Business Strategy Principles of Economics Exam 3

These flashcards cover the key concepts from the lecture on business strategy within economics, focusing on the Five Forces Framework, competition dynamics, product positioning, and the hold-up problem.

What are the Five Forces that determine business profitability?

Existing competitors, potential entrants, potential substitutes, suppliers, and customers.

What is the main characteristic of existing competitors in the Five Forces Framework?

More rivals yield more intense competition.

What is the threat of entry in the context of potential competitors?

New entry can increase supply and intensify competition.

How do potential substitutes pose a threat to businesses?

Substitutes can come from unrelated industries and often offer better or cheaper alternatives.

What factors determine the bargaining power of suppliers?

Suppliers can threaten success by charging higher prices and can refuse to do business.

What impact can buyers have on pricing for a company?

Buyers can force companies to lower prices by threatening to buy from alternatives.

What drives price competition to zero in markets?

Pure price competition forces profits to zero as firms continuously undercut each other.

What is the role of product differentiation in market competition?

Product differentiation reduces incentives for rivals to undercut prices, increasing bargaining power.

What are some factors of non-price competition?

Product features, quality, customer service, design, reliability, and advertising.

How should a firm position its product if competing in a market with one competitor?

Position close to the competitor to maximize customer acquisition while being far away to avoid price undercutting.

What is the hold-up problem in the context of relationship-specific investments?

It occurs when one party tries to renegotiate terms for a better deal after investments have been made.

How can the hold-up problem be mitigated?

By using long-term contracts, building reputation through repeated interactions, or vertical integration.

What is the cost-benefit principle in the make vs. buy decision?

Make if benefits exceed costs, considering factors like elimination of hold-ups and supplier market power.

What type of advertising should differentiated firms focus on?

Only firms selling differentiated products should advertise to increase their firm demand.

What is the relationship between demands from advertising and price elasticity?

Successful advertising shifts the demand curve, typically making it less elastic.