Industrial Organization and Firm Strategy
HW
The Big Four
(1)
(a)
The reduction of market share is the result of price cut by rivals in the primary market.
Although a discount may cheapen brand image, appropriate use of discount strategy can
help increase market share and avoid price competition with rivals.
To consolidate brand image, post-sales services, and intensify marketing campaigns are
ways to maintain.
(b)
The airline industry is one example, each is highly distinguishable by brand image and
unique service characteristics. Competition is high in this industry, as the core service i.e.
flights are not that much distinctive from each other. And prices are quite transparent to
firms, they are rather rigid, hence discounts and special offers are common methods to
attract customers to increase market share.
(2)
(a)
No significant price adjustments, but rather emphasize on brand image and attempt market
segmentation to retain customers willing to pay a premium for a well-known brand.
(b)
The beverage (手搖杯) industry. The entry barrier of 手搖杯 is low, anyone can open a
drink store and start selling drinks. Therefore, brand and product differentiation become
highly important, since drinks can almost be homogeneous. Nowadays, many drink stores
partner with smallholders to increase the variety of its products and satisfy a wider range
of needs from customers.
(3)
(a)
If the market is still growing and demand elasticity is relatively low. The firm may
increase prices as a response to the rival nearing its capacity constraint.
(b)
Semiconductor industry is one that faces an upper capacity limit, often needing to expand
production and process lines to meet demands. And there is always a time lag, before the
expansion becomes production that results in higher output.
(4)
(a)
Discount will be offered to increase market share because other firms can only react after
one or two quarters. By offering a cheaper price, market share will increase thus increase
in profit.
(b)
Real estate is an industry that can offer discounts selectively because price is discussed
privately. Also, the actual price of trade would only be known to the public after a certain
period of time after the government exposes the actual price online.
(5)
(a)
A discount strategy would be used to gain market share. Since marginal costs are low,
higher market share indicates more items sold, and lower average cost per item.
(b)
The software industry is an example. The fixed cost of designing the software is high, and
it costs little to sell an extra copy.
(6)
(a)
Firms would choose to discount to prevent the loss of market share, try to regain market
share, and start a price war to maximize profit.
(b)
The industry of cassette tape is one example. Technology shift causes less people to use
cassette tapes, which leads to rapid decline in the market.
Multimarket Contact
(1)
∵ C L < CH
In market 1, firm 1 has the cost advantage.
→ firm 1 sets price at PM ; firm 2 sets a higher price and sells 0.
In market 2, firm 2 has the cost advantage.
→ firm 2 sets price at PM ; firm 1 sets a higher price and sells 0.
When the firm sets price at PM, the profit
Now, if firm 1 wants to undercut firm 2 in market 2, firm 1 will set price at CH
in market 2. In the first period, the profit =
And in the following periods, two firms will engage in a price war. The price in each
market is CH, the profit =
Therefore, the total profit of firm 1 when it deviates =
The stability condition is given by
The minimum value of the discount factor =
(2)
Considering homogeneous firms compete in identical markets, the multimarket contact
does not seem to help collusion. However, if each firm has a cost advantage in one of the
markets, asymmetrics can make losses weigh more than gain. Therefore, the likelihood of
collusion will increase, which interprets the positive correlation of multimarket contact on
hotel rated.
An alternative interpretation is that maybe hotel rates are positively correlated with hotel
size. Consumers may place more value on hotels that own larger chains. As the problem
set mentioned, multimarket contact is highly correlated with hotel chain size. Therefore,
the correlation between multimarket contact and hotel size would also interpret the
positive coefficient of multimarket contact on hotel rated.