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 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. 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 ² R 1 2 Q 45 * = 30 ³ ´ 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. 8 ² P 2 1 $25 $45 ³ ´ $38.67 $54.67 Firm 1’s Reaction Function Firm 2’s
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M&S 452 — Strat and Org c ± 2008 Scott Schaefer 9 The games we have discussed so far in class are simultaneous move games. The players choose their strategies at the same time, and without observing what the other is doing. Outcomes of games are very often different if the players move sequentially , where the second can observe the first’s action before choosing. 10 Recall the Battle of the Sexes game. .. Scott Wrigley Field Field Museum Wrigley 5 Rachel 20 Museum 0 Two Nash Equilibria, but no obvious outcome.
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M&S 452 — Strat and Org c ± 2008 Scott Schaefer 11 Outcomes can be quite different if the players move sequentially. ² ³ ´ Rachel Scott Wrigley Museum W M (R Payoff, S Payoff) (20,10) (5,5) (0,0) (10,20) Work backwards to solve. 12 Note this game has a clear
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Week6 Slides - 2 1 Relationship between internal and...

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