ADVANCE TOPICS IN BUSINESS STRATEGY

LIMIT PRICING TO PREVENT ENTRY

Strategy where an incumbent maintains a price below the monopoly level in order to prevent entry.

Not always a profitable business strategy Limit Pricing May Fail to Deter Entry Linking the Preentry Price to Postentry Profits

Commitment mechanism Learning Curve Effects Incomplete Information Reputation Effects Dynamic Considerations

LIMIT PRICING AND RESIDUAL DEMAND

The Value of Commitment

PREDATORY PRICING TO LESSEN COMPETITION

A strategy where a firm temporarily prices below its marginal cost to drive competitors out of the market.

RAISING RIVALS COST TO LESSEN COMPETITION

Strategy in which a firm gains an advantage over competitors by increasing their cost.

Strategies involving marginal cost Strategies involving fixed costs Strategies for vertically integrated firms

RAISING RIVALS MARGINAL COST

RAISING RIVALS COST

VERTICAL FORECLOSURE

Strategy wherein a vertically integrated firm charges downstream rivals a prohibitive price for an essential input, thus forcing rivals to use more costly substitutes or go out of business.
Tactic used by a vertically integrated firm to squeeze the margins of its competitors.

PRICE-COST SQUEEZE

PRICE DISCRIMINATION AS A STRATEGIC TOOL

PRICE DISCRIMINATION

Is the practice of charging different customers different prices for the same product

CHANGING THE TIMING OF DECISIONS OR THE ORDER OF MOVES

Another way a manager can profitably change the business environment is by changing the timing of decisions or order of moves.

First-Mover Advantages

Permits a firm to earn a higher payoff by committing to a decision before its rival get a chance to commit their decisions.

SEQUENTIAL MOVE PRODUCTION GAME

SECOND-MOVER ADVANTAGES

Being first is not always advantageous; sometimes secondmover advantages are even greater.

Being the second to introduce new product can yield higher pay-offs than being first if it permits the second mover to free ride on investments made by the first mover.

PENETRATION PRICING TO OVERCOME NETWORK EFFECTS

What is a Network? A network consists of links that connect different points (called nodes) in geographic or economic space. One way Network Two way Networks

Star Network

NETWORK EXTERNALITIES

Direct network externalities

Two-way networks that link users exhibit positive externalities

Indirect network externalities

(network complementarities) The indirect value enjoyed by the user of a network because of complementarities between the size of a network and the availability of complementary products or services.

FIRST-MOVER ADVANTAGE DUE TO CONSUMER LOCK IN

A NETWORK GAME

USING PENETRATION PRICING TO CHANGE THE GAME

Penetration Pricing

Charging a low price initially to penetrate a market and gain a critical mass of customers, useful when strong network effects are present.