the economics of organisations and strategy. chapter 10 the dominant firm and predation

The Economics of The Economics of Organisations and StrategyOrganisations and Strategy


Chapter 10

The Dominant Firm and Predation


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Chapter 10 - Question 1Chapter 10 - Question 1

A dominant firm, in dealing with its market rivals, might be viewed as akin to:

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An aggressive competitor;

An oligopolist;

Monopolistically competitive;

A monopolist.


Chapter 10 - Question 2Chapter 10 - Question 2The Stackelberg model is appropriate for analysing the behaviour of a dominant firm selling:

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A specialised product;

An homogeneous product;

A heterogeneous product;

Multiple products.


Chapter 10 - Question 3Chapter 10 - Question 3For a dominant firm following a price leadership strategy, output will be set at:

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or;

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MCMC

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Chapter 10 - Question 4Chapter 10 - Question 4For a dominant firm following a strategy of price leadership, the longer-term outcome will be:

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An increasing economic rent;

A loss of market share;

The launch of new products;

Reduced unit costs.


Chapter 10 - Question 5Chapter 10 - Question 5

The strategy of limit pricing is designed to make it difficult for a new entrant:

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To earn an economic rent post entry;

To engage in price competition;

To exit the market post entry;

To engage in non-price competition.


Chapter 10 - Question 6Chapter 10 - Question 6If a potential entrant believes that post entry the dominant firm will adopt a non-cooperative Cournot strategy or seek a cooperative solution then:

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The dominant firm should engage in predatory pricing;

The best strategy for the dominant firm is non-price deterrence;

There is no rational basis for the dominant firm limit pricing;

There is a strong possibility that the entrant will be aggressive.


Chapter 10 - Question 7Chapter 10 - Question 7Predatory pricing is a two stage process. The two stages are:

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First stage P < MC, second stage P = MC;

First stage P < MC, second stage P > MC;

First stage P > MC, second stage P < MC;

First stage P = MC, second stage P = MC.


Chapter 10 - Question 8Chapter 10 - Question 8Which of the following greatly increases the risks of predatory pricing for a dominant firm:

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The opportunity cost of capital for the predator is high;

The victim’s capital investment is a sunk cost;

The competition authorities are very active;

All of the above.


Chapter 10 – Answer1 Chapter 10 – Answer1

Correct answer: Dominance is more akin to the market power of a monopolist than an oligopolist. In exercising power, an oligopolist must take account of the reaction of rivals. In contrast a dominant firm can act independently of its rivals.

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Chapter 10 - Answer 2Chapter 10 - Answer 2

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Correct answer: The Stackelberg model is conceptually similar to the Cournot model. The Cournot model assumes an homogeneious product and that the decision variable for the firm is the quantity to produce. The key difference between the Stackelberg and Cournot models is that in the former case the dominant firm pre-fixes its level of output and it is only rivals that then choose how to respond.



Correct answer: the dominant firm determines its residual demand curve, which in turn, allows the calculation of its marginal revenue curve. Setting this marginal revenue equal to marginal cost determines its profit maximising output.

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Correct answer: A strategy of price leadership generates an economic rent, not only for the dominant firm, but also for the competitive fringe. Firms in the competitive fringe use these rents to invest in additional capacity – and new entrants are encouraged by the prospect of earning a rent – with the effect that the competitive fringe increases its market share and hence the dominant firm loses market share.



Correct answer: a strategy of limit pricing is a deterrence strategy. The dominant firm sets the market price at a low level such that a new entrant – operating below the scale at which unit costs are minimised – cannot earn a rent or even a normal profit.

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Correct answer: Game theory teaches that the ex ante conjectures such as those set out in the question are likely to be plausibly held because post-entry the two firms are in a new game that is independent of the ex ante strategy of the dominant firm.

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Correct answer: the purpose of predatory pricing is in the first stage to drive a rival from the market and in the second to raise price above marginal cost in order to earn a rent. In order to drive the rival from the market the dominant firm increases output so that the market price falls below marginal cost. Both firms are now making a loss, but the assumption is that the dominant firm has deeper pockets and can outlast the smaller rival.

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Correct answer: if the opportunity cost of capital is high this will make it more difficult for the predator to achieve a positive net present value from a cash flow stretching over the negative effects of the predation period and relying on the distant future for a positive cash flow. If the victim’s capital costs are sunk then it is likely to be earning a quasi-rent and therefore will be prepared to fight rather than give up. Needless to say active competition authorities are always a threat.

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the economics of organisations and strategy. chapter 10 the dominant firm and predation

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