Industrial Organization is the area of economics that studies the markets as institutions, the state of competition and strategic interaction among firms, the industrial policy and the business decisions firms make within the market framework. The course looks at the markets from three different perspectives: the economic theory, the applied business perspective and the institutional and legal perspective. The focus of the course is split equally between the economic theory and business perspective but there is a significant legal component incorporated in various topics. The course includes economic modeling, game theory, numerous real life examples and several case studies. We explore interesting topics of market organization such as negotiations, antitrust, networks, platforms, electronic markets, intellectual property, business strategies, predation, entry deterrence and many others. The basic objective of the course is to enable the student to understand the structure of markets and the nature of strategic competition. Knowledge in this course will be valuable for the students in acquiring managing and governance skills, enriching their understanding of the institutional framework of business, and improve their analytical ability in negotiations. Prerequisites: The course requires understanding of basic economic modeling, knowledge of intermediate microeconomics (especially production/cost theory), knowledge of basic concepts and methodologies of game theory, intermediate econometrics and basic calculus.
7. The 4 business strategies
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來自 National Research University Higher School of Economics 的課程
Industrial Organization: Strategy and Competition in Business
6 個評分
National Research University Higher School of Economics
6 個評分
從本節課中
Deterrence and predation
Our fifth lecture focuses on games where firms are in different stages of the competition game. In this setting there exists a monopolistic firm already in the market, while another firm considers entering this market in the future. We will examine how the incumbent firm will be affected by the prospect of entrance. We will cover all basic principles of deterrence for the protection of the incumbent’s territory. We will talk about, credibility, empty threats, preemption, contestability and strategic relevance. We will examine the four general business strategies for deterrence and we will see a very intriguing paradox that can teach us a lot about credibility and the importance of reputation.
與講師見面
Kosmas MarinakisAssistant Professor
ICEF and Faculty of Economics Sciences, HSE
We will examine all four possible cases one by one,
and we'll see the business strategies that firms follow in everyday competition.
So, the first case is when you have x_I and x_E to be strategic substitutes.
This means that your reaction curves,
your reaction functions will be downward sloppy.
In addition, you have the incumbent to be tough.
This means that the strategic effect is negative.
As you increase the investment,
should damage your opponent.
So, increase in K_I has a negative impact on the profit of their potential entrant.
And an example of this,
because this is a generalized case that gets almost any example in
every of the four different alternative scenarios that we will have,
so K_I may be capacity,
you build more capacity,
and then x can be competition in quantities or
any competition that will have downward sloping reaction functions.
So, now, what is the characteristic of competition here is that every x_I,
the entrant, must now set a lower x_E after investment has happened.
So, it makes you want to lower
your choice variable because now the strategic effect is negative.
Your profit will go down.
So, you can for just your x for that.
This means that it may be feasible and additionally,
profitable for the incumbent to set K_I.
high enough to make it so high that the choice of
x_E will not be low enough in order to allow entrance.
So, in this case, you deter.
If it's not possible to go to that high investment in order to deter,
increasing your investment is still good for you because it will make you tougher.
It will make you ready for competition.
And even in the case that you will accommodate,
you'll accommodate in the next stage with much better terms if
you prepared now by increasing your investment in this stage.
This is what economists and business people call a "top-dog" strategy.
It's a term that started from economics and also now has taken some traction into
politics and to other theories because it makes a lot of sense in competition.
Top-dog is when you want to become as big as possible in
order to either kill your opponent or in
case that you have to accommodate and be friendly to this guy.
The terms of the agreement will be with your side
because you will be much stronger than you would be without investing.
So, this is how substitutability in toughness will result in competition.
The best strategy to play is the "top-dog" strategy.
Even if you want to deter or if you want to accommodate,
it will not make a difference.
The second case is when you still have strategic substitutability,
but now your investment is soft.
It means that investing more will make your profits better,
but it will make your opponent's profits better also.
So, if you increase K_I,
this will have a positive impact on the profits of the entrant.
For example, informative advertisement will pull your product up,
but also all other products, potential products,
into the market and then,
still competition will be in quantities.
So, at every x_I,
the entrant now will set a higher quantity even before,
a higher x than before because in this case,
we said that it can be quantity as well.
This means that because you advertised,
now I can actually get away with the higher quantity because there's a higher demand.
So, in this case,
what happens is that investment worsens
the position of the incumbent with respect to future deterrents.
So, at the competition stage,
if you keep investing now,
you will make it harder to kill your opponent at that point.
So, it made it possible for K_I to be set low enough
because now you want to set advertisement as low as possible,
it will be possible to set it small enough in order
to make the other guy to not be able to enter because there is no advertisement,
there is not enough demand.
If I enter, I will probably not do well.
So, you keep investment very low in order to deter.
Now, you want to stay with this strategy of
under-investment even if your opponent will enter anyway,
because in this case,
you will be better,
more competitive in case of accommodation.
You make every life harder even if they enter.
So, you want to stay as small possible,
and we call this strategy the "lean-and-hungry" strategy.
So, this is going to stay,
lean small and hungry for competition.
Now, in the third case,
you have complementarity and toughness again.
So, complementarity means that x's are strategic complements,
upward sloping reaction functions,
and then the incumbent is now again tough.
Strategic effect is negative again.
So, increase in K_I has a negative impact on the profit or fee that is excess supply,
for example, excess capacity,
and the x's are now prices because we need strategic complementarity.
So, for deterrence, the incumbent again has to overinvest,
has to become as big as possible.
This means that the incumbent is enabled to keep x_I low enough to keep, let's say,
low prices in this case so that the entrant
will not be able to match it up on entry and therefore will not pass.
So, you say, "Okay, wait a second."
If I enter in this business,
I will have to charge prices that they will probably be very low for my cost.
My cost will be higher for these prices.
So, I cannot enter.
So, by overinvesting, you protect your territory and you make the entrant
think twice before they enter because they will not be able to march your X,
which x can be price,
x can be your technology, or something like that.
So, this is same thing like you would do in the "top-dog" strategy,
is a "top-dog" strategy.
You want to stay big in order to be able to fight more effectively in the next stage.
If you want to accommodate,
your entrant will enter anyway,
then in this case,
you should not go for overinvestment.
You should not go for a "top-dog" approach.
And the thing that incumbent sits a high x_I and high prices,
let's say, or high technology or something like that,
I will expect the entrant to follow.
There will be expectation of having something like a collusive effect in this case.
So, if you want to do that,
this would be called a "puppy-dog" strategy,
meaning that you just expect your opponent to be
nice and you behave to them nicely from the beginning.
So, you stay as small as possible, and you say, "Okay,
I don't need to overinvest or something to
capacity because we will set high prices anyway,
and we will sell a little product.
So, I do not need the capacity.
Let me stay small."
This is a "puppy-dog" strategy,
is not a very aggressive strategy,
but sometimes it does work.
And if you want to accommodate,
this is the strategy that you have to follow.
Finally, we have complementarity and softeners,
the fourth and last case.
This means that x is a strategy complements.
Incumbent is also soft.
And increase in K_I will have a positive impact on the profit of the entrant.
An example would be that K_I would be informative advertisement again,
but now x will not be quantity like we had in the second case.
It will be prices.
So, if you want to do deterrence,
now you have to underinvest.
Why? Because you are soft.
Your investment will help also the other guy.
You don't want to go this way.
So, you want to underinvest to stay small.
Underinvestment will make it more difficult for the entrant to match your low x_I.
You don't need, for example,
to advertise a lot because this will increase your cost,
and you will not be able to maintain the low price.
You want, no matter what, to keep a low price,
so will make your entrant to pass to not enter.
Now, this is another instance of the "lean-and-hungry" strategy.
You want to stay small and hungry for competition.
If they enter, because you kept everything low,
now you are ready to give them
a very low x that they will not be able to match and therefore,
they will likely pass.
If however you can not deter and you will have to go for accommodation,
you don't want to go in this direction,
you want to go to the opposite direction,
you have to know it from before and do not try to underinvest.
In this case, you will want to overinvest if you want to accommodate.
That is, if x_E and x_I is the same,
both profits will go up.
Both profits will increase.
So, therefore, you want to follow something like a "fat-cat" strategy,
meaning that overinvesting in advertisement.
So, you will make your profit to go up at some point and be higher than it would be
without advertisement because now your target is not to kill the other guy,
but your target is to make as high as possible as you can by accommodating the other guy.
So, this is called the "fat-cat" strategy.
And another advantage of
industrial organization is that we have these amazing names for our strategies.
We're the only field of economics that we can get away with this name about fat-cats,
and puppy-dogs, and lean-and-hungry,
and top-dogs, and everything like that.
See you for the concluding section right after this.
