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).

A monopolist earns $80 million annually and will maintain that level of profit indefinitely,provided no other firm enters the market.If another firm successfully enters the market,the incumbent's profits remain at $80 million the first period,but fall to $35 million annually thereafter.The opportunity cost of funds is 20 percent,and profits in each period are realized at the beginning of each period.If the monopolist can earn $45 million indefinitely by limit pricing,should it do so?

Smyth Industries operated as a monopolist for the past several years,earning annual profits amounting to $50 million,which it could have maintained if Jones Incorporated did not enter the market.The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually.The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit).One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year.The estimated impact of such a move is a loss of $1 billion.Ignoring antitrust concerns,answer the following question: If Smyth Industries engages in predatory pricing by slashing its price 50 percent below marginal cost,the present value of current and future profits is:

If one more user is added to a two-way network,it will generally:

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?

Which of the following is a strategy that can be used only by vertically integrated firms?

Refer to the following payoff matrix: Player 2 Player 1 a b A Q \ 50,\ 5 \ 25,\ 30 B Q \ 40,\ 2 \ 20,\ 1 Suppose the simultaneous-move game depicted in this payoff matrix could be turned into a sequential-move game with player 1 moving first.In this case,the equilibrium payoffs will be:

In general,adding one more user to a two-way network tends to:

Consider the following normal-form game. Player B Player A Strategy Left Right Top \ 100,\ 200 -\ 10,\ 100 Bottom \ 500,-\ 50 -\ 100,-\ 100 a.What is player B's best strategy in a simultaneous-move play of this game? b.What is player A's best strategy in a simultaneous-move play of this game? c.What are player A and B's equilibrium payoff in a simultaneous-move play of this game? d.Use an extensive-form representation to show that player B can earn higher payoffs by exercising a first-mover advantage.(Note: Player B's payoffs will appear first in this extensive-form game since it is the first mover.) e.List two things player B must do in order to be able to achieve these higher payoffs.

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