1) Consider a firm selling two products, A and B, that substitute for each other. Suppose that an entrant introduces a product that is identical to product A. What factors do you think will affect (a) whether a price war is initiated, and (b) who wins the price war?
2) The following table reports the distribution of profits (on a per-disc basis) for different steps in the vertical chain for music compact discs:
Artist: $ .60
Record company: $1.80
Retailer: $ .60
Use the five forces to explain this pattern. (Note: There are about half a dozen major record companies, including Warner, Sony, and Polygram. They are responsible for signing up artists, handling technical aspects of recording, securing distribution, and promoting the recordings.)
3) Consumers often identify brand names with quality. Do you think branded products usually are of higher quality than generic products and therefore justify their higher prices? If so, why don't all generic product makers invest to establish a brand identity, thereby enabling them to raise price?
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