1. The Economics of Organisations and Strategy

2. Chapter 10 The Dominant Firm and Predation

3. The Economics of Organisations and Strategy The purpose of this tool is to allow you to test your understanding of basic microeconomic concepts and also to help you build confidence. These notes are by no means exhaustive, and it is recommended that you refer to the chapter for a fuller understanding of the issues. To use the tutorial, read the question(s), and decide upon the most appropriate answer, by clicking on the A, B, C or D button. Questions can be skipped by clicking on the appropriate button at the bottom or tabs at the top of the screen. You can always end the session by clicking on the ‘End’ button. End Welcome to the Economics of Organisations & Strategy Tutorial

4. The Economics of Organisations and Strategy Chapter 10 - Question 1 A dominant firm, in dealing with its market rivals, might be viewed as akin to: End B C A D An aggressive competitor; An oligopolist; Monopolistically competitive; A monopolist. D

5. The Economics of Organisations and Strategy Chapter 10 - Question 2 The Stackelberg model is appropriate for analysing the behaviour of a dominant firm selling: End B C A D A specialised product; An homogeneous product; A heterogeneous product; Multiple products. B

6. The Economics of Organisations and Strategy Chapter 10 - Question 3 For a dominant firm following a price leadership strategy, output will be set at: End B C A D ;; or; B pq ABCD MC S

7. The Economics of Organisations and Strategy Chapter 10 - Question 4 For a dominant firm following a strategy of price leadership, the longer-term outcome will be: End B C A D An increasing economic rent; A loss of market share; The launch of new products; Reduced unit costs. B

8. The Economics of Organisations and Strategy Chapter 10 - Question 5 The strategy of limit pricing is designed to make it difficult for a new entrant: End B C A D To earn an economic rent post entry; To engage in price competition; To exit the market post entry; To engage in non-price competition. A

9. The Economics of Organisations and Strategy Chapter 10 - Question 6 If a potential entrant believes that post entry the dominant firm will adopt a non-cooperative Cournot strategy or seek a cooperative solution then: End B C A D The dominant firm should engage in predatory pricing; The best strategy for the dominant firm is non-price deterrence; There is no rational basis for the dominant firm limit pricing; There is a strong possibility that the entrant will be aggressive. C

10. The Economics of Organisations and Strategy Chapter 10 - Question 7 Predatory pricing is a two stage process. The two stages are: End B C A D First stage P < MC, second stage P = MC; First stage P MC; First stage P > MC, second stage P < MC; First stage P = MC, second stage P = MC. B

11. The Economics of Organisations and Strategy Chapter 10 - Question 8 Which of the following greatly increases the risks of predatory pricing for a dominant firm: End B C A D The opportunity cost of capital for the predator is high; The victim’s capital investment is a sunk cost; The competition authorities are very active; All of the above. D

12. The Economics of Organisations and Strategy Chapter 10 – Answer1 Correct answer: Dominance is more akin to the market power of a monopolist than an oligopolist. In exercising power, an oligopolist must take account of the reaction of rivals. In contrast a dominant firm can act independently of its rivals. EndReturn

13. The Economics of Organisations and Strategy Chapter 10 - Answer 2 EndReturn Correct answer: The Stackelberg model is conceptually similar to the Cournot model. The Cournot model assumes an homogeneious product and that the decision variable for the firm is the quantity to produce. The key difference between the Stackelberg and Cournot models is that in the former case the dominant firm pre-fixes its level of output and it is only rivals that then choose how to respond.

14. The Economics of Organisations and Strategy Chapter 10 - Answer 3 Correct answer: the dominant firm determines its residual demand curve, which in turn, allows the calculation of its marginal revenue curve. Setting this marginal revenue equal to marginal cost determines its profit maximising output. EndReturn

15. The Economics of Organisations and Strategy Chapter 10 - Answer 4 EndReturn Correct answer: A strategy of price leadership generates an economic rent, not only for the dominant firm, but also for the competitive fringe. Firms in the competitive fringe use these rents to invest in additional capacity – and new entrants are encouraged by the prospect of earning a rent – with the effect that the competitive fringe increases its market share and hence the dominant firm loses market share.

16. The Economics of Organisations and Strategy Chapter 10 - Answer 5 Correct answer: a strategy of limit pricing is a deterrence strategy. The dominant firm sets the market price at a low level such that a new entrant – operating below the scale at which unit costs are minimised – cannot earn a rent or even a normal profit. EndReturn

17. The Economics of Organisations and Strategy Chapter 10 - Answer 6 Correct answer: Game theory teaches that the ex ante conjectures such as those set out in the question are likely to be plausibly held because post-entry the two firms are in a new game that is independent of the ex ante strategy of the dominant firm. EndReturn

18. The Economics of Organisations and Strategy Chapter 10 - Answer 7 Correct answer: the purpose of predatory pricing is in the first stage to drive a rival from the market and in the second to raise price above marginal cost in order to earn a rent. In order to drive the rival from the market the dominant firm increases output so that the market price falls below marginal cost. Both firms are now making a loss, but the assumption is that the dominant firm has deeper pockets and can outlast the smaller rival. EndReturn

19. The Economics of Organisations and Strategy Chapter 10 - Answer 8 Correct answer: if the opportunity cost of capital is high this will make it more difficult for the predator to achieve a positive net present value from a cash flow stretching over the negative effects of the predation period and relying on the distant future for a positive cash flow. If the victim’s capital costs are sunk then it is likely to be earning a quasi-rent and therefore will be prepared to fight rather than give up. Needless to say active competition authorities are always a threat. EndReturn

20. The Economics of Organisations and Strategy Here you have several choices, you can either return to the question that you were asked, or, you may move on to the next question. If you wish to return to the question you were working on, then simply click on the RETURN button on the bottom right of the screen. You can END the session too. INCORRECT ANSWER EndReturn