Strategy I problem set free essay sample

1. Why do price misreads (or more generally the inability to observe prices with precision) encourage firms to lower prices? [Note: assume all prices are subject to misreads.] Misreads occur when a firm are competing with no information about competitors and assumes that competitors have taken an uncooperative pricing action when in fact they are cooperative. This assumption makes the firm react in an uncooperative manner, lowering the price. This asymmetric information can then lead both firms use tit-for-tat pricing strategy what makes the competing firm respond to the initial reactionary firm in an uncooperative manner as well and lead a price war. A price war usually occurs when a firm believes that price-cutting produces increased market share, but truly does not have a cost advantage. Typically, price wars are overreactions to threats that either arent there at all or are not as big as they seem. So, price wars inevitably cause firms to considerably lower prices. We will write a custom essay sample on Strategy I problem set or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 2. It is often argued that price wars may be more likely to occur during low-demand periods than high-demand periods. Are there factors that might reverse this implication? That is, can you think of reasons why the attractiveness of deviating from cooperative pricing might actually be greater during booms (high-demand) than during busts (low-demand)? To reverse this implication where price wars happen during low-demands, we can explore the fact that in high demand there is a better opportunity to bring new customers to the firm, since in economic booms there will usually enter more new first time customers in the market. So, and as the price is a very attractive characteristic to bring more new customers, firms should play with this and take advantage to increase their long term market share and long term profitability. Since in high demand period is more economic favorable charging a lower price to attract this new costumers that certainly will became a loyal customers than charging a higher price to the existing customers. We can present another factor that is firms’ opportunity of increasing capacity. As during high demand market demands are growing and the customers’ bases are increasing due to the lower prices, firms should avail and increase their long-term capacity. Adding to the lower prices and the increase of market share, the capacity increase will improve the firm’s  cost structure and profitability. As a result, these factors clears that a price war during the high demand is profitable than in lowdemand. So as it was said previously, during the high demand there are more new customers into the market. Naturally firms will try to achieve a bigger market share and to this will cut the price to compete with other firms, deviating from cooperative pricing. 3. Consider a firm selling two products A and B which substitute each other. Suppose that an entrant introduces a product that is identical to product A. What factors do you think will affect (a) whether a price war is initiated and (b) who wins the price war? The two products that incumbent sells are substitutes goods and the entrant introduce an identical product of A. With this, it is clear the entrant will set the price of the identical product lower than the incumbent one to be profitable, so incumbent has to lower the price of A to equals the price. As a result, the profits of B will decrease, once that costumers will not purchase B anymore, as well as A profits because of price decreasing. So we can see that if a price war is initiated, the incumbent has a lot to lose. However, if the exit barriers are not high, incumbent probably would prefer to continues in the market but leave the production of product A and avoid a price war and all the consequences about that. In conclusion, entrant would win the war, since incumbent left the production of A and entrant lost one competitor. However, it is just a supposition thus we do not have enough about neither about the market (level of demand of this goods), the costs nor the capacity of both firms. 4. The study on entry and exit discussed in class (Dunne, Roberts and Samuelson, p. 300 of Besanko et al.) uses data from the 60s to the 80s. Do you expect average entry and exit to be changed since then? Why? I think that it is clear that average entry and exit has changed since 60s and 80s. Nowadays we live in a technological era that is a really different reality. Entry and exits rates are becoming more and more dynamic, since the barriers and conditions to enter and exit to the market had changed. Adding also the fact that nowadays the technological progress, consumer taste and regulation are constantly changing. Today firms enter and exit in the market much more easily. In the past there was less innovation and facility to do something  different, and also the predisposition from the consumers was more inflexible to accept new and different goods in the market. 5. Discuss factors which might affect the speed of both growth and decline of an industry. [That is features of product, distribution channels, country institutions, anything you think will affect the growth and decline phase of an industry.] Factors that can affect the growth phase of an industry are the amount of capital, that is crucial to the marketing strategies. A marketing strategy at several times is the most important aspect in this phase, it will permit to differentiate a firms offerings from other competitors within the industry. It is needed budget to focus in marketing campaign but also to invest in plant and equipment. Another factor is the Research and development that will permit to the firm know better the customers needs, satisfaction levels and suggestions. All of this, because in growth phase rivalry is the issue that has to have in account since, there is industry-wide acceptance of the product, more new entrants join the industry and more intense competition res ults. Knowing well the market is the point. According the factors that can influence the speed of decline of an industry I suggest the technological progress and the consumer tastes change. Technological progress is a big issue since the technology is in constant developing and for the firms is not easy to follow all the innovations least because it has a capital problem associated. Due to this disability of not adapting to the technological progress will make that competitors take advantage and the industry becomes to be seen as old-fashion and as a consequence will surfer in sales and will entering in the decline phase. The second factor is about the consumer’s tastes that are now constantly changing. Consumers are becoming more and more exigent and quickly can change to another product.