The Economics of
Organisations and Strategy
Chapter 10
The Dominant Firm and Predation
The Economics of
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Chapter 10 - Question 1
A dominant firm, in dealing with its market rivals, might
be viewed as akin to:
A
An aggressive competitor;
B
An oligopolist;
C
Monopolistically competitive;
D
A monopolist.
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Chapter 10 - Question 2
The Stackelberg model is appropriate for analysing
the behaviour of a dominant firm selling:
A
A specialised product;
B
An homogeneous product;
C
A heterogeneous product;
D
Multiple products.
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Chapter 10 - Question 3
p
For a dominant firm
following a price
leadership strategy,
output will be set at:
S
MC
A B
C
D
A
;
B
C
or;
D
;
q
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Chapter 10 - Question 4
For a dominant firm following a strategy of price
leadership, the longer-term outcome will be:
A
An increasing economic rent;
B
A loss of market share;
C
The launch of new products;
D
Reduced unit costs.
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Chapter 10 - Question 5
The strategy of limit pricing is designed to make it
difficult for a new entrant:
A
To earn an economic rent post entry;
B
To engage in price competition;
C
To exit the market post entry;
D
To engage in non-price competition.
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Chapter 10 - Question 6
If a potential entrant believes that post entry the dominant
firm will adopt a non-cooperative Cournot strategy or
seek a cooperative solution then:
A
The dominant firm should engage in predatory
pricing;
B
The best strategy for the dominant firm is non-price
deterrence;
C
There is no rational basis for the dominant firm limit
pricing;
D
There is a strong possibility that the entrant will be
aggressive.
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Chapter 10 - Question 7
Predatory pricing is a two stage process. The two
stages are:
A
First stage P < MC, second stage P = MC;
B
First stage P < MC, second stage P > MC;
C
First stage P > MC, second stage P < MC;
D
First stage P = MC, second stage P = MC.
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Chapter 10 - Question 8
Which of the following greatly increases the risks of
predatory pricing for a dominant firm:
A
The opportunity cost of capital for the predator is
high;
B
The victim’s capital investment is a sunk cost;
C
The competition authorities are very active;
D
All of the above.
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Chapter 10 – Answer1
Correct answer: Dominance is more akin to the
market power of a monopolist than an oligopolist.
In exercising power, an oligopolist must take
account of the reaction of rivals. In contrast a
dominant firm can act independently of its rivals.
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Chapter 10 - Answer 2
Correct answer: The Stackelberg model is
conceptually similar to the Cournot model. The
Cournot model assumes an homogeneious product
and that the decision variable for the firm is the
quantity to produce. The key difference between
the Stackelberg and Cournot models is that in the
former case the dominant firm pre-fixes its level of
output and it is only rivals that then choose how to
respond.
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Chapter 10 - Answer 3
Correct answer: the dominant firm determines its
residual demand curve, which in turn, allows the
calculation of its marginal revenue curve. Setting
this marginal revenue equal to marginal cost
determines its profit maximising output.
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Chapter 10 - Answer 4
Correct answer: A strategy of price leadership
generates an economic rent, not only for the
dominant firm, but also for the competitive fringe.
Firms in the competitive fringe use these rents to
invest in additional capacity – and new entrants are
encouraged by the prospect of earning a rent – with
the effect that the competitive fringe increases its
market share and hence the dominant firm loses
market share.
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Chapter 10 - Answer 5
Correct answer: a strategy of limit pricing is a
deterrence strategy. The dominant firm sets the
market price at a low level such that a new entrant –
operating below the scale at which unit costs are
minimised – cannot earn a rent or even a normal
profit.
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Chapter 10 - Answer 6
Correct answer: Game theory teaches that the ex
ante conjectures such as those set out in the
question are likely to be plausibly held because
post-entry the two firms are in a new game that is
independent of the ex ante strategy of the
dominant firm.
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Chapter 10 - Answer 7
Correct answer: the purpose of predatory pricing
is in the first stage to drive a rival from the market
and in the second to raise price above marginal
cost in order to earn a rent. In order to drive the
rival from the market the dominant firm increases
output so that the market price falls below marginal
cost. Both firms are now making a loss, but the
assumption is that the dominant firm has deeper
pockets and can outlast the smaller rival.
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Chapter 10 - Answer 8
Correct answer: if the opportunity cost of capital is
high this will make it more difficult for the predator to
achieve a positive net present value from a cash flow
stretching over the negative effects of the predation
period and relying on the distant future for a positive
cash flow. If the victim’s capital costs are sunk then it
is likely to be earning a quasi-rent and therefore will be
prepared to fight rather than give up. Needless to say
active competition authorities are always a threat.
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