1. To what extent does the theory of limit pricing provide a useful contribution to the theory of
entry deterrence?
2. Is limit pricing preferable to monopoly pricing on social welfare criteria?
3. What factors are likely to influence the credibility of a threat by an incumbent to engage an
entrant in predatory competition, in the event that entry takes place?
4. Explain how an incumbent might attempt to deter entry by increasing its own sunk cost
investment.
5. According to the empirical evidence, what are the most commonly used entry-deterring
strategies adopted by incumbent firms in new and established product markets?
6. For what reasons might a firm depart from a policy of pricing for profit maximization and
adopt a cost plus pricing formula instead? Under what conditions do these two pricing
methods produce identical outcomes?
7. What conditions must be satisfied for a producer to be able to implement a policy of price
discrimination?
8. Explain the distinction between the three degrees of price discrimination.
9. In the case of a monopolist, why might a policy of first-degree price discrimination produce
an outcome that is preferred on social welfare (efficiency) criteria over a policy of setting a
uniform price to maximise profit?
10. What factors should be considered by a cinema chain in setting its ticket prices, and the
prices that are charged inside the cinema for food and drinks?
11. Explain why economists have interpreted supermarket (or other retailer) loyalty cards as a
form of second-degree price discrimination.
12. The demand for gas and electricity varies between different times of the day and between
different months of the year. What factors should be considered by a utility company
when deciding how much capacity to install, and what prices to charge during peak and
off-peak periods?
13. What is the distinction between vertical and horizontal product differentiation?
14. Explain the methodological difference between representative consumer models and
spatial or location models of product differentiation.
15. Can a free market be expected to deliver a socially optimal level of product
differentiation?
16. Select a product and list the most important characteristics you search for. What factors
may help you to get close to a desired bundle of characteristics?
17. The model of limit pricing was found wanting because of the noncredibility of the Sylos
Postulate. Might an incumbent firm find it profitable to carry through with its threat in order
to build up a reputation for toughness in order to deter further entry?
18. Why might an army invading an island destroy its landing craft or burn the bridges behind
it?
19. Why might a strategic actor have an incentive to obscure its payoffs, delegate decision
making, use a bargaining agent, or obstruct communications?
20. What is the relationship between commitment and renegotiation? Commitment and
reputation?
21. If you are a film studio or distributor what other options do you have besides movie
theaters? Are these options likely sufficient to conclude that even if all theaters in a city are
owned by one firm, that that firm will not be a monopolist? Under what circumstances will it
have very little market power?
22. What are the likely effects of market growth and depreciation on the effectiveness of
investments in capacity to deter entry?
23. Although strategic investment can confer an advantage on the first mover, such investment
also locks in the firm, which can be a disadvantage if conditions change. For example, the
adoption of the standard for compact discs by Philips and Sony in the early 1980s would have
been very costly if the market had eventually settled on a different standard. Discuss how the
value of flexibility would affect our analysis of strategic advantage.
24. The decision of two banks to form a network of compatible ATMs will make the services
of these two banks closer substitutes, and likely lead to more aggressive competition between
them in deposit rates. At the same time there will be a positive “network effect” because
account holders of both banks have access to a larger ATMnetwork. This trade off between the
benefits of compatibility and the costs in terms of tougher competition is a common one in
high-technology industries where standardization is important. Can you think of other
examples?