Competing with wal mart
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Competing with Wal-Mart. Learning Objectives. In an oligopoly, a firm’s profitability depends on its interactions with other firms. Oligopoly: Firms in Less Competitive Markets. Oligopoly A market structure in which a small number of interdependent firms compete.

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Competing with Wal-Mart

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Competing with wal mart

Competing with Wal-Mart

Learning Objectives

In an oligopoly, a firm’s profitability depends on its interactions with other firms.


Oligopoly firms in less competitive markets

Oligopoly: Firms in Less Competitive Markets

Oligopoly A market structure in which a small number of interdependent firms compete.


Oligopoly and barriers to entry

Learning Objective 13.1

Oligopoly and Barriers to Entry

Table 13-1

Examples of Oligopolies in Retail Trade and Manufacturing


Oligopoly and barriers to entry1

Learning Objective 13.1

Oligopoly and Barriers to Entry

Barriers to Entry

Barrier to entry Anything that keeps new firms from entering an industry in which firms are earning economic profits.

Economies of Scale

Economies of scale The situation when a firm’s long-run average costs fall as it increases output.


Oligopoly and barriers to entry2

Learning Objective 13.1

Oligopoly and Barriers to Entry

Barriers to Entry

Economies of Scale

FIGURE 13.1

Economies of Scale Help Determine the Extent of Competition in an Industry


Oligopoly and barriers to entry3

Learning Objective 13.1

Oligopoly and Barriers to Entry

Barriers to Entry

Ownership of a Key Input

If production of a good requires a particular input, then control of that input can be a barrier to entry.

Government-Imposed Barriers

Patent The exclusive right to a product for a period of 20 years from the date the product is invented.


Using game theory to analyze oligopoly

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

Game theory The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.


Using game theory to analyze oligopoly1

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

All games share three key characteristics:

1 Rules that determine what actions are allowable

2 Strategies that players employ to attain their objectives in the game

3 Payoffs that are the results of the interaction among the players’ strategies

Business strategy Actions taken by a firm to achieve a goal, such as maximizing profits.


Using game theory to analyze oligopoly2

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

A Duopoly Game: Price Competition between Two Firms

FIGURE 13.2

A Duopoly Game


Using game theory to analyze oligopoly3

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

A Duopoly Game: Price Competition between Two Firms

Payoff matrix A table that shows the payoffs that each firm earns from every combination of strategies by the firms.

Collusion An agreement among firms to charge the same price or otherwise not to compete.

Dominant strategy A strategy that is the best for a firm, no matter what strategies other firms use.

Nash equilibrium A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.

Don’t Let This Happen to YOU!Don’t Misunderstand Why Each Manager Ends Up Charging a Price of $400


Competing with wal mart

Learning Objective 13.2

MakingtheConnection

  • A Beautiful Mind: Game Theory Goes to the Movies

In the film A Beautiful Mind, Russell Crowe played John Nash, winner of the Nobel Prize in Economics.


Competing with wal mart

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

Firm Behavior and the Prisoners’ Dilemma

Cooperative equilibrium An equilibrium in a game in which players cooperate to increase their mutual payoff.

Noncooperative equilibrium An equilibrium in a game in which players do not cooperate but pursue their own self-interest.

Prisoners’ dilemma A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.


Competing with wal mart

Learning Objective 13.2

13-2

Solved Problem

Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi?


Competing with wal mart

Learning Objective 13.2

MakingtheConnection

  • Is There a Dominant Strategy for Bidding on eBay?

On eBay, bidding the maximum value you place on an item is a dominant strategy.


Competing with wal mart

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

Can Firms Escape the Prisoners’ Dilemma?

FIGURE 13.3

Changing the Payoff Matrix in a Repeated Game


Competing with wal mart

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

Can Firms Escape the Prisoners’ Dilemma?

Price leadership A form of implicit collusion where one firm in an oligopoly announces a price change, which is matched by the other firms in the industry.


Competing with wal mart

Learning Objective 13.2

MakingtheConnection

  • American Airlines and Northwest Airlines Fail to Cooperate on a Price Increase

The airlines have trouble raising the price this business traveler pays for a ticket.


Competing with wal mart

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

Cartels: The Case of OPEC

Cartel A group of firms that collude by agreeing to restrict output to increase prices and profits.

FIGURE 13.4

World Oil Prices, 1972–2006


Competing with wal mart

Learning Objective 13.2

Using Game Theory to Analyze Oligopoly

Cartels: The Case of OPEC

FIGURE 13.5

The OPEC Cartel with Unequal Members


Competing with wal mart

Learning Objective 13.3

Sequential Games and Business Strategy

Deterring Entry

FIGURE 13.6

The Decision Tree for an Entry Game


Competing with wal mart

Learning Objective 13.3

13-3

Solved Problem

Is Deterring Entry Always a Good Idea?


Competing with wal mart

Learning Objective 13.3

Sequential Games and Business Strategy

Bargaining

FIGURE 13.7

The Decision Tree for a Bargaining Game


Competing with wal mart

Learning Objective 13.4

The Five Competitive Forces Model

FIGURE 13.8

The Five Competitive Forces Model


Competing with wal mart

Learning Objective 13.4

The Five Competitive Forces Model

Competition from Existing Firms

Competition among firms in an industry can lower prices and profits.

Competition in the form of advertising, better customer service, or longer warranties can also reduce profits by raising costs.

The Threat from Potential Entrants

Firms face competition from companies that currently are not in the market but might enter. We have already seen how actions taken to deter entry can reduce profits.


Competing with wal mart

Learning Objective 13.4

The Five Competitive Forces Model

Competition from Substitute Goods or Services

Firms are always vulnerable to competitors introducing a new product that fills a consumer need better than their current product does.

The Bargaining Power of Buyers

If buyers have enough bargaining power, they can insist on lower prices, higher-quality products, or additional services.

The Bargaining Power of Suppliers

If many firms can supply an input and the input is not specialized, the suppliers are unlikely to have the bargaining power to limit a firm’s profits.


Competing with wal mart

Learning Objective 13.4

MakingtheConnection

  • Is Southwest’s Business Strategy More Important Than the Structure of the Airline Industry?

Southwest’s business strategy allowed it to remain profitable when many other airlines faced heavy losses.


Competing with wal mart

Can Target Compete with Wal-Mart in the Market for Generic Drugs?

LOOK

An Inside

Target Says It Will Match Wal-Mart’s $4 Generic Drug Price


Competing with wal mart

K e y T e r m s

Nash equilibriumNoncooperative equilibriumOligopolyPatentPayoff matrixPrice leadershipPrisoners’ dilemma

Barrier to entryBusiness strategyCartelCollusionCooperative equilibriumDominant strategyEconomies of scaleGame theory


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