Exam 13: Advanced Topics in Business Strategy

Sanford Inc.currently competes in a duopoly.The market price is $10 and Sanford's annual profit is $10 million.If Sanford were the only firm in the market, it could charge the monopoly price of $25 per unit and earn $35 million annually for an indefinite period of time.By charging $5 per unit for one year, Sanford could drive its rival out of the market and maintain a monopoly position indefinitely.However, this strategy will result in a $20 million loss since its marginal cost is $8 per unit. a.What pricing strategy is the manager considering? b.Ignoring legal considerations, is this pricing strategy profitable? Assume the interest rate is 5 percent and, for simplicity, that any current period profits or losses occur immediately (at the beginning of the year).

As a newly hired stock analyst, your first job is determining the value of a company that sells a service that has extremely strong network effects.Essentially, this firm sells a two-way network that links users and currently comprises 50,000 nodes.Each connection service within the network has a value of $10.Estimate the total value of the firm.

Which of the following is NOT an example of raising rivals' fixed costs?

Firms 1 and 2 compete in a Cournot duopoly.If firm 1 adopts a strategy that raises firm 2's marginal cost

Penetration pricing is

Firms 1 and 2 compete in a Cournot duopoly.If firm 2 adopts a strategy that raises firm 1's marginal cost:

A potential entrant knows that it faces a (inverse) residual demand curve given by P = 50 - 4Q.While the entrant does not know the inverse market demand it does know that the incumbent committed to producing 150 units.Using this information, which of the following equations best summarizes the inverse market demand curve?

Suppose the inverse market demand is given by P = 150 - 2Q.If the incumbent continues to produce 10 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A monopolist's demand curve is given by D^M and its average cost curve is AC in the accompanying figure.Suppose a potential entrant can produce at the same cost as the monopolist. a.What level of output does the monopolist have to produce in order for the entrant to face the residual demand curve, D^R? b.How much profit will the monopolist earn if it commits to the output that generates the residual demand curve, D^R? c.Is the level of output that generates the residual demand curve, D^R, enough for the monopolist to deter entry?

If Smyth Industries engages in predatory pricing by slashing its price 50 percent below marginal cost, the present value of current and future profits are

Which of the following is an incorrect statement about predatory pricing?

An example of vertical foreclosure is when a firm

Effective limit pricing between one incumbent firm and one potential entrant involves

Vertical foreclosure is an example of a firm

A network linking 8 users is typically

A single firm that charges the monopoly price in the market earns $600.If another firm successfully enters the market, the incumbent's profits fall to $350 and the entrant earns $275.If the incumbent engages in limit pricing, its profits are $400.For what interest rate, i, is limit pricing a profitable strategy for the incumbent?

A bottleneck is a

Is it Smyth Industries to remain as a duopolist or engage in predatory price?

Consider a two-way network with 1,000 users.The number of potential connections is

Consider an incumbent successfully links the preentry price and postentry profit to prevent entry.The incumbent's monopoly profit is $10 million.If a rival successfully enters the market, the incumbent's profits will fall to $4 million.If the incumbent lowers output to 25,000 units, its rival will stay out of the market resulting in an infinite stream of profits of $8 annually.Due to a recent loan default, the current interest rate is whopping 210 percent.Is limit pricing profitable for the incumbent?