Exam 13: Advanced Topics in Business Strategy

Consider an incumbent that is a monopoly currently earning $1 million annually. Given the declining costs of raw materials, the incumbent believes a new firm may enter the market. If successful, a new entrant would reduce the incumbent's profits to $750,000 annually. To keep potential entrants out of the market, the incumbent lowers its price to the point where it is earning $850,000 annually for the indefinite future. If the interest rate is 5 percent, does it make sense for the incumbent to limit price to prevent entry?

Limit pricing is:

A network linking six users is typically:

Suppose the inverse market demand is given by P = 75 - 0.5Q. If the incumbent continues to produce 20 units of output, which of the following equations best summarizes the potential entrant's residual demand curve?

A single firm that charges the monopoly price in the market earns $500. If another firm successfully enters the market, the incumbent's profits fall to $325 and the entrant earns $250. 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?

Using the following sequential-move production game, determine whether player B has a first-mover advantage and identify the strategy that leads to that advantage:

Firms that can effectively price discriminate can increase profitability when they engage in:

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

Penetration pricing is a way to:

Refer to the following payoff matrix: The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix is:

Consider a two-way network with 1,000 users. Adding one additional user to such a network benefits all users by adding:

A network linking eight users is typically:

Which of the following makes it more difficult for an incumbent to successfully engage in limit pricing?

A two-way network that links users and in which the per-unit value of the service increases as the size of the network increases is a:

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, compute the present value of Smyth Industries' profits if it remains a duopolist in this market when the interest rate is 5 percent.

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:

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?

Refer to the following payoff matrix: The Nash equilibrium for the simultaneous-move game depicted in the payoff matrix is:

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

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, is it in Smyth Industries' interest to remain as a duopolist or engage in predatory pricing?