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Week6 Slides - 2 1 Relationship between internal and...

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M&S 452 — Strat and Org c 2008 Scott Schaefer 1 Lecture 6: Organization and Strategic Commitment Where we’ve been... Analyzing things that go on inside organizations * Incentives * Performance measurement * Divisionalization and decentralization Strategy applications * Complementarities * Positioning using performance measurement tradeoffs M&S 452 — Strat and Org c 2008 Scott Schaefer 2 Where we’re headed... Relationship between internal and external considerations Two main questions * How do internal organizational decisions affect product market competition? * What factors affect the optimal scope of the organization?
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M&S 452 — Strat and Org c 2008 Scott Schaefer 3 Cournot Competition A model of oligopoly behavior Imagine firms first choose capacities and then price adjusts to equate supply and demand. Applies most naturally to markets in which firms make production decisions in advance and face high costs of holding inventories — price should adjust more quickly than quantity. M&S 452 — Strat and Org c 2008 Scott Schaefer 4 Rivals react to aggression by being less aggressive. Reaction functions are downward sloping. The Cournot game features Strategic Substitutes : This means if firm 1 chooses a higher quantity (that is, a higher level of its strategic variable), firm 2’s best response is to choose a lower quantity. Strategic variables are inversely related.
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M&S 452 — Strat and Org c 2008 Scott Schaefer 5 R 1 R 2 Q 2 Q 1 45 45 Q * 2 = 30 Q * 1 = 30 M&S 452 — Strat and Org c 2008 Scott Schaefer 6 Bertrand with Differentiated Products Another model of oligopoly behavior Think of competitors producing imperfect substitutes. Applies most naturally to markets in which firms can steal some business from competitors by cutting prices. Rivals react aggressively to aggressive moves.
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M&S 452 — Strat and Org c 2008 Scott Schaefer 7 Reaction functions are upward sloping. The Differentiated Goods Bertrand game features Strategic Complements : This means if firm 2 chooses a higher price (that is, a higher level of its strategic variable), firm 2’s best response is to choose a higher price. Strategic variables are directly related.
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