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

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Competing with Wal-Mart

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  1. Competing with Wal-Mart Learning Objectives In an oligopoly, a firm’s profitability depends on its interactions with other firms.

  2. Oligopoly: Firms in Less Competitive Markets Oligopoly A market structure in which a small number of interdependent firms compete.

  3. Learning Objective 13.1 Oligopoly and Barriers to Entry Table 13-1 Examples of Oligopolies in Retail Trade and Manufacturing

  4. 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.

  5. 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

  6. 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.

  7. 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.

  8. 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.

  9. Learning Objective 13.2 Using Game Theory to Analyze Oligopoly A Duopoly Game: Price Competition between Two Firms FIGURE 13.2 A Duopoly Game

  10. 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

  11. 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.

  12. 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.

  13. Learning Objective 13.2 13-2 Solved Problem Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi?

  14. 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.

  15. 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

  16. 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.

  17. 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.

  18. 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

  19. Learning Objective 13.2 Using Game Theory to Analyze Oligopoly Cartels: The Case of OPEC FIGURE 13.5 The OPEC Cartel with Unequal Members

  20. Learning Objective 13.3 Sequential Games and Business Strategy Deterring Entry FIGURE 13.6 The Decision Tree for an Entry Game

  21. Learning Objective 13.3 13-3 Solved Problem Is Deterring Entry Always a Good Idea?

  22. Learning Objective 13.3 Sequential Games and Business Strategy Bargaining FIGURE 13.7 The Decision Tree for a Bargaining Game

  23. Learning Objective 13.4 The Five Competitive Forces Model FIGURE 13.8 The Five Competitive Forces Model

  24. 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.

  25. 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.

  26. 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.

  27. 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

  28. 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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