midterm1_07_early_1_answers

midterm1_07_early_1_answers - Please answer four out of the...

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Please answer four out of the six possible questions. Each question is worth 20 points. Each part of a question is worth 5 points. In all cases, provide some explanation for you answer. In NO case, am I looking for more than 3-4 sentences. 1. Consider buyer and supplier power in the concentrate, bottling, and aluminum smelting industries. a. Compare the concentrate and bottling industries: Which industry faces a greater threat of hold up from suppliers (i.e. in which industry are suppliers more powerful)? Suppliers are more powerful for bottlers, where Coke and Pepsi are the main suppliers. They have huge supplier power due to their differentiation. Coke and Pepsi face little supplier power because they largely buy generic inputs, we think. Moreover, we know that they have very high gross margins. b. Evaluate the following statement: “In an industry like the aluminum industry, buyer power is irrelevant.” What characteristics of the aluminum industry either make this true or false. Because the aluminum industry is so competitive, prices are very low relative to marginal cost, rendering buyer power irrelevant, because prices cannot be reduced any further. c. Compare the supplier power of the two main inputs to aluminum smelting. What factors increased supplier power for each group of suppliers? Alumina refiners had some power because aluminum suppliers were specialized to using specific types of alumina. Electricity suppliers have power because electricity can only be bought locally, and suppliers are often monopolists in their local market. d. Why did Coke and Pepsi purchase certain products, like sweetener, on behalf of their bottlers? And, what happened to the power of sweetener suppliers when a second firm (Holland) began offering aspartame? Coke and Pepsi purchased inputs for their bottlers because Coke and Pepsi had much stronger bargaining power with suppliers due to their high market shares and strong product differentiation. When Holland began offering aspartame, this reduced the power of sweetener suppliers because it created greater competition among suppliers. 2. Barriers to entry and imitation a. Briefly explain how network externalities can create barriers to imitation. As part of your answer, give an example of a firm that you would expect has benefited from a barrier to imitation through network externalities, and explain how this has occurred. Network externalities create a barrier to imitation because customers will prefer the market leader because of the network externality, even if rival products are identical or even better. For example, when MSN IM challenged AOL IM, AOL IM was able to retain much of its market share because users did not want to switch to MSN, because it had fewer users.
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