not move first and decides simultaneously with Philips, there will be acoordination problem (two Nash Equilibria).

Question 19Which of the following assumptions lead to the unrealistic prediction of the Bertrand paradox?

YourAnswer

Score Explanation

Powerfulsuppliers

0.25 The Bertrand model describes the supply side competition in anindustry and does not take costs for input goods intoconsideration. These would be influenced by the bargaining



power of the suppliers.

Infinitepriceelasticity

0.25 One assumption of the Bertrand Paradox is that consumers areinfinitely price elastic. This means that all consumers just careabout prices and switch to the firm that charges the lowestprice. This makes it very attractive for firms to charge pricesthat are just a bit lower than the ones of their competitors,because they will get all consumers.

In reality, consumers experience some costs associated withswitching to another seller. Imagine a consumer takes part in aloyalty programme of the initial seller. When switching toanother seller who charges lower prices, the consumer has togive up all the privileges related to the initial seller. Maybe it maynot be worth for the consumer to switch even if the other sellercharges a much lower price. In this context, switching costssuch as loyalty programmes lower competition and enable firmsto achieve positive profits.

Identicalproducts

0.25 One assumption of the Bertrand Paradox is that the firms’products are identical. Hence, the consumers just buy from thecompany with the lowest prices. This leads to fierce pricecompetition since every firm has an interest to undercut theothers and serve the whole market. The firms end up chargingprices equal to costs. In reality, consumers have different tastesand products are differentiated. This substantially weakenscompetition so that the firms are able to achieve positive profits.

Imperfectmarkettransparency

0.25 One assumption of the Bertrand Paradox is that the market isperfectly transparent, e.g. the consumers always know theprices of all firms. As soon as one firm lowers its price, allconsumers will know this instantly and buy from this firm only.This strengthens price competition. In reality, markets are often imperfectly transparent – and not allconsumers can observe the prices of all firms. Hence,undercutting prices has only a marginal effect on someconsumers. This weakens competition since firms are lesseager on lowering prices. This subsequently enables firms toachieve positive profits.

Total 1.00 /1.00



Question 20Imagine Telecom Argentina is the monopolist for landline phone calls in Argentina. Every day,

100,000 minutes of landline phone calls are sold within Argentina. Telecom Argentina charges

5 Pesos per minute.

Now a small company called Telefonica Buenos Aires enters the market. Telefonica Buenos

Aires charges 3 Pesos per minute and limits its network to the Buenos Aires metropolitan area

where 25% of Argentina's overall landline phone call minutes are sold. Telefonica Buenos Aires

can convince Telecom Argentina that it will not extend its network further.

Assume that the phone call services of Telefonica Buenos Aires and Telecom Argentina have

the same quality. All consumers will switch to the supplier with the lower prices. There are no

switching costs. The companies cannot charge different prices for different regions.

Will Telecom Argentina attack Telefonica Buenos Aires?


Yes

No 1.00

Total 1.00 / 1.00


After the market entry of Telefonica Buenos Aires, the company will take over all the BuenosAires metropolitan area which is 25,000 mintues per day (25% of 100,000 = 25,000). This isbecause Telefonica Buenos Aires charges a lower price than Telecom Argentina (3 Pesosinstead of 5 Pesos). Under these circumstances, Telecom Argentina has two options:

a) Telecom Argentina can attack Telefonica Buenos Aires and set a price for its phoneservices that is marginally below 3 Pesos. This way, Telecom Argentina would win back all100,000 minutes per day but lose 2 Pesos per minute (5 Pesos - 3 Pesos). The overall losswould be 100,000 * 2 Pesos = 200,000 Pesos.

b) Alternatively, Telecom Argentina could accommodate the entry and leave the 25,000mintues to Telefonica Buenos Aires. In this case, the overall loss would be 25,000 * 5 Pesos =125,000 Pesos.

Since the losses form accommodating Telefonica Buenos Aires's market entry (125,000Pesos) are lower than the losses from attacking Telefonica Buenos Aires (200,000 Pesos),Telecom Argentina will accommodate the market entry of Telefonica Buenos Aires.





The patent office explicitlyinvites firms to present sleepingpatents because they usuallyprovide welfare to consumers.

0.00 Sleeping patents are per definition thosepatents which are never implemented.Hence, they do not provide any value toconsumers.

Product innovation comes ata fixed cost but usuallydecreases marginal cost.

0.25 Product innovations are about improving /inventing new products but are less costrelated. Process innovations are usuallyrelated to lowering costs.

The value of innovation canbe higher for firms in acompetitive market than for amonopolist.

0.25 If the risk of entry is high enough, amonopolist will invest in innovation;otherwise the value of innovation is higher ina competitive market, because a monopolistwould face the replacement effect.

In special situationsmonopolists can have highincentives to invest in R&D.

0.25 If the risk of entry is high enough, amonopolist will invest in innovation;otherwise the value of innovation is higher ina competitive market, because a monopolistwould face the replacement effect.

Total 0.75 /1.00

Question 22Empirical research can show that predatory pricing is always more effective than pre-

emption.


True



False 1.00

Total 1.00 / 1.00


False. The fact that we don’t observe entry could mean that an incumbent was successful indeterring, but it could also mean that there was no attempt at entry. It is impossible to observea counterfactual situation.

Question 23Imagine you are the CEO of Breitling. Your company and Rolex are the leading manufacturers

of luxury watches. A UK based film production studio plans a new James Bond action movie

and approaches you with a product placement offer: If you pay £ 4mn, James Bond will wear a

Breitling watch in the movie. The production studio makes clear that they will make the same

offer to Rolex if you don’t accept the deal.

You receive the following information from your market research department:

• If you accept the deal, you can achieve additional revenues of £ 3mn. Rolex’s revenues

decrease by £ 1mn.

• If Rolex accepts the deal and is unlucky (probability = 50%), Rolex can achieve additional

revenues of £ 4mn. Your revenues decrease by £ 1mn.

• If Rolex accepts the deal and is lucky (probability = 50%), Rolex can achieve additional

revenues of £ 6mn. Your revenues decrease by £ 3mn.

• If neither Rolex nor you accept the deal, there is no change in revenues.

Should you accept the deal?


Yes 1.00

No

Total 1.00 / 1.00




We can solve this sequential game by backward induction.

a) Let’s have a look at what happens when Breitling does not accept the deal.Then Rolex can decide about whether to accept the deal or not. If Rolex accepts the deal,they can be lucky or unlucky.

- If Rolex is lucky (probability = 50%), they make additional revenues of £ 6mn and pay £ 4mnfor the product placement, so their payoffs from the deal are £ 2mn.- If Rolex is unlucky (probability = 50%), they make additional revenues of £ 4mn and pay £4mn for the product placement, so their payoffs from the deal are £ 0.

Rolex’s expected payoffs from the deal are 0.5 * £ 2mn + 0.5 * £ 0 = £ 1mn.If Rolex does not accept the deal, their payoffs will be £ 0.Knowing this, Breitling should anticipate that Rolex will accept the deal (expected payoffs of £1mn instead of payoffs of £ 0).

b) Breitling now knows that Rolex will accept the deal if they get the offer.In this case, the payoffs for Breitling will be 0.5 * (- £ 3mn) + 0.5 * (-£ 1mn) = (- £ 2mn). Hence,Breitling knows that if they do not accept the deal, they will lose £ 2mn.

If Breitling accepts the deal, they will make additional revenues of £ 3mn and have to pay £4mn for the product placement. Hence, if Rolex accepts the deal, the will lose £ 1mn.

Taking this into account, Rolex should accept the deal to minimize the losses.

Question 24The existence of substitutes makes a market less attractive, because…

YourAnswer

Score Explanation

…thecross-priceelasticityofsubstitutesisnegative.

…thereare morefirms in



themarket.

…itaffects theelasticityof demandof thefocalproduct.

1.00 If there is a substitute product in the market, consumers will maythink of choosing this substitute product if the focal product's priceincreases. Hence, the consumers are no longer willing to acceptas high price increases as without the existence of the substituteproduct. This is reflected in a change in the price elasticity ofdemand of the focal product. Since consumers are now moreprice sensitive in the market of the focal product, this market getsless attractive.

Total 1.00 /1.00



Cooperationbetween competitors ina market is more likelyto be stable if ceterisparibus there are manycompetitors.

0.12 False. If there are many companies in the market andthey cooperate (charge the monopoly price), eachcompany gets only a small share of the monopolyprofit. This is relatively unattractive compared to thepayoffs from deviating. Hence, cooperation is lesslikely.

Games with infiniterepetitions can besolved via backwardsinduction.

0.12 False. Games with infinite repetitions can never besolved via backward because there is no clear endpoint to the game. The solve a game via backwardinduction, you need a clear end point. This is thecase in games with finite repetitions.

A monopolist in amarket will considerdeterring entry if thisstrategy changes theentrant's expectationsabout the nature ofpost-entry competition.

0.12 True. If it does not change the entrant’s expectationsand does not keep him out of the market, there is noneed to engage in entry deterrence from theincumbent’s point of view.

A self-binding 0.12 False. A self-binding commitment is about convincing



commitment changesa game from asimultaneous game toa sequential game.

potential partners that one is committed to actcooperatively. This is not about changing the gameform a simultaneous game to a sequential game. Theidea of aggressive commitment is to eliminate thosemoves which lead to unattractive equilibria. Thisincorporates changing the game for a simultaneousgame to a sequential game.

In repeatedinteractions betweencompanies,cooperation is morelikely if ceteris paribusfuture payments aremore important.

0.12 True. If players cooperate, they receive relatively lowpayoffs today and in all future periods (given that thegame goes on). If the players deviate, they receivehigh payoffs today but zero payoffs in the future. Iffuture payoffs are important, there is a higherlikelihood of cooperation.

Playing acommitment strategyalways keeps apotential entrant out ofthe market.

0.00 False. If the commitment is not credible / not costlyenough, this has no influence on the decision of theentrant.

Strategic entrybarriers arise from thenature of the industryand / or from theposition of theincumbent within theindustry.

0.00 False. Structural entry barriers arise from the natureof the industry and / or from the position of theincumbent within the industry. Strategic entry barriersare the outcome of an intended aggressive action ofthe incumbent to keep the entrant out of the market.

If two horizontallydifferentiated productshave the same price,all consumers willprefer the sameproduct.

0.12 False. This holds for vertically differentiated productsbut not for products that are horizontallydifferentiated. In the latter case, some consumersprefer product A whereas other prefer product B.

Total 0.75 /1.00

Exam Feedback _ Competitive Strategy

Documents

Transcript of Exam Feedback _ Competitive Strategy