SQA by Simonhey

Summary Qualitative and CPG Assignments

Month: December 2021

There are two firms without capacity constraints in the market for diving eyeglasses in Atlantis. Customers in this market consider the products of these firms to be homogeneous. As it happens, the production cost for each eyeglass is independent of the number of produced eyeglasses, the same for both firms, and given by \$15. Buyers prefer to buy from the firm that charges the lowest price. In case of equal prices, buyers flip a fair coin to decide where to buy. Does this scenario constitute a game? What is the market price in Atlantis? How many Nash equilibria are there? Does the outcome differ from that in a Cournot Duopoly?

For experts only: If you are up to a challenge, consider a market analogously to the one described but with three identical firms. How many Nash equilibria exist? Characterize all of them, including the prevailing market price!

Learning Goals:

-Is it a game? Why?

-What are the Nash equilibria?

-How many are there?

-What is the difference between a Cournot vs Bertrand oligopoly

First an explanation about the difference between the Cournot and Bertrand oligopoly

Cournot oligopoly:

-Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. It is named after Antoine Augustin Cournot (1801–1877) who was inspired by observing competition in a spring water duopoly.

It has the following features:

-There is more than one firm and all firms produce a homogeneous product, i.e. there is no product differentiation;

-Firms do not cooperate, i.e. there is no collusion;

-Firms have market power, i.e. each firm’s output decision affects the good’s price;

-The number of firms is fixed;

-Firms compete in quantities, and choose quantities simultaneously;

-The firms are economically rational and act strategically, usually seeking to maximize profit given their competitors’ decisions.

Bertrand oligopoly:

Bertrand competition is a model of competition used in economics, named after Joseph Louis François Bertrand (1822–1900). It describes interactions among firms (sellers) that set prices and their customers (buyers) that choose quantities at the prices set. The model was formulated in 1883 by Bertrand in a review of Antoine Augustin Cournot’s book in which Cournot had put forward the Cournot model.Cournot argued that when firms choose quantities, the equilibrium outcome involves firms pricing above marginal cost and hence the competitive price. In his review, Bertrand argued that if firms chose prices rather than quantities, then the competitive outcome would occur with price equal to marginal cost.

The Difference between Bertrand and Cournot:

Bertrand is a model that competes on price while Cournot is model that competes on quantities (sales volume).

Explanation:

Bertrand competitions a Model were firms compete on price, which naturally triggers the incentive to undercut competition by lowering price, thereby depleting profit until the product is selling at zero economic profit. This effectively is the pure-strategy Nash equilibrium.

Nash learning goals:

Why is the competitive price a Nash equilibrium in the Bertrand model? First, if both firms set the competitive price with price equal to marginal cost (unit cost), neither firm will earn any profits. However, if one firm sets price equal to marginal cost, then if the other firm raises its price above unit cost, then it will earn nothing, since all consumers will buy from the firm still setting the competitive price (recall that it is willing to meet unlimited demand at price equals unit cost even though it earns no profit). No other price is an equilibrium. If both firms set the same price above unit cost and share the market, then each firm has an incentive to undercut the other by an arbitrarily small amount and capture the whole market and almost double its profits. So there can be no equilibrium with both firms setting the same price above marginal cost. Also, there can be no equilibrium with firms setting different prices. The firms setting the higher price will earn nothing (the lower priced firm serves all of the customers). Hence the higher priced firm will want to lower its price to undercut the lower-priced firm. Hence the only equilibrium in the Bertrand model occurs when both firms set price equal to unit cost (the competitive price).

1. LITERATURE ANALYSIS
• international firms face challenge of finding optimal balance between standardising & adapting their marketing across national borders in order to be successful
• 330 articles with titles including 1) “adaption synonyms” 2) standardisation/adaption across border

FRAMEWORK OF ANALYSIS

Studies 1: aim to describe how (1a) and/or why (1b) firms standardise/adapt in certain way → investigate strategic decisions made by managers concerning degree of international marketing standardisation/adaption based on situational factors that influence decisions

Studies 2: attempt providing recommendations regarding standardisation/adaption (2a) and/or to normative-theoretically ground recommendations → identify performance-enhancing fits between firm’s strategy of standardisation/adaption & specific situations

• concept of fit can be modelled in 6 ways: moderation, mediation, profile deviation, matching, covariation, gestalts

RESULTS ANALYSIS STUDIES 2

• 274 of 330 (83%) give recommendations on how to standardise/adapt to enhance performance, but only 32 of those draw on concept of situation-strategy fit → findings are fragmentary, some extent even contradictory and very heterogeneous
• articles of recommendation built on 3 assumptions: 1) strategy’s performance outcome is situationally independent 2) markets are completely efficient & all strategies that can be observed in practice must have proved successful in past 3) managers always consider performance-relevant situational factors accurately (are rationally unbounded)
• articles that theoretically ground recommendations (17 of 330): use eg humor theory, theory of profit maximisation, theory of friction, stakeholder theory  not “helpful” anyways as they do not integrate concept of situation-strategy fit
1. THEORETICAL FRAMWORK & PROPOSITIONS

THEORETICAL FRAMEWORK

• none of existing articles integrates both concept of fit & normative theory for systematically & comprehensively deriving performance-enhancing strategies of s/a in given situations

→ overcoming weakness of existing literature with normative-theoretical framework

• framework will focus on international product strategy (international standardisation/adaption of product name, features, design, quality, packaging), not on marketing strategy & processes

REUIREMENTS

• specific strategy of international s/a can be regarded as enhancing foreign profit, if two requirements are fulfilled:

1) leads to increase in profit if potential increase in total cost associated with strategy is smaller than possible increase in revenue or vice versa

2) leads to increase in profit if allows for relative increase in quantity of products sold that is larger than a possible relative decrease in profit margin or vice versa

PROPOSITIONS

Proposition 1: fit between a high cross-national homogeneity of demand for specific product and a high degree of international product standardisation enhances foreign product profit

markets with low culture difference, supranational laws, as for similar products

Proposition 2: fit between high potential for cross-national economies of scale for specific product and high degree of international product standardisation enhances foreign product profit

Proposition 3: fit between high cost of modification of a specific product and high degree of international product standardisation enhances foreign product profit

→ given the constant level of quantity produced, higher degree of standardisation can reduce cost = if modification is costly, adaption isn’t the wise choice

Proposition 4: fit between high foreign price elasticity of demand for specific product and high degree of international product standardisation enhances foreign product profit

firms should attempt to offer products at low prices abroad to increase revenue & profit, lower prices call for lower costs = realised most easily with standardisation

Proposition 5: the perceptual errors of firm’s managers with regard to the relevant situation of firm negatively moderate the product-profit enhancing effects of the situation-strategy fits

Proposition 6: the quality of execution with regard to pursued strategy of international product s/a positively moderates the product-profit enhancing effects of the situation-strategy fits