9/4/13 Quiz Feedback | Competitive Strategy

Feedback — End-of-week quiz | Week 4

You submitted this quiz on Tue 6 Aug 2013 10:50 AM PDT (UTC -0700). You got a
score of 9.55 out of 10.00. You can attempt again, if you'd like.

Welcome to the fourth end-of-week quiz!

As in the previous weeks, we put some questions together to help you review the topics
covered in the second week.

If you don't know the answers to some of the questions right away: No worries, just give it a try!
After the quiz we will provide detailed explanations for each question. Alternatively, you will find
support from your fellow students and the teaching staff in the discussion forums.

Please keep in mind that you can attempt every quiz up to three times. The questions are
shuffled around each time.

Good luck and have fun!

Question 1
According to the Porter's 5 Forces framework, a market tends to be more attractive if...

Your Answer Score Explanation

...there are many
buyers that each
represent a small
share of the market's
overall revenues.
 0.25 If there are many small buyers this means that each
individual buyer has little bargaining power.
Subsequently, the companies in the market do not
have to fear that the buyers can negotiate the prices of
their products down. This makes the market more
attractive.

...there are close
substitutes to the
product.
 0.25 If there are close substitutes to the product, the
companies in the market cannot set (very) high prices.
If they set high prices, the buyers would just switch to
the substitute product. This makes the market less
attractive.

...suppliers have  0.25 If suppliers have little bargaining power, the companies
little bargaining can negotiate low prices for the input goods. This
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little bargaining can negotiate low prices for the input goods. This
power. makes the market more attractive.

...buyers are  0.25 If the buyers are powerful, the can successfully bargain
powerful. the prices for the products down. This makes the
market less attractive.

Total 1.00 /
1.00

Question 2
Imagine Kroger was the only supermarket chain in Los Angeles for the past 10 years. Safeway

announces that they consider opening their own supermarkets in the area. Which of the
following reactions by Kroger indicate a pre-emption strategy?

Your Answer Score Explanation

Kroger closes down less frequented supermarkets  0.33 This in not related to
and focuses on hot spots. pre-emption.

Kroger stops selling groceries and focuses on drugs  0.33 This in not related to
resale. pre-emption.

Kroger stops selling fresh veggies and fruits.  0.33 This in not related to
pre-emption.

Total 1.00 /
1.00

Question 3
Structural entry barriers can arise from...

Your Answer Score Explanation

...the nature of the  0.33 The entry barrier arises through given natural
industry. circumstances or the industry rather than through an
intentional action by the incumbent. This is why it is
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intentional action by the incumbent. This is why it is
called a structural entry barrier.

...the incumbent's  0.33 In this case, the incumbent undertakes a strategic

action intended to move with the primary intention of keeping the entrant
keep the entrant out out of the market. This is why it is called a strategic
of the industry. entry barrier.

...the position of  0.33 The entry barrier arises through the position of the
the incumbent within incumbent in the industry that might have evolved
the industry. through historical circumstances or external influences.
This is why it is called a structural entry barrier.

Total 1.00 /
1.00

Question 4
Imagine an incumbent faces the threat of a potential entrant in the coming period (t2). The
incumbent can now decide whether to pre-empt the market or to accommodate the entry. The
profits are indicated in the graphic below.

If the incumbent accommodates the market entry, what would be the cumulative profits for
the incumbent for the periods t1 to t4?
Assume that the interest rate is zero. Please type in a number, e.g. 3.

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You entered:

Preview Help

Your Answer Score Explanation

6  1.00

Total 1.00 / 1.00

Question Explanation

If the incumbent accommodates the market, the incumbent makes profits of 3 prior to market
entry (period t1) and profits of 1 after the market entry (periods t2, t3 and t4). This drop in
profits is caused by the loss of market share to the incumbent. This yields overall profits of 6.

Question 5
Assume Telefonica is the monopolist for mobile communication services in Spain.
- Vodafone considers entering the market.
- In the case of market entry, Telefonica can either accommodate the entry or retaliate.
- Vodafone can subsequently decide whether to stay in the market or exit.

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The possible actions and payoffs are illustrated in the graphic below.

Imagine now that Vodafone implements a commitment strategy and builds a call centre in
Spain that can only be used for the Spanish market. If Vodafone is not active in the Spanish
market, the call centre occurs costs of 3mn. All other payoffs are not affected.

What will be the outcome of the game?

Your Answer Score Explanation

Vodafone enters the market, Telefonica retaliates and

Vodafone stays

Vodafone enters the market, Telefonica retaliates and

Vodafone exits

Vodafone stays out of the market

Vodafone enters the market and Telefonica does not  1.00

retaliate

Total 1.00 /
1.00

Question Explanation

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Building a call centre changes the payoffs as illustrated in the graphic below. Whenever
Vodafone stays out of the market, this causes additional costs of 3mn.

We can solve this game by backward induction:

We can solve this game by backward induction:

-Lets start with the case that Vodafone enters the market and Telefonica retaliates. In this
situation it is best for Vodafone to stay in the market (payoffs of -3mn instead of payoffs of
-4mn)

-Telefonica now knows that they receive payoffs of -3mn when they retaliate after Vodafone's
market entry, and payoffs of 5mn when they accommodate the entry. Hence, they will
accommodate if Vodafone enters the market (payoffs of 5mn instead of payoffs of -3mn).

- Vodafone can anticipate this and has to choose whether to stay out of the market (payoffs of
-3mn) or to enter the market which will be accommodated by Telefonica (payoffs of 3mn).
Under these circumstances, Vodafone is best of with entering the market.

The outcome of the game is that Vodafone enters the market and Telefonica does not
retaliate.

Question 6
Which of the following statements are true:

Your Answer Score Explanation

Predatory pricing  0.25 The idea of predatory pricing is to charge low prices
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needs to be
implemented before
the market entry of a
potential competitor.
Limit pricing is
related to setting high
prices to signal high
quality of the product.
Limit pricing
signals the potential
entrant that there is a
low level of demand in
the market.
Limit pricing works
in presence of
incomplete
information only.
Total
Question 7
Imagine British Gas is the monopolist for electricity supply in the UK. Every day, 50,000 units of
electricity are sold and consumed across the UK. British Gas charges GBP 6 for one unit of
electricity.
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(even below marginal costs) and by that ruin the profits
of the competitor in the market in order to make him
leave the market.
This strategy is only effective once the competitor is
active in the market.
 0.25 The idea of limit pricing is to keep the price low in
order to signal to the potential entrant that
- there is low demand and the market is unattractive
- the incumbent has low production costs and can
aggressively retaliate after market entry
 0.00 The idea of limit pricing is to keep the price low in order
to signal to the potential entrant that - there is low
demand and the market is unattractive - the incumbent
has low production costs and can aggressively retaliate
after market entry.
 0.25 The idea of limit pricing is to keep the price low in
order to signal to the potential entrant that
- there is low demand and the market is unattractive
- the incumbent has low production costs and can
aggressively retaliate after market entry
In a world of complete information, the entrant is
perfectly informed about the demand in the market and
the cost structure of the incumbent. Hence, the
incumbent won't succeed with keeping the entrant out
of the market by sending misleading signals to the
entrant
0.75 /
1.00
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Now a small company called London Power enters the market. London Power charges GBP 4

for one unit of electricity and limits its network to the Greater London area where 50% of the
UK's overall units of electricity are sold and consumed. London Power can convince British Gas
that it will not extend its network further.

Assume that the electricity of British Gas and London Power 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 British Gas attack London Power?

Your Answer Score Explanation

Yes  1.00

No

Total 1.00 / 1.00

Question Explanation

After the market entry of London Power, the company will take over all the Greater London
area which is 25,000 units per day (50% of 50,000 = 25,000). This is because London Power
charges a lower price than British Gas (GBP 4 instead of GBP 6).

Under these circumstances, British Gas has two options:

a) British Gas can attack London Power and set a price for its electricity that is marginally
below GBP 4. This way, British Gas would win back all 50,000 units per day but lose GBP 2 per
unit (GBP 6 - GBP 4). The overall loss would be 50,000 * GBP 2 = GBP 100,000.

b) Alternatively, British Gas could accommodate the entry and leave the 25,000 units to
London Power. In this case, the overall loss would be 25,000 * GBP 6 = GBP 150,000

Since the losses form accommodating London Power's entry (GBP 150,000) are higher than
the losses from attacking London Power (GBO 100,000), British Gas will attack London Power.

Question 8
Which of the following are possible entry strategies?

Your Score Explanation

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Answer

Judo  0.25 If an entrant serves a small portion of the market at low prices
Economics and signals the incumbent that it does not increase its capacity
drastically in the future (what we call judo economics), the
incumbent might not be willing to fight back this small portion of
the market because it would cannibalize his profits. This can be a
successful entry strategy.

Limit  0.25 Limit pricing is an entry deterrence strategy that can be

Pricing implemented by the incumbent to keep the entrant out of the
market.

 0.25 A credible commitment of the entrant to stay in the market may

Commitment stop incumbents retaliating and hence can be a successful entry
strategy.

 0.25 Predatory pricing is an entry deterrence strategy that can be

Predatory implemented by the incumbent to keep the entrant out of the
Pricing market.

Total 1.00 /
1.00

Question 9
Charging prices below marginal costs in the current competition indicates a...

Your Score Explanation

Answer

Commitment
Strategy

Pre-
Emption
Strategy

 1.00 With a predatory pricing strategy, the incumbent sets prices even
Predatory below marginal costs in the current competition. The aim is to
Pricing destroy the profits of the company which has previously entered
Strategy the market and forces it this way to leave the market. Once the

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entrant drops out or the market, the incumbent raises prices

again.

Limit
Pricing
Strategy

Total 1.00 /
1.00

Question 10
Which of the following are structural entry barriers?

Your Score Explanation

Answer

Pre-  0.20 By pre-empting the market the incumbent might be successful in

emption keeping the entrant out of the market. In this sense, pre-emption is
a barrier for the entrant. By playing a pre-emption strategy the
incumbent undertakes a particular action that is clearly targeted to
keep the entrant out of the market. This is a strategic entry
barrier.

Judo  0.20 Judo economics is a market entry strategy that might be

economics implemented by a potential entrant.

 0.00 In many industries the production costs decline with experience

Experience over time. More specifically: The more copies of a product a
curve company has produced in its lifetime, the more efficient the
effects company is and the cheaper the company can produce this
product. If an incumbent has been present for some year in the
industry, they might have a strong efficiency advantage over an
entrant. This is an entry barrier. Since this entry barrier arises
from the history of the industry rather than from a specific action of
the incumbent, it is classified as structural entry barrier.

 0.20 If switching costs in a market are high, the entrants product must
Switching have a much higher value than the products existing in the market.
costs Alternatively, the entrant must offer a very valuable goodie to
make the customer switch from the product of the incumbents to
the product of the incumbent.
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Control  0.20 If the incumbent controls resources that are essential for
over producing the markets core product, a potential entrant might not
essential be able to produce this product and hence has to stay out of the
resources market. This entry barrier arises from the position of the
by incumbent within the industry and can be classified as structural
incumbent entry barrier.

Total 0.80 /
1.00

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