midterm1_07_early_2_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. Discuss two reasons why the threat of supplier power was low for Nucor. First, Nucor has lower costs than most steel firms, allowing them to buy at low prices and still be profitable. Second, Nucor employees have little power because so many people want to work at Nucor, because of their above-avg compensation. Third, Nucor used a purchasing agent who pooled Nucor’s purchases with other steel firms. 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. b. Consider the following industries: aluminum smelting, concentrate, bottling: Did high fixed costs and the resulting economies of scale created an entry barrier in any of these industries? If so, which one? If not, why not?
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  • Spring '07
  • Game Theory, Barriers to entry, supplier power, Nucor, group-performance based incentive

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