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| Words: 494 | Submitted: 08-Jan-2012
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DescriptionSuppose you are the owner-operator of the gas station in a small town. Over the past twenty years, you and your rival has successfully kept prices at a very high level. You recently learned that your rival is retiring and closing his station in two weeks. What should you do today?
Problem Solving Tools
Suppose you are the owner-operator of the gas station in a small town. Over the past twenty years, you and your rival has successfully kept prices at a very high level. You recently learned that your rival is retiring and closing his station in two weeks. What should you do today?
Your rival is losing all the incentives to maintain a reputation with you and will no longer be scared of any retaliation you may threaten him with. This means that you can no longer make credible threat that you will engage in a price war or other enforcement mechanism. You will anticipate this and to prevent him gaining the entire market share, you will lower your price so as to cut your losses.
Which of the following might create first mover advantages?
Maxwell house introduces the first freeze-dried coffee.
A consortium of U.S. firms introduces the first high-definition television.
Wal-Mart a store in Nome, Alaska.
Merck introduces Arogout, the first effective medical treatment for ulcers.
It would seem that the first freeze-dried coffee could easily be copied and that the Maxwell House name is not a significant barrier to entry.
The first high-definition television could be a first mover advantage; there may be network efforts or positive externalities that can be exploited.
Wal-Mart is not a first mover-advantage because sores already exist in Nome.
Merck likely has a patent on the drug which serves as a barrier to entry. Being first is very important in patent races.
Coke and Pepsi have sustained their market dominance for nearly a century. General motors and Ford have lost their dominance. What is the difference between the two cases?
The products that coke and Pepsi produce are still desired and purchased by the public, satisfying and flavorful drinks. Coke and Pepsi did not depend on the supply of something from an independent source whose cost escalated dramatically and rapidly. Ford and General Motors banked on and continued to produce a product that was no longer desired by the public, low-mileage, gas guzzling vehicles. Their dependence on a low-cost fuel and no way to control the cost of that fuel caused a dramatic reduction in sales.
In a situation that occurs only once, if you advertise and your rival advertises, you will each earn $5million in profits. If neither of you advertises, your rival will make $4million and you will make $2million. If you advertise and your rival does not, you will make $10million and your rival will make $3 million. If your rival advertises and you do not, you will make $1 million and your rival will make $3 million.
Do you have a strategy that you will choose no matter what your rival does?
Is there a strategy your rival will choose no matter what ...
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