Exam 13: Advanced Topics in Business Strategy

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.

A monopolist earns $50 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 $50 million the first period, but fall to $25 million annually thereafter. The opportunity cost of funds is 10 percent, and profits in each period are realized at the beginning of each period. If the monopolist can earn $27 million indefinitely by limit pricing, should it do so?

The price-cost squeeze is:

Limit pricing will effectively deter entry when:

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

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).

Consider an incumbent that successfully links the pre-entry price and post-entry 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 million annually. Due to a recent loan default, the current interest rate is whopping 210 percent. Is limit pricing profitable for the incumbent?

Which of the following is incorrect?

Selling a product below cost to gain a foothold in the market in order to eliminate the inefficiencies introduced by lock-in is known as: