Economics Of Strategy 7th Edition By David Dranove – Test Bank A+

Description

1. What type of firm is one that is already operating in a particular market?
2. a) Market leader
3. b) Entrant
4. c) Incumbent
5. d) Market follower
6. e) Monopolist

Ans: c

Heading: Entry and Exit

Level: Easy

1. What is the term defined as the withdrawal of a product from a market?
2. a) Shut-down
3. b) Exit
4. c) Sale
5. d) Removal
6. e) Withdrawal

Ans: b

Heading: Some Facts about Entry and Exit

Level: Easy

1. Which of the following generally accompanies firms that survive as market entrants?
2. a) Precipitous growth
3. b) Lower marginal costs than incumbents
4. c) Higher average revenue than incumbents
5. d) Small size allowing fast decision making
6. e) None of the above

Ans: a

Heading: Some Facts about Entry and Exit

Level: Easy

1. What term represents the conduct and performance of firms in the market after entry has occurred?
2. a) Postentry competition
3. b) Postentry actions
4. c) Postentry procedures
5. d) Postentry diversification
6. e) Postentry strategic decisions

Ans: a

Heading: Entry and Exit Decisions: Basic Concepts

Level: Medium

1. What are the two types of barriers to entry?
2. a) Legal and strategic
3. b) Price and Size
4. c) Structural and strategic
5. d) Size and Legal
6. e) Price and Structure

Ans: c

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Medium

1. What type of entry exists if structural barriers are so high the incumbent need do nothing to deter entry?
2. a) Deterred Entry
3. b) Judo Entry
4. c) Stealth Entry
5. d) Accommodated Entry
6. e) Blockaded Entry

Ans: e

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Medium

1. What type of entry exists if structural entry barriers are low, and either (1) entry-deterring strategies will be ineffective or (2) the cost to the incumbent of trying to deter entry exceeds the benefits it could gain from keeping the entrant out?
2. a) Deterred Entry
3. b) Judo Entry
4. c) Stealth Entry
5. d) Accommodated Entry
6. e) Blockaded Entry

Ans: d

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Medium

1. What type of entry exists if (1) the incumbent can keep the entrant out by employing an entry-deterring strategy and (2) employing the entry-deterring strategy boosts the incumbent’s profits?
2. a) Deterred Entry
3. b) Judo Entry
4. c) Stealth Entry
5. d) Accommodated Entry
6. e) Blockaded Entry

Ans: a

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Medium

1. How can incumbents legally erect entry barriers around novel and non-obvious products or production processes?
2. a) Collusive pricing
3. b) Predatory pricing
4. c) Patents
5. d) Formation of a cartel
6. e) Price fixing

Ans: c

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Easy

1. Which of the following firms maintains a monopoly or cartel by controlling essential inputs thus creating a barrier to entry?
2. a) DeBeers in diamonds
3. b) Nike in shoes
4. c) Pepsi in beverages
5. d) Subway in sandwich fast food
6. e) Levis in denim jeans

Ans: a

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Easy

1. Which of the following is a potential risk of a brand umbrella?
2. a) The brand umbrella reduces the incumbents sunk cost of introducing a new product
3. b) The umbrella brand may help the incumbent navigate the vertical chain
4. c) The brand umbrella allows an incumbent offset uncertainty about the quality of a new product
5. d) A brand umbrella may make suppliers and distributors more willing to enter relationship specific investments in or sell credit to incumbents
6. e) If a new product under the umbrella fails, consumers may become disenchanted with the entire brand

Ans: e

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Entry

Level: Medium

1. Which of the following is not an exit barrier for firms in an industry?
2. a) Sunk costs
3. b) Labor agreements or commitments to purchase raw materials
4. c) Obligations to input suppliers
5. d) Excess capacity
6. e) Government restrictions

Ans: d

Heading: Entry and Exit Decisions: Basic Concepts – Barriers to Exit

Level: Easy

1. What term describes a market where a monopolist cannot raise price above long run average cost?
2. a) Blockaded
3. b) Perfectly contestable
4. c) Accommodated
5. d) Deterred
6. e) Predatory

Ans: b

Heading: Entry Deterring Strategies

Level: Hard

1. Which of the following is a method a monopolist firm might use to prevent entry into a market?
2. a) Limit pricing
3. b) Predatory pricing
4. c) Capacity expansion
5. d) All of the above
6. e) None of the above

Ans: d

Heading: Entry Deterring Strategies

Level: Medium

1. Which of the following terms refers to the practice whereby an incumbent firm discourages entry by charging a low price before entry occurs?
2. a) Limit pricing
3. b) Price leading
4. c) Predatory pricing
5. d) Quality pricing
6. e) Capacity expansion

Ans: a

Heading: Entry Deterring Strategies – Limit Pricing

Level: Medium

1. What situation occurs if an incumbent firm with increasing marginal costs or limited capacity sets a price just below the entrants’ marginal costs even though the incumbent may be unable to meet all market demand (or possibly may have to sacrifice its profits to do so)?
2. a) Contestable limit pricing
3. b) Strategic limit pricing
4. c) Predatory pricing
5. d) Quality pricing
6. e) Capacity expansion

Ans: b

Heading: Entry Deterring Strategies – Limit Pricing

Level: Hard

1. Which of the following methods is believed to be used by Brazilian cement makers to prevent entry into the market?
2. a) Limit pricing
3. b) Price leading
4. c) Predatory pricing
5. d) Quality pricing
6. e) Capacity expansion

Ans: a

Heading: Example 11.3 Limit Pricing by Brazilian Cement Manufacturers

Level: Hard

1. What situation occurs when a large incumbent sets a low price to drive smaller rivals from the market?
2. a) Limit pricing
3. b) Price leading
4. c) Predatory pricing
5. d) Quality pricing
6. e) Capacity expansion

Ans: c

Heading: Entry Deterring Strategies – Predatory Pricing

Level: Hard

1. What term best describes the paradox which says despite the conclusion that predatory pricing to deter entry appears irrational, many firms are commonly perceived as slashing prices to deter entry?
2. a) Cloud paradox
3. b) Credit paradox
4. c) Entry paradox
5. d) Chain-store paradox
6. e) Pricing paradox

Ans: d

Heading: Entry Deterring Strategies – Predatory Pricing

Level: Medium

1. What was the cause of Walmart’s exit from the German market?
2. a) Loss of a predatory pricing lawsuit
3. b) High tariffs on imported goods
4. c) Total revenue that failed to cover sunk costs
5. d) German regulations against foreign owned firms
6. e) None of the above

Ans: a

Heading: Entry Deterring Strategies – Predatory Pricing

Level: Medium

1. Which of the following conditions may make predatory pricing by incumbents rational?
2. a) When entry costs are very high
3. b) When entrants are uncertain about market conditions
4. c) When existing firms have significant coast advantages
5. d) When entrants are required to obtain extensive licensing and regulatory approvals
6. e) When exiting firms have increasing marginal revenue

Ans: b

Heading: Entry Deterring Strategies – Predatory Pricing

Level: Medium

1. What is the typical “capacity use” ratio as reported by plant managers to the U.S. Census of Manufacturers annually?
2. a) 40%
3. b) 50%
4. c) 60%
5. d) 70%
6. e) 80%

Ans: e

Heading: Entry Deterring Strategies – Capacity Expansion

Level: Hard

1. Which of the following is not a condition under which an incumbent firm can successfully deter entry by holding excess capacity?
2. a) The investment in excess capacity must be sunk prior to entry
3. b) The incumbent should have a sustainable cost advantage
4. c) Market demand growth should be slow
5. d) The potential entrant should not itself be attempting to establish a reputation for toughness
6. e) The excess capacity investment must be recoverable prior to entry

Ans: e

Heading: Entry Deterring Strategies – Capacity Expansion

Level: Medium

1. What term describes when a firm sells a combination of goods and services at a price below what the individual items would cost?
2. a) Packaging
3. b) Combining
4. c) Bundling
5. d) Mixing
6. e) Assembling

Ans: b

Heading: Entry Deterring Strategies – Bundling

Level: Medium

1. Which term describes the situation where a smaller firm and potential entrant can use the incumbent’s size to its own advantage?
2. a) Jujitsu economics
3. b) Karate economics
4. c) Boxing economics
5. d) Judo economics
6. e) David and Goliath economics

Ans: d

Heading: Entry Deterring Strategies – “Judo Economics” and the “Puppy-Dog Ploy”

Level: Hard

1. What term is defined as a firm selling goods at a price below their normal price (and generally below cost) usually as an export in international trade?
2. a) Predatory pricing
3. b) Cost plus pricing
4. c) Dumping
5. d) Marginal cost pricing
6. e) Price leading

Ans: c

Heading: Exit-Promoting Strategies

Level: Easy

1. What term describes a situation where two or more parties expend resources battling each other?
2. a) Predatory pricing
3. b) War of attrition
4. c) Dumping
5. d) Capacity Expansion
6. e) Puppy Dog Ploy

Ans: b

Heading: Exit-Promoting Strategies – Wars of Attrition

Level: Easy

1. When are sunk costs a most effective entry barrier?
2. a) When the incumbent has incurred them and the entrant has not
3. b) When incumbents have long-standing relationships with suppliers and customers
4. c) When channels are few and hard to replicate
5. d) When a firm has a reputation for toughness or competes in multiple markets
6. e) When marginal costs are low and flooding the market causes large price reductions

Ans: a

Heading: Evidence on Entry-Deterring Behavior – An Entry-Deterrence Checklist

Level: Medium

1. When is reputation a most effective entry barrier?
2. a) When the incumbent has incurred them and the entrant has not
3. b) When incumbents have long-standing relationships with suppliers and customers
4. c) When channels are few and hard to replicate
5. d) When a firm has a reputation for toughness or competes in multiple markets
6. e) When marginal costs are low and flooding the market causes large price reductions

Ans: b

Heading: Evidence on Entry-Deterring Behavior – An Entry-Deterrence Checklist

Level: Medium

1. When is predatory pricing a most effective entry barrier?
2. a) When the incumbent has incurred them and the entrant has not
3. b) When incumbents have long-standing relationships with suppliers and customers
4. c) When channels are few and hard to replicate
5. d) When a firm has a reputation for toughness or competes in multiple markets
6. e) When marginal costs are low and flooding the market causes large price reductions

Ans: d

Heading: Evidence on Entry-Deterring Behavior – An Entry-Deterrence Checklist

Level: Medium

File: ch7, Chapter 7: The Dynamics Competing Across TIme

Multiple Choice

1. What term refers to situations in which firms can sustain prices in excess of those that would arise in a non-cooperative single-shot price or quantity-setting game?
2. a) Dedicated pricing
3. b) Strategic pricing
4. c) Marginal pricing
5. d) Cost-plus pricing
6. e) Cooperative pricing

Ans: e

Heading: Dynamic Pricing Rivalry – Dynamic Pricing Rivalry: Intuition

Level: Easy

1. What term describes a policy in which a firm is prepared to match whatever change in strategy a competitor makes?
2. a) Response strategy
3. b) Always cooperate strategy
4. c) Always aggress strategy
5. d) Tit-for-tat strategy
6. e) Trigger strategy

Ans: d

Heading: Dynamic Pricing Rivalry – Competitor Responses and Tit-for-Tat Pricing

Level: Medium

1. What term describes a decision that has a long-term impact and is difficult to reverse?
2. a) Dedicated investment
3. b) Strategic commitment
4. c) Critical choice
5. d) Market investment
6. e) Firm commitment

Ans: a

Heading: Strategic Commitment

Level: Easy

1. Given the following payoff diagram:

		Firm 2
		Aggressive	Passive
Firm 1	Aggressive	40,10	55,15
	Passive	50, 25	70, 20

How much can firm 1 improve its outcome by committing to a strategy thus transforming the simultaneous move game to a sequential move game?

1. a) 5
2. b) 10
3. c) 15
4. d) 20
5. e) 20

Ans: a

Heading: Competition Identification and Market Definition – The Basics of Competitor Identification

Level: Medium

1. What type of cooperation-inducing strategy is defined as one so compelling that that a firm would expect all other firms to adopt it?
2. a) Backward induction
3. b) Focal point
4. c) Always aggress
5. d) Coordination
6. e) Folk

Ans: b

Heading: Dynamic Pricing Rivalry – Coordination

Level: Hard

1. What is a grim trigger strategy in a two firm repeated game?
2. a) A strategy where a firm will always aggress regardless of how the other firm acts
3. b) A strategy where a firm will always cooperate regardless of how the other firm acts
4. c) A strategy in which a firm is prepared to match whatever changes in strategy the competitor makes
5. d) A strategy in which a firm initially cooperates and then aggresses for the rest of the game as soon as the opponent aggresses
6. e) A strategy in which a firm is prepared to aggress when its opponent cooperates and cooperate when its opponent aggresses

Ans: d

Heading: Dynamic Pricing Rivalry – Why is Tit-for-Tat So Compelling?

Level: Medium

1. What tactical term best describes the capacity relationship between Toyota and Honda such that Toyota’s response is to reduce production output of the Rav 4 if Honda were to first announce a large increase in the production of the CR-V that drove down prices?
2. a) Tough commitment
3. b) Strategic complement
4. c) Soft commitment
5. d) Strategic substitute
6. e) Duopoly

Ans: d

Heading: Strategic Commitment and Competition – Strategic Complements and Strategic Substitutes

Level: Medium

1. What type of effect describes how a commitment impacts the present value of the firm’s profits, assuming the firm adjusts its own tactical decisions in light of this commitment and that its competitor’s behavior does not change?
2. a) Tactical effect
3. b) Financial effect
4. c) Direct effect
5. d) Strategic effect
6. e) Indirect effect

Ans: c

Heading: Strategic Commitment and Competition – Strategic Complements and Strategic Substitutes

Level: Medium

1. Why might a firm not be able to react quickly to competitors’ pricing moves?
2. a) Lags in detecting competitors’ prices
3. b) Infrequent interactions with competitors
4. c) Ambiguities in identifying which firm among a group of firms in a market is cutting price
5. d) Difficulties distinguishing drops in volume due to price cutting by rivals from drops in volume due to anticipated decreases in market demand
6. e) All of the above

Ans: e

Heading: How Market Structure Affects the Sustainability of Cooperative Pricing – Reaction Speed, Detection Lags, and the Sustainability of Cooperative Pricing

Level: Medium

1. Which of the following statements is true about how the volatility of demand conditions affects the sustainability of cooperative pricing?
2. a) Price cutting is easier to detect when demand conditions are volatile
3. b) Pricing coordination becomes easier in a volatile demand condition because firms are chasing a moving target
4. c) Price cutting is harder to detect when demand conditions are stable
5. d) Demand volatility is an especially serious problem when the production involves substantial variable costs
6. e) Demand volatility is an especially serious problem when the production involves substantial fixed costs

Ans: e

Heading: How Market Structure Affects the Sustainability of Cooperative Pricing – Reaction Speed, Detection Lags, and the Sustainability of Cooperative Pricing

Level: Medium

1. Which of the following terms describes the situation created by a large dominant firm where smaller firms can find buyers as long as they sustain a lower price?
2. a) Price umbrella
3. b) Price leading
4. c) Predatory pricing
5. d) Premium pricing
6. e) Price lining

Ans: a

Heading: How Market Structure Affects the Sustainability of Cooperative Pricing – Asymmetries among Firms and the Sustainability of Cooperative Prices

Level: Medium

1. Why do price-sensitive buyers tend to harm cooperative pricing in a market?
2. a) They cause an increase in detection lags because competitor prices become more difficult to monitor
3. b) There is a resultant decrease in the frequency of interaction between competitors
4. c) There is an increase in the probability of misreads
5. d) The is an increase in temptation to cut price, even if competitors are expected to match
6. e) There is an increase in detection lags because prices of competitors are more difficult to monitor

Ans: d

Heading: How Market Structure Affects the Sustainability of Cooperative Pricing – Market Structure and the Sustainability of Cooperative Pricing: Summary

Level: Hard

1. Which of the following practices can help firms facilitate cooperative pricing?
2. a) Price leadership
3. b) Advance announcement of price changes
4. c) Price following
5. d) Most favored customer clauses
6. e) Uniform delivered prices

Ans: c

Heading: Facilitating Practices

Level: Easy

1. Which of the following is an example of a market where barometric price leadership occurs?
2. a) Breakfast cereal
3. b) Prime-rate loan
4. c) Tobacco
5. d) Steel until 1960s
6. e) Fast food hamburger

Ans: b

Heading: Facilitating Practices – Price Leadership

Level: Medium

1. What type of clause is a provision in a sales contract that promises a buyer that it will pay the lowest price the seller charges?
2. a) Low price clause
3. b) Price matching clause
4. c) Best price clause
5. d) Most favored customer clause
6. e) Competitive price clause

Ans: d

Heading: Facilitating Practices – Most Favored Customer Clauses

Level: Easy

1. Which of the following statements is true about a tough commitment?
2. a) It is good for competitors
3. b) It is bad for competitors
4. c) In Cournot competition, elimination of production facilities is an example of a tough commitment
5. d) In Betrand competition, a commitment to increase prices is an example of a tough commitment
6. e) Tough commitments are always in the best interest of a firm

Ans: b

Heading: Strategic Commitment and Competition – Tough versus Soft Commitments

Level: Medium

1. Which of the following statements is true about a soft commitment?
2. a) It is bad for competitors
3. b) It is good for competitors
4. c) In Cournot competition, capacity expansion is an example of a soft commitment
5. d) In Betrand competition, a commitment to reduce prices is an example of a soft commitment
6. e) Tough commitments are always in the best interest of a firm

Ans: b

Heading: Strategic Commitment and Competition – Tough versus Soft Commitments

Level: Medium

1. Which of the following commitment strategies involves soft commitment postures, strategic complements for the stage 2 tactical variables, a refrain commitment action and an acceptance of the status quo out of fear thus waiting to follow the leader?
2. a) Top Dog
3. b) Lean and Hungry Look
4. c) Mad Dog
5. d) Puppy-Dog Ploy
6. e) Fat-Cat Effect

Ans: e

Heading: Strategic Commitment and Competition – A Taxonomy of Commitment Strategies

Level: Hard

1. What type of pricing involves a firm quoting a single delivered price for all buyers with the firm absorbing any freight charges itself?
2. a) Uniform delivered pricing
3. b) Uniform FOB pricing
4. c) Uniform customer pricing
5. d) Uniform favored pricing
6. e) Uniform competitive pricing

Ans: a

Heading: Facilitating Practices – Uniform Delivered Prices

Level: Medium

1. Which set of advice below should a manager disregard when seeking pricing stability that is least likely to suffer from antitrust legislation?
2. a) All pricing decisions should be made unilaterally. Avoid direct contacts with competitors about price
3. b) Carefully handle public pricing communications
4. c) Always share analyses of probably competitive reactions
5. d) Monitor the content. Announce price changes; do not lecture competitors about the need to raise prices or consequences of reducing them
6. e) Clear your pricing tactics with an attorney well versed in antitrust law

Ans: c

Heading: Facilitating Practices – Facilitating Practices and Anti-trust

Level: Easy

1. What process involves using computer simulations to track the likely competitive implications of pricing and investment decisions over many years?
2. a) Regression testing
3. b) Virtual reality
4. c) War gaming
5. d) Commitment testing
6. e) Scenario testing

Ans: c

Heading: Strategic Commitment and Competition – A Taxonomy of Commitment Strategies

Level: Medium

1. What type of option exists when a decision maker has the opportunity to tailor a decision to information that will be received in the future?
2. a) Real option
3. b) Commitment option
4. c) Project option
5. d) Decision option
6. e) Future option

Ans: a

Heading: Flexibility and Real Options

Level: Easy

1. What term refers to the situation in the used car market where owners are more anxious to sell low-quality cars than high-quality cars?
2. a) Clunker market
3. b) Quality conundrum
4. c) Car scrapping market
5. d) Low-quality market
6. e) Lemons market

Ans: e

Heading: Quality Competition – Quality Choice in Competitive Markets

Level: Easy19.

1. What step of Ghemawat’s framework for analyzing commitment intensive choices involves analyzing whether the firm’s commitment is likely to result in a product market position in which the firm delivers superior benefits to consumers or operates with lower costs than competitors?
2. a) Positioning analysis
3. b) Sustainability analysis
4. c) Flexibility analysis
5. d) Judgment analysis
6. e) Final Commitment analysis

Ans: a

Heading: A Framework for Analyzing Commitments

Level: Hard

1. How much revenue a firm brings in by improving the quality of a product such that more consumers want to buy it depends on which two factors?
2. a) The decrease in demand caused by the increase in quality and the incremental profit earned on each additional unit sold
3. b) The increase in demand caused by the increase in quality and the incremental profit earned on each additional unit sold
4. c) The increase in demand caused by the increase in quality and the incremental loss on each additional unit sold
5. d) The decrease in demand caused by the increase in quality and the incremental loss on each additional unit sold
6. e) The quality of changes to the original product and the decrease in demand cause by the changes in quality

Ans: b

Heading: Quality Competition – Quality Choices of Sellers with Market Power

Level: Easy

Short Answer

1. In a six-firm market, if all firms charge the monopoly price, the profit equals $120,000. In that same six-firm market, if all firms instead charge the prevailing price, the profit is $60,000. If the pricing period is one-month long, what is the maximum monthly discount rate implied for each firm to still have an incentive to independently price at the monopoly level?

Ans: 25%

Heading: Dynamic Pricing Rivalry – Tit-for-Tat Pricing with Many Firms

Level: Medium

1. Suppose a firm has $50 million to invest in a new market. Given market uncertainties, the firm forecasts a high-scenario where the present value of the investment is $200 million and a low-scenario where the present value of the investment is $20 million. If the firm believes each scenario is equally likely and invests today, what is the net present value of the investment?

Ans: $60 million

Heading: Flexibility and Real Options

Level: Medium

1. Suppose a firm has $50 million to invest in a new market. Given market uncertainties, the firm forecasts a high-scenario where the present value of the investment is $200 million and a low-scenario where the present value of the investment is $20 million. Suppose that by waiting a year, the firm can learn with certainty which scenario will arise. Assume a 10% annual discount rate. If the firm waits one year and learns that the high-scenario will happen, what is the firm’s expected net present value of the investment?

Ans: $68.2 million

Heading: Flexibility and Real Options

Level: Medium

1. Suppose that a firm offers secret discounts to 200 customers in a particular industry to attract those customers from a competitor firm. If there is a 2% probability that any one of those customers will disclose the pricing, what is the probability that the firms competitors will hear from one of those 200 customers? Suppose there are instead 20 buyers to which discounts are offered. What is the probability then that the competitors may find out about one of the discounts?

Ans: .98; .33

Heading: How Market Structure Affects the Sustainability of Cooperative Pricing – Reaction Speed, Detection Lags, and the Sustainability of Cooperative Pricing

Level: Medium

1. Suppose Firm #1 dominates a market for widgets priced at $100/unit with a marginal cost of $60/unit. If Firm #2 enters the market and offers comparable widgets at a 3% discount, extending a price umbrella optimal as long as Firm #1 loses no more than what portion of its market share?

Ans: 7.5%

Heading: How Market Structure Affects the Sustainability of Cooperative Pricing – Asymmetries among Firms and the Sustainability of Cooperative Prices

Level: Hard