Answer for Most study Questions

Answer for Most study Questions - Study Questions for Exam...

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Study Questions for Exam 1 1. Generally, which firms captured more value: aluminum producers or Coke and Pepsi? Explain your answer by analyzing the competitive forces in the concentrate industry. In each industry, which of the competitive forces seem to be the most important in determining average profitability? Coke and Pepsi captured more value – much higher profit margins. Coke and Pepsi managed to avoid destructive price competition (“battle without blood”). Huge investments in differentiation which reduce the incentive to cut price. Moreover, only two dominant players further reduces incentive for either to cut price. Facilitated by huge entry barriers as a result of the brand loyalty, and the sunk costs in advertising and promotion that would have to be incurred by a new entrant. Suppliers provided commodity raw materials, and buyers (bottlers) had little power because of high excess capacity. In both industries, rivalry among incumbent firms is probably most important. In aluminum it’s very high due to absence of differentiation and high number of firms with excess capacity. In concentrate rivalry is low because of differentiation. 2. Briefly explain how economies of scale and network effects can create barriers to imitation of a firm’s competitive advantage? Give an example where you would expect that network effects would create a barrier to imitation, and explain how it would create a barrier to imitation. Strong economies of scale imply high fixed costs. When fixed costs are high relative to market size, then this makes it difficult for firms (either smaller existing firms or new entrants) to challenge the largest firm, because they need to get big (incur a lot of fixed costs) to exploit economies of scale. However, if the fixed costs are high relative to market size, may not be sufficient revenues/profits to profitably support another firm with high fixed costs. 3. In defending his company against allegations of anticompetitive practices, Bill Gates claimed that if someone developed an operating system for personal computers that was superior to MS Windows, it would quickly become the market leader. Do you agree? To answer this question, consider the following: If you developed Oranges, a new operating system that was easier to use than Windows, what challenges would you face in stealing market share from Windows? A new operating system would not necessarily steal a lot of market share from Windows due to switching costs in learning and compatible software.
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4. In 1993, the market price for aluminum is about $1100/ton. The following data describe your costs for producing aluminum. These costs are based on you producing at your capacity of 20,000 tons/year. Electricity: $250/ton of aluminum Alumina: $400/ton of aluminum Other raw materials: $150/ton Maintenance: $40/ton Freight: $40/ton Labor: $70/ton SG&A: $30/ton How much would you produce this year? Produce to capacity. At any level of output, price (MR) is above marginal cost (regardless of how you categorize costs).
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  • Spring '07
  • high fixed costs, Nucor

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