Chapter 13: Q. 2LO (page 515)
Explain the economic basis for predatory pricing.
The economic reason behind predatory pricing drives potential rivals out of the market.
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Question:23. Evaluate the following: "Since a rival's profit-maximizing price and output depend on its marginal cost and not its fixed costs, a firm cannot profitably lessen competition by implementing a strategy that raises its rival's fixed costs."
Explain why networks often lead to first-mover advantages, and how to use strategies such as penetration pricing to favorably change the strategic environment.
Assess whether a firm’s profits can be enhanced by changing the timing of decisions or the order of strategic moves and whether doing so creates first- or second-mover advantages.
Question:18. Argyle is a large, vertically integrated firm that manufactures sweaters from a rare type of wool produced on its sheep farms. Argyle has adopted a strategy of selling wool to companies that compete against it in the market forsweaters. Explain why this strategy may, in fact, be rational. Also, identify at least two other strategies that might permit Argyle to earn higher profits.
Barnacle Industries was awarded a patent over 15 years ago for a unique industrial-strength cleaner that removes barnacles and other particles from the hulls of ships. Thanks to its monopoly position, Barnacle has earned more than \(160 million over the past decade. Its customers-spanning the gamut from cruise lines to freighters-use the product because it reduces their fuel bills. The annual (inverse) demand function for Barnacle's product is given by P=400-.0005 Q, and Barnacle's cost function is given by C(Q)=250 Q. Thanks to subsidies stemming from an energy bill passed by Congress nearly two decades ago, Barnacle does not have any fixed costs: The federal government essentially pays for the plant and capital equipment required to make this energy-saving product. Absent this subsidy, Barnacle's fixed costs would be about \)4 million annually. Knowing that the company's patent will soon expire, Marge, Barnacle's manager, is concerned that entrants will qualify for the subsidy, enter the market, and produce a perfect substitute at an identical cost. With interest rates at 7 percent, Marge is considering a limit-pricing strategy. If you were Marge, what strategy would you pursue? Explain.
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