What is the definition of competitive advantage?
When a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market.
When a firm has the ability of a firm to outperform its industry
What is the consumer surplus?
Software package worth to me (B or perceived Benefit) = 150
Market price (P) = 80
Consumer surplus = 150 - 80 = 70
Also: B - P
What is the maximum willingness-to-pay and how to denote it?
The maximum amount a consumer is willing to pay. Denote it with a B for the perceived benefit
When is the economic value created?
The economic value created is thus the difference between the perceived benefit and cost, or B – C, where B and C are expressed per unit of the final product.
So for the consumer and producer.
What is the producer surplus
That is, the producer’s profit margin, P – C, represents the portion of the value-created that it captures.
When will a firm profitably purchase inputs from suppliers?
When B - C is positive.
What is a cost leadership strategy?
A firm that creates more value than its competitors by offering products that have a lower C than its rivals.
How can firms achieve cost leadership?
- benefit parity: making products with the same B but with a lower C than its rivals
- Benefit proximity: Slightly lower B than rivals.
- Offer a product that is qualitatively different from that of its rivals
What is a benefit leadership strategy?
A firm that follows a strategy of benefit leadership creates more value than its competitors by offering products that have a higher B than its rivals.
How can firms achieve benefit leadership?
- The benefit leader can achieve benefit parity by making products with the same C but at a higher B than its rivals.
- Cost proximity: entails a C that is not too much higher than competitors.
- Offer a substantially higher B and C
How to retain the most profits as a cost leader?
A cost leader that has benefit parity with its rivals can lower its price just below the unit cost of the firm with the next lowest unit cost. This makes it unprofitable for higher-cost competitors to respond with price cuts of their own and thus allows the firm to capture the entire market.
How to retain the most profits as a benefit leader?
A benefit leader that has cost parity with its rivals can raise its price just below the sum of:
1. Its unit cost,
2. The additional benefit ΔB creates relative to the competitor with the next-highest B.
To top this consumer surplus bid, a competitor would have to cut prices below its unit cost, which would be unprofitable. At this price, then, the firm with the benefits advantage captures the entire market.
What type of strategy to use when there is the low price elasticity of demand?
price changes have no impact on demand
Margin strategy: exploit advantage through higher profit margins.
Cost advantage: maintain price parity with competitors
Benefit advantage: charge price premium relative to competitors
What type of strategy to use when there is high price elasticity of demand?
demand for the good or service is more than proportionally affected by the change in its price
Share strategy: exploit advantage through underpricing competitors and gain higher market share.
Cost advantage: underprice competitors.
Benefit advantage: maintain price parity and let benefit advantage increase share.
When is an advantage based on lower cost likely to be more profitable than a benefits strategy?
- The nature of the product limits opportunities for enhancing its perceived benefit B.
- Consumers are relatively price sensitive and will not pay much for a product with more benefits.
- The product is a search good (quality can be assessed prior to purchase)
When is an advantage based on higher benefits likely to be more profitable than a low cost strategy?
- The consumer will pay a significant price premium for attributes that enhance B.
- Economies of scale or learning are significant, and firms are already exploiting them.
- The product is an experience good (quality can be assessed after purchase)
What does stuck in the middle mean?
Describes a firm that pursues elements of cost leadership and benefit leadership at the same time and, in the process, achieves neither.
What are the trade-offs between a benefit and cost position?
- A firm that offers high-quality products increases its market share, which then reduces average cost because of economies of scale or the experience curve.
- The rate at which accumulated experience reduces costs is often greater for higher- quality products than for lower-quality products
- Inefficiencies muddy the relationship between cost position and benefit position
What are the different cost drivers?
- Cost drivers related to firm size, scope, and cumulative experience
- Cost drivers independent of firm size, scope, or cumulative experience
- Cost drivers related to organization of the transactions
What are the benefit drivers?
- Physical Characteristics of the Product Itself.
- The Quantity and Characteristics of the Services or Complementary Goods the Firm
- Characteristics Associated with the Sale or Delivery of the Good.
- Characteristics That Shape Consumers’ Perceptions or Expectations of the Product’s Performance or Its Cost to Use.
- The Subjective Image of the Product.
What is a focus strategy?
A firm with a focus strategy either offers a narrow set of product varieties or serves a narrow set of customers, or does both.
What is a consumer surplus parity?
When firms are offering a consumer the same amount of consumer surplus
What is the consumer’s shopping problem?
For the consumer, it is to find the seller offering the highest B- P. Also known as the process of search.
What is a search good?
Consumers can easuliy compare product charartacirsc. Search goods are often commodities, and consumers choose solely on the basis of price.
