# Competitive Strategy Coursera Quiz Answers – Networking Funda

## All Weeks Competitive Strategy Coursera Quiz Answers

### Week 01 Competitive Strategy Coursera Quiz Answers

#### Quiz 1: Simultaneous Games

Q1. Which of the following statements are true?

(There can be more than 1 correct answer)

• In a prisoner’s dilemma game the highest outcome for both players is reached.
• Rational players take only the payoffs into consideration when making a decision.
• Players, actions, rules and payoffs are important parts of a game (in terms of game theory).
• If each player has a dominant strategy, there will be a Nash Equilibrium in the game.
• A rational player will never play a dominated strategy.
• Every game must have at least one Nash Equilibrium.
• Every game must have a dominant strategy.

Q2. Assume that two big communication companies (Secchat and Safetalk) are thinking about developing an innovative chat system for smartphones. Both companies can either develop the new technology or not. Given the dynamics and characteristics of the market, there is only room for one new chat system.

The payoffs would look like this:

How many Nash Equilibria are in this one periodic game?

• 4
• 3
• 0
• 2
• 1

Q3. Your business intelligence department realizes that they made a mistake in calculating the expected payoffs. Instead, they expect payoffs as shown in the game matrix below. They are not sure about what payoffs Pepsi and Cola can receive if they both do not advertise.

What payoffs would they have to receive in order to turn this game into a prisoners’ dilemma?

• 100 \lt X \lt 200100<X<200
• 50 \lt X \lt 10050<X<100
• X > 20X>20
• X \lt -25X<−25

Q4. How many dominated strategies are in this game?

• 2
• 3
• 1
• none
• 4
• 5

Q5. Pepsi and Cola consider starting an advertising campaign. Both can either advertise or not advertise. If both decide to advertise each company gets a payoff of 50 mn Euro. If they don’t advertise, each gets a payoff of 70 mn Euro. If Cola advertises and Pepsi doesn’t, Cola gets a payoff of 100 mn Euro, whilst Pepsi makes losses of 50 mn Euros – and vice versa.

If you were responsible for marketing at Coca Cola, would you launch the advertising campaign?

(Consider this as a single stage game, in which all players act rationally.)

• Yes.
• No.

#### Quiz 2: Sequential Games

Q1. Under which circumstances would Adam’s Pizza decide against a marketing campaign?

• x = € 1mn
• x = € 2mn
• x = € 4mn
• x = € 6mn
• x = € 7mn

Q2. A well-known cinema in town has offered Adam’s Pizza (A) to make advertisement on their tickets. If Adam’s Pizza declines the offer, they will approach A’s competitor Big Pizza (B) with the same offer. On the tickets, there is only space for one advertisement campaign. The actions and the corresponding payoffs are shown in the game tree below.

What is the Nash Equilibrium in this game?

• A: marketing / B: status quo
• A: no marketing / B: marketing
• A: no marketing / B: no marketing
• There is no Nash Equilibrium.

Q3. Which of the following statements are correct?

• Chess is an example for a sequential game.
• In a sequential game the first player can anticipate the reaction of the second player. This can be considered a first-mover advantage.
• Sequential games and simultaneous games have the same rules.
• In sequential games, threats are always credible.
• Threats always change the outcome of the game.
• Sequential games can be solved using backward induction or forward induction.

Q4. Let’s get back to the 1970’s: At this time, Intel is the only supplier of computer chips to IBM. At the same time, IBM is exploring the possibility of decreasing this dependency and producing computer chips on its own. In order to prevent IBM from doing so, Intel promises to decrease its price.

IBM can choose first between continuing to purchase computer chips from Intel and producing them in an own subsidiary. After that, Intel can choose whether to set a low price or a high price. If IBM opens its own subsidiary, IBM receives 40mn USD and Intel gets a payoff of 30mn USD. If IBM keeps Intel as its supplier and Intel sets a high price, then IBM gets a payoff of 10mn USD and Intel makes 90mn USD. In the case of low prices, IBM and Intel receive 50mn USD each.

Imagine you are the purchasing director of IBM. Would you open your own subsidiary producing computer chips?

• No.
• Yes.

Q5. Imagine now that Intel invests in a new production facility that increases its production capacity significantly. In order to utilize their capacity, Intel has to sell high quantities to set low prices. With charging high prices, Intel would now realize a payoff of 30mn USD (given that IBM doesn’t open an own subsidiary).

As the purchasing director of IBM, would you now open your own subsidiary for computer chips?

• No.
• Yes.

#### Quiz 3: Take Care of Your Competitors

Q1. Can a Nash Equilibrium contain dominated strategies?

• Yes
• No

Q2. Should Mars opt for the product placement in this game?

• Yes
• No

Q3. Can a game contain several Nash Equilibria?

• Yes
• No

Q4. You are the owner of the hair salon City Cuts.

Which price strategy would you choose given the payoffs in the matrix below? (You want to end up in a Nash Equilibrium.)

• Low Price
• High Price

Q5. Simultaneous games can be solved with the help of a __.

• matrix
• game tree
• system of equations
• verbal expression

Q6. How many Nash Equilibria exist in this game? Please note that we only consider equilibria in pure strategies as discussed in the course.

• 0
• 1
• 2
• 3

Q7. Which values can be plugged in for x so that the game turns into a prisoners’ dilemma?

• 2 < x < 5
• 4 < x < 5
• 1 < x < 3
• 2 < x < 6

Q8. What is a strategy according to the working definition of this course?

• A player’s plan of actions in a game.
• The best alternatives a player has.
• The behaviour of a firm in a certain setting.
• A set of rules a player can choose from.

Q9. British Airways is the monopolist for domestic flights in the United Kingdom. Lufthansa wants to enter the market. British Airways threatens Lufthansa to start a price war if they enter.

Is this a credible threat ?

• Yes
• No

Q10. Identify the dominated strategy in the following game:

• Sensodyne – Do not advertise
• Colgate – Do not advertise

### Week 02 Competitive Strategy Coursera Quiz Answers

#### Quiz 1: Reasons for Cooperation

Q1. Through which mechanisms can cooperation between companies be achieved?

• Entry deterrence
• Commitment
• Bullying
• Repeated games

Q2. Have a look at the game matrix below. Could some kind of cooperation improve the outcome of this game?

• Yes.
• No.

Q3. Imagine a price setting game like in the game matrix below.

Which of the following statements is true?

• The two companies are suffering from a Prisoner’s Dilemma.
• Both companies set a low price because this is the best outcome for both of them.
• It would be best for both companies if they could commit to an outcome where one firm chooses a high price and the other firm chooses a low price.
• Both companies cannot coordinate on one Nash Equilibrium.

#### Quiz 2: Finite Repetition

Q1. Which of the following statements is true?

• Backward induction is used to analyze repeated games with infinite repetitions.
• In finite games it is clear from the beginning how often the game is repeated and when it ends.
• In repeated games interactions between competitors always take place in endless patterns.
• Repeated games are the only way to achieve cooperative behavior.

Q2. If the outcome of a game is determined by the fact that in the last stage of the game there is no further threat of retaliation, this is called _ effect.

• sausage
• end-game
• funnel
• first- mover
• equilibrium

Q3. Imagine SausageKing and Hotdog-Master run hot dog stalls at the stadium of the football world championships. Both stalls exactly know that they can only sell sausages during the five weeks of the championships. After that, they have to leave the site. Mondays at 8am, they can set their prices for the coming week. The possible actions and related payoffs are as follows:

What prices will the two stalls set on the first Monday of the championships?

• Hotdog-Master sets a Low Price and SausageKing sets a High Price.
• Both set a High Price.
• SausageKing sets a Low Price and Hotdog-Master sets a High Price.
• Both set a Low Price.

Q4. Which of these statements are true for a game with finite repetitions?

• The outcome is always the same as for a game with infinite repetitions.
• The players do not play a dominant strategy.
• There is no endgame effect.
• In each period of the game, the equilibrium outcome is the same.

#### Quiz 3: Infinite Repetition

Q1. Which of the following factors enhance cooperation?

• Future payoffs are highly valued.
• The customers are heterogeneous in their preferences.
• The punishment for incorporative behavior is small.
• The number of competitors is small.

Q2. Let’s assume Saudi Arabia and Venezuela control the market for oil. Each country has enough resources and production capacity to supply the whole demand in the market. At the end of each year, the countries decide simultaneously about the prices they will charge in the following year. With probability p, the countries stay in the market and the game goes on.

If both countries charge the monopoly price the market is shared equally and the overall profit is 80mn USD. If one country charges a slightly lower price, it will serve the whole market and make profits of 60mn USD. If both countries charge a low price this will end in fierce competition and both countries will make zero profits.

The companies agreed on charging monopoly prices and punish deviation with setting a low price for all future periods.

Cooperation is achieved if…

• p > 1/4
• p > 1/3
• p > 1/4
• p > 1/3

Q3. Assume that there are two skis manufacturers. Every year at Christmas, they think about launching an advertising campaign. Because both companies have been in the market for quite a while and intend to stay in the market, this can be treated as a game with infinite repetitions. The possible actions of the companies and the related payoffs are as follows:

What could be a good strategy to sustain cooperation in the market?

• Flip a coin and advertise accordingly.
• Choose always the action that the other company wasn’t doing in the previous period.
• Don’t advertise as long as the other manufacturer doesn’t advertise. If the other manufacturer advertises once, advertise in all future Christmas seasons.
• Advertise at each Christmas season, no matter what the other manufacturer is doing.

Q4. Sweet Retreat and Flour & Faith sell cupcakes around the main university building in Los Angeles. One day, the two owners meet in secret and agree to coordinate their prices.

Their cupcake price cartel is more stable if…

• …more cupcake stores open in the area.
• …the banks charge less for credits.
• …the price for flour and other ingredients goes down.

#### Quiz 4: Commitment

Q1. Which of the following statements are correct?

• With a most favored customer clause in place, it is very costly for the companies to compete for a specific group of customers with heavy price cuts.
• Self-binding commitment is a form of aggressive commitment.
• A most favored customer clause means that a company promises its customers that they will get refunded if another customer is charged a lower price in the future.
• Reputation building is a form of cooperative commitment.
• Reputation building makes it more costly for companies to compete for certain customers through price cuts.

Q2. Enerflow and PowerCoal are manufacturers of coal-fired power stations and serve the European and Asian market. Both companies think about starting an R&D project to develop a more efficient and environmental friendly power turbine. There is not enough demand for two competing technologies of this kind in the market.

The payoff structure is as follows:

How many Nash Equilibria exist in this game?

• 2
• 3
• 1
• 0
• 4

Q3. Imagine now that Enerflow builds a new research and production facility specifically for this new power turbine technology. The facility cannot be used for other purposes.

What kind of strategy is Enerflow following?

• Aggressive commitment strategy
• Soft commitment strategy
• Sustainable research strategy
• Tit-for-tat strategy

Q4. Cooperative commitment… (check all that apply)

• … changes a simultaneous game into a sequential game.
• … often makes it difficult for companies to start a price war over a specific group of customers.
• … is about building a reputation as a unselfish player.
• … indicates the welfare of a society.

#### Quiz 5: Why Firms Work Together

Q1. In which type of games can an endgame effect occur?

• Games with finite repetitions
• Games with infinite repetitions

Q2. Reputation building is a type of a(n)…

• Soft commitment
• Self-binding commitment
• Most favoured customer clause
• Aggressive commitment

Q3. Imagine Airbus and Boeing both think about launching a new large-scale passenger airplane. The payoffs are stated in the matrix below.

• If Boeing plays aggressive commitment what will be the outcome of the game?
• Boeing launches the 747X, Airbus does not launch the A380
• Boeing lauchnes the 747X, Airbus launches the A380
• Boeing does not launch the 747X, Airbus launches the A380
• Boeing does not launch the 747X, Airbus does not launch the A380

Q4. City Cuts and Toby’s Hairstyle compete on prices in one season. The possible actions and the corresponding payoffs are reported in the matrix below.

Imagine now that they both know that they will repeat the price setting every season. It is not clear from now how many season are there to come.

How will this change the outcome of the game?

• Higher payoffs for City Cuts
• Higher payoffs for both due to cooperation
• Lower payoffs for both due to deviation
• No change
• Higher payoffs for Toby’s Hairstyle

Q5. Imagine that Singapore Airlines and Delta Airlines are the only two airlines that serve the route New York City – Singapore.

At the beginning of each season, they decide whether to set the monopoly price (cooperate) or a lower price (deviate). The probability that there will be a next season is p.

The payoffs for each season are stated in the matrix below.

For what range of values of p do the two rational airlines cooperate?.

• Between 0 and .5
• Between .25 and .75
• Between 0.25 and 1
• Between .5 and 1

Q6. Imagine a prisoners’ dilemma type of game with infinite repetitions. Which of the following factors enhance cooperation in this game?

• High importance of future payoffs
• Large number of competitors
• High number of employees
• Great happiness of consumers
• Low degree of punishment

Q7. Imagine that AT&T and Verizon are the only two operators that offer mobile telephony services in New York.

Once every month, they decide whether to set the monopoly price (cooperate) or a lower price (deviate). The probability that they will still be in the market in the next month is p = 0.5.

The payoffs for each season are stated in the matrix below.

What is a possible value for the monopoly profits M so that the two rational companies will cooperate.

• M = 80 or greater
• M = 100 or greater
• M = 60 or greater
• M = 120 or greater

Q8. Imagine a prisoners’ dilemma type of game with infinite repetitions. Compare a situation with high interest rates to a situation with low interest rates.

• In which of these situations is it more likely that the players will cooperate?
• Situation with high interest rates
• Situation with low interest rates

Q9. What might be possible effects of implementing a most favoured customer clause?

• It makes people collect bonus points
• It lowers competition
• It makes future customers buy earlier
• It increases the customer’s willingness to pay
• It increases competition

Q10. Imagine that the Summer Olympics 2016 last for two weeks. There are two burger stalls on site. They can set prices twice – once at the beginning of each week.

Their possible actions and the corresponding payoffs for each subgame are reported in the following matrix. They can either cooperate (set high prices) or deviate (set low prices).

What is the outcome of this repeated game assuming that the players act rationally?

• No cooperation in first period – Cooperation in second period
• Cooperation in first period – Cooperation in second period
• Cooperation in first period – No cooperation in second period
• No cooperation in first period – No cooperation in second period

### Week 03 Competitive Strategy Coursera Quiz Answers

#### Quiz 1: Complements

Q1. Which of these products are complements?

• DVD and DVD-Player
• Butter and Margarine
• Smartphone and Mobile Application.
• Pencil and Eraser
• Sugar and Honey

Q2. Tobias thinks about buying a computer to run statistical analyses. He has never had a computer before. He is more likely to buy a computer if the prices for statistical software packages…

• …increase
• …drop
• …stay stable

Q3. Which of these statements are correct?

• Poles and skis are classical examples of complementary products.
• Cars and bicycles are classical examples of complementary products.
• The cross-price elasticity indicates how much the profit of one good increases if the demand for the other good drops.
• Substitute goods always have complementary effects.
• The cross-price elasticity can only be calculated for products with a high degree of complementarity.
• Complementary products have a negative cross-price elasticity.
• Two products A and B are complements if the demand for B increases when the price of A decreases and vice versa.

Q4. Imagine consumer electronics manufacturer “Banana” reduces the price for its portable music player by 10%. In the month after the price drop, sales of Banana’s earphones increased by 8%. At the same time, Banana also sold 5% more travel charges for its portable music player.

Which of the following products have the highest degree of complementarity?

• Portable music players and earphones
• Earphones and travel chargers
• Travel chargers and portable music players

#### Quiz 2: Strategies for Complements

Q1. Under certain circumstances, it makes sense to produce the complementary product yourself.

You should not produce it yourself if…

• …the consumers in the market have heterogeneous preferences.
• …you want to internalize the externalities of the two products.
• …there are many substitute products.
• …you expect that your potential customers will be put off by your dominant position in the market.

Q2. Which of the following statements are correct?

• Customers with high switching costs are more valuable to the firm.
• Bundling means that customers can mix and match their favourite products.
• If customers fear a lock-in effect, they may not purchase the product.

Q3. “Toastmaster”, the UK’s major manufacturer of toasters is in financial difficulties. The four big producers of toast bread announce that they support the company with an interest-free credit. What could be their motivation?

• Supporting the toaster manufacturer can help decrease the price for toasters. This could increase the demand for toast bread.
• This could improve the quality and design of the toasters and subsequently also increase the sales of toast bread.
• It is always better for the toast producers to support the toaster manufacturer rather than producing toaster themselves.
• The toaster manufacturer will remember this when the other companies need assistance and will return the favour.

Q4. “Niglette” is producing razors and razor blades. The company thinks about decreasing the price for its razors so that the profit margin for razors is almost zero. At the same time, they want to increase the price for razor blades.

What could be potential risk in this context?

• The consumers only buy razors.
• Consumers are deterred due to the increased dominant position of the company.
• Consumers only buy the cheaper razor from the company.

#### Quiz 3: Complements and Cooperation

Q1. Which of the following statements are correct?

• Competitors can also be complementors.
• A typical characteristic of strategic partnerships is joint equity ownership.
• Complementors can never be competitors.
• Strategic partnerships imply that one firm takes over the other firm.
• If two firms are economically integrated they always engage in an intensive exchange of information.

Q2. Which of the following statements are correct?

• Economic integration can be achieved through cross ownership of equity.
• Economic integration fosters organizational integration.
• Companies always have an interest in sharing knowledge with each other.
• Organizational integration fosters economic integration.
• Economic integration can be achieved through frequent exchange of knowledge.
• If two firms own shares of each other they tend to be more willing to share knowledge and coordinate their behaviour.

Q3. In which of the following situation(s) is cooperation likely?

• Two companies produce the same product.
• Two firms produce complementary goods.
• Two companies have the same number of employees.
• Two companies interact very often.

Q4. If two manufacturers produce complementary products there is…

• … less need for economic integration.
• … more need for economic integration.

#### Quiz 4: Complementary Products and Strategic Partnerships

Q1. Imagine you are a printer manufacturer. Which of the following aspects might keep you from producing ink cartridges? (There can be more than one correct answer)

• Market for ink cartridges may be unattractive.
• Lack of competencies which are required for the production.
• Prospective customers might be put off by your dominant position.
• Better tailoring of ink cartridges to printers.
• Opportunity to set higher prices.

Q2. If A and B are complementary products, how should the following expression look like?

• >
• <

Q3. What are typical characteristics of strategic partnerships? (There can be more than one correct answer)

• Joint equity ownership
• High degree of competition
• Organizational integration
• Coordination mechanisms
• Low exchange of information
• Shared decision making

Q4. Is the following statement true or false?

Products A and B are complements if A increases users’ utility from B, and vice versa.

• True
• False

Q5. Which of the following strategies can help to internalize the positive effects that complements exert on each other? (There can be more than one correct answer)

• Increasing lock-in
• Soft commitment
• Cross subsidies
• Multiple repetitions
• Aggressive behaviour
• Bundling

Q6. What are possible benefits of economic integration in the context of strategic partnerships? (There can be more than one correct answer)

• Alignment of interests
• Feasibility of inter-organizational coordination
• Increasing competition
• Internalization of positive externalities
• Feasibility of retaliation

Q7. Which aspect of a strategic partnership is highlighted in the following graphic?

• Economic Integration
• Organisational Integration

Q8. What’s the idea of cross subsidies?

Product A is sold at small margins (even loss) to increase sales of complementary product B (high margins).

• Firm sells product A and complement B combined as a package.
• The more complementary products exist, the more costly it is for customers to change to another product.

Q9. Why does it make sense to support the supplier of the complement to the own product? (There can be more than one correct answer)

• Higher level of employee satisfaction
• Lower quality of the complement
• Higher sales of complement
• Higher quality of complement

Q10. Which of the following pairs of products are complementary products? (There can be more than one correct answer)

• Tennis Racket and Squash Racket
• Car and Fuel
• Toothbrush and Toothpaste
• PC and Monitor
• Audio CD and MP3 file
• Tablet and Laptop
• Powdered laundry detergent and liquid laundry detergent
• Video Console and Video Game

### Week 04 Competitive Strategy Coursera Quiz Answers

#### Quiz 1: Market Choice and Entry Barriers

Q1. Imagine CafeCaliente is the only producer of espresso coffee in Spain. Every year, they sell 10 million packages of coffee for a price of 5 Euros each. Due to an agreement with the national supermarket chains, they cannot charge different prices in different regions. CafeCaliente has production costs of 2 Euros per package of coffee, independent of the amount of coffee they sell.

A new company, CafeMadrid, enters the market and starts selling coffee at the price of 4,50 Euros. They have enough production capacity to serve the Madrid region (about 20% of the total market) at costs slightly above 4 Euros. Moreover, their license allows them to sell only in the Madrid region.

If you were the CEO of CafeCaliente, how would you react?

• Change the price to 4,50 Euros per package.
• Keep the price at 5 Euros per package.
• Change the price to 4 Euros per package.

Q2. If you are planning to enter a new market, you should go through the following steps:

• 1) Choose the appropriate type of market entry
• 2) Assess the attractiveness of different markets
• 3) Decide about which market to enter
• 4) Choose the right entry strategy
• 1) Assess the attractiveness of different markets
• 2) Decide about which market to enter
• 3) Choose the appropriate type of market entry
• 4) Choose the right entry strategy
• 1) Assess the attractiveness of different markets
• 2) Choose the appropriate type of market entry
• 3) Decide about which market to enter
• 4) Choose the right entry strategy
• 1) Choose the appropriate type of market entry
• 2) Decide about which market to enter
• 3) Choose the right entry strategy
• 4) Assess the attractiveness of different markets

Q3. Which of the following statements are correct?

• Strategic entry barriers intend to keep the entrant out of the market.
• Strategic entry barriers are a result of an incumbent’s aggressive action.
• Strategic entry barriers are determined by the nature of industry.
• Incumbents should consider alternative scenarios when thinking about deterring entry.
• Economies of scale and scope are strategic entry barriers.
• Control of access to relevant natural resources is a structural entry barrier.

Q4. What is true about Porter’s 5 forces framework?

• A high number of substitute products increase the attractiveness of the market.
• The Porter’s 5 forces framework is used to analyze a firm’s competencies and resources.
• Government regulations always have a positive effect on the attractiveness of the market.
• If buyers have a strong bargaining power, this may have a negative impact on the profits in the industry.
• An important determinant of the attractiveness of a market is whether firms can easily leave the market.
• Porter’s 5 forces is used to analyze the market attractiveness.
• Buyers and suppliers always have a strong bargaining power.

Q5. Which of the following situations describe structural entry barriers?

• Due to a new regulation, customers can easily switch their mobile network provider.
• Computer chip manufacturers have to produce a large number of chips in order to be cost efficient.
• A chocolate manufacturer has an exclusive distribution contract with the major supermarket chain.
• It is difficult to protect professional service innovations with patents.
• Customers are very loyal to established brands of bags.

#### Quiz 2: Entry Strategies

Q1. What is true about the value chain reconfiguration strategy?

• The entrant offers rather inferior products in the initial phase.
• Innovators enter the market with superior products.
• After the entry of the new competitor, the price sensitive customers will stay with the market leader.
• The market leader can easily respond to the entrant by replicating its product portfolio and changing to a low cost business model.
• Over the time the entrant tries to improve his product(s) and takes a larger share of the market.

Q2. Imagine BMW is the sole manufacturer of cars in Germany. They only sell conventional fuel-powered cars. Tesla Motors now enters the market with electric cars that are cheaper than conventional cars. Given their specific technical expertise, they limit their product range to electric cars. Which of the following factors make it more likely that BMW accommodates Tesla Motors’ entry?

• The overall market for cars in Germany is rather small.
• Tesla Motors’ electric cars are much cheaper than the cars from BMW.
• Only a few customers are willing to buy an electric rather than a fuel-powered car.

Q3. A niche market strategy can be successful if…

• …the incumbent can lower prices for specific regions or customer groups.
• …the incumbent cannot lower prices for specific regions or consumer groups.

Q4. Which of the following are entry strategies?

• Pre- emption
• Limit pricing
• Niche market
• Judo Economics
• Value Chain Reconfiguration
• Partitioning-off a market
• Predatory pricing
• Bullying

#### Quiz 3: Entry Deterrence

Q1. Imagine TelSing is the sole mobile network operator in Singapore. The parliament passes a law that allows other companies to enter the market in the coming year. There are some mobile network operators from other countries which are interested in entering the market but do not know much about the market dynamics in Singapore.

Would it be a good strategy for TelSing to lower network charges?

• Yes, because it shows the entrants that TelSing is committed to a price war if other players enter the market.
• Yes, because the lower price could be interpreted as a sign for low demand in the market.
• Yes, because it signals to the entrants that TelSing has low costs and can get engaged in a price war later on.
• Yes, because it shows that prices are very volatile in the market.

Q2. BurritoBavaria is the only burrito chain operating in the city center of Munich. BestBurrito, a burrito chain from Berlin, thinks about expanding into other German cities. Even though they don’t know much about Munich and the market for burritos there, they are interested in opening a branch in Munich. When BurritoBavaria gets to know about this, they lower their prices radically. This way, they want to signal to BestBurrito that there is low demand for burritos in Munich and the market is not really interesting.

What strategy is BurritoBavaria implementing?

• Price cutting.
• Limit pricing.
• There is not enough information given in the text to answer this question.
• Predatory pricing.

Q3. A monopolist anticipates that another company wants to enter the market. The monopolist is very worried about losing a high share of the market to the potential entrant. If you were the monopolist, you would…

• …always accommodate entry.
• …try to deter entry if the costs of losing market share to the entrant are higher than the costs related to deterring entry.
• …always block entry.
• …accommodate entry if the costs of losing market share are lower than the costs of deterring entry.

Q4. Adopting a pre-emption strategy means…

• …overinvesting to reduce variable costs of production below the level that would be optimal without threat of entry.
• …shifting locations of outlets further away from each other than would be optimal without threat of entry.
• …focusing on a smaller range of products than would be optimal without threat of entry.
• …choosing locations for outlets more densely than would be optimal without threat of entry.
• …pursuing vertical production differentiation with greater product variety than would be optimal without threat of entry.

Q5. Commitment as a structural entry barrier …

• … makes the entrant think that a price war is not beneficial for the incumbent.
• … eliminates incredible threats.
• … tries to internalize the benefits of complementary products.
• …aims to eliminate those actions which are not favorable to the incumbent.

#### Quiz 4: Entering a New Market

Q1. Imagine British Gas is the monopolist for electricity supply in the UK. Every day, 50,000 units of electricity are sold and consumed across the UK. British Gas charges GBP 6 for one unit of electricity.

Now a small company called London Power enters the market. London Power charges GBP 4 for one unit of electricity and limits its network to the Greater London area where 50% of the UK’s overall units of electricity are sold and consumed. London Power can convince British Gas that it will not extend its network further.

Assume that the electricity of British Gas and London Power have the same quality. All consumers will switch to the supplier with the lower prices. There are no switching costs. The companies cannot charge different prices for different regions.

Will British Gas attack London Power?

• Yes
• No

Q2. Imagine an incumbent faces the threat of a potential entrant in the coming period (t2). The incumbent can now decide whether to pre-empt the market or to accommodate the entry. The profits are indicated in the graphic below.

If the incumbent pre-empts the market, what would be the cumulative profits for the incumbent for the periods t1 to t4?

Assume that the interest rate is zero. Please type in a number, e.g. 3.

`Enter math expression here`

Q3. Which of the following are structural entry barriers? (There can be more than one correct choice)

• Experience curve effects
• Pre-emption
• Rationing by governments
• Aggressive commitment
• Brand loyalty
• Control over essential resources by incumbent

Q4. Assume Telefónica is the monopolist for mobile communication services in Spain.

• Vodafone considers entering the market.
• In the case of market entry, Telefonica can either accommodate the entry or retaliate.
• Vodafone can subsequently decide whether to stay in the market or exit.

The possible actions and payoffs are illustrated in the graphic below.

Imagine now that Vodafone implements a commitment strategy and builds a call centre in Spain that can only be used for the Spanish market. If Vodafone is not active in the Spanish market, the call centre occurs costs of 1mn. All other payoffs are not affected.

What will be the outcome of the game?

• Vodafone stays out of the market
• Vodafone enters the market and Telefonica does not retaliate
• Vodafone enters the market, Telefonica retaliates and Vodafone exits
• Vodafone enters the market, Telefonica retaliates and Vodafone stays

Q5. Which of the following are possible entry strategies? (There can be more than one correct choice)

• Predatory Pricing
• Commitment
• Limit Pricing
• Pre-Emption
• Judo Economics
• Value Chain Reconfiguration

Q6. According to the Porter’s 5 Forces framework, a market tends to be more attractive if…

• …there are close substitutes to the product.
• …there is a low degree of competition within the market.
• …suppliers have little bargaining power.
• …the market is highly regulated by the government.
• …there are many buyers that each represent a small share of the market’s overall revenues.

Q7. Imagine Kroger was the only supermarket chain in Los Angeles for the past 10 years. Safeway announces that they consider opening their own supermarkets in the area. Which of the following reactions by Kroger indicate a pre-emption strategy?

• Kroger stops selling groceries and focuses on drugs resale.
• Kroger stops selling fresh veggies and fruits.
• Kroger starts building more supermarkets in the area.
• Kroger closes down less frequented supermarkets and focuses on hot spots.
• Kroger adds a bakery and a butcher section to its supermarkets.

Q8. Structural entry barriers can arise from…

• …the incumbent’s action intended to keep the entrant out of the industry.
• …the position of the incumbent within the industry.
• …the nature of the industry.

Q9. Which of the following statements are true: (There can be more than one correct choice)

• Limit pricing works in presence of incomplete information only.
• Limit pricing is related to setting high prices to signal high quality of the product.
• Predatory pricing signals the potential entrant that there is a low level of demand in the market.
• Limit pricing needs to be implemented before the market entry of a potential competitor.

Q10. Charging prices below marginal costs in the current competition indicates a…

• Predatory Pricing Strategy
• Pre-Emption Strategy
• Commitment Strategy
• Limit Pricing Strategy

### Week 05 Competitive Strategy Coursera Quiz Answers

#### Quiz 1: R & D and Innovation

Q1. Which of the following statements is/are true?

• Product innovations and process innovations never go hand in hand.
• Process innovations make the consumer willing to pay more for the product.
• An incremental innovation helps the innovating firm to act as a monopolist in the market.
• The focus of process innovations is to decrease the costs of production.

Q2. What is true about the different stages of the research and development process?

• The achievements of basic research are difficult to protect.
• Basic research requires more budget than applied research.
• Applied research is all about developing new products.
• Basic research generates specific knowledge which is related to a concrete application.
• For product development it is also important to identify the relevant consumer groups.
• Applied research is about applying scientific knowledge to solve a specific problem.

Q3. Firms often face the following problem(s) when engaging in basic research:

• They end up in a prisoner’s dilemma like situation.
• They get engaged in a patent race.
• They get locked into a certain type of technology.

Q4. FieldLab and MedInvest are leading pharmaceutical companies. They both think about starting a research campaign to examine the basic structure and properties of cancer cells which costs about 8mn USD. The outcome of the research campaigns does not directly relate to a product and is difficult to patent. But it helps the whole industry to better understand cancer cells and subsequently develop more sophisticated drugs. These can be sold at higher prices and generate additional revenues of 7mn USD for each company (if one company does research) or 9mn USD for each company (if both companies do research).
What will happen?

• The companies do more research than optimal.
• Both companies decide against starting a campaign even though this would be better for them.
• Only MedInvest starts the research campaign and this hurts FieldLab.
• The firms cannot decide about who should do the research.

#### Quiz 2: Incentives to Innovate

Q1. According to the replacement effect…

• …a monopolist has generally low incentives to innovate because of the high level of pre-innovation profits.
• …a monopolist has generally low incentives to innovate because this would make the market more attractive for possible entrants.
• …a monopolist has high incentives to innovate if another company is about to enter the market.
• …the outcome of innovation is rather uncertain.
• …a monopolist has higher incentives to innovate than firms in a competitive market.

Q2. Given a monopoly situation, the replacement effect dominates the efficiency effect if…

• …there are many different customers in the market.
• … the monopolist has already been in the market for a long time.
• … the probability that another firm enters the market is high.
• … the probability that another firm enters the market is low.

Q3. Imagine you are the CEO of Forklift 2000, a well-established manufacturer of forklifts. Every year, there is demand for 1.000 forklifts. Usually, the customers go for the cheaper product. You and your competitor Lift-It Corporation have production costs of 10.000 Euros per forklift and the same production capacity.

At the beginning of this year, the head of an automation engineering company approaches you. He offers to equip you exclusively with an innovative production technology that lowers your production costs by 2.500 Euros per forklift.

What would you be willing to spend for the innovation?

• 4.399.000 €
• 3.000.000 €
• 5.000.000 €
• 2.499.000 €

#### Quiz 3: Innovation & Competition

Q1. What is true about sleeping patents?

• With sleeping patents innovators try to prevent others from producing a similar product.
• Sleeping patents help a monopolist to maintain its monopoly position.
• Sleeping patents are closely related to existing products of the innovating firm.
• Sleeping patens increase competition in the market.

Q2. Imagine there are two companies producing spray deodorants. A recent survey revealed that consumers prefer eco-friendly over conventional products. Both firms now think about setting up a research facility (total costs of 15mio Euro) to explore eco-friendly spray technologies. The probability that a research facility manages to develop such an innovative technology is 50%. If both firms sell eco-friendly deodorants, they make additional profits of 30mio Euro each. If only one firm offers such deodorants, this firm makes additional profits of 100mio Euro.

What will happen?

• Both firms set up a research facility.
• Just one firm sets up a research facility.
• Both companies do not set up a research facility.

#### Quiz 4: Why Worry About Research and Development

Q1. The first generation of Apple’s iPad is an example of…

• …an incremental innovation.
• …a drastic innovation.
• …a product innovation.
• …a process innovation.

Q2. Imagine that L’Oréal and Garnier are active in the market for skin care products.

Each firm could engage in research and development (R&D) to improve the formula of their anti-wrinkle cream.

The costs for such a R&D project are estimated to be 10mn Euros.

With probability of 25% such a R&D project comes up with a marketable improvement of the cream formula.

If only one firm (either Garnier or L’Oréal) comes up with an improved cream formula, this firm will make additional gross profits of 32mn Euros.

If both firms (Garnier and L’Oréal) come up with an improved cream formula, each firm will make additional gross profits of 16mn Euros.

Assume that L’Oréal and Garnier are both rational players that take their competitors into account. What will be the outcome of this situation?

• Neither Garnier nor L’Oréal engage in R&D
• Only Garnier engages in R&D
• Garnier and L’Oréal engage in R&D
• Only L’Oréal engages in R&D

Q3. Which of the following actor(s) has(have) the highest incentives to innovate?

• Companies in a competitive market
• Monopolist without threat of an entrant
• Monopolist with threat of an entrant
• Potential entrant
• It is not clear

Q4. Sleeping patents…

• …are often commercialised immediately after patent granting.
• …are used by companies to prevent competitors from inventing a close rival to the own product.
• …have been criticised by competition authorities in the past.
• …are always good for consumers.
• …are used by companies to maintain a dominant position in their product markets.
• …are accused of hindering technological progress.

Q5. Which of the following statements are true:

• When undertaking a R&D project, firms often face the threat that a competitor comes up with the innovation first and absorbs the whole market potential of the innovation.
• In general, process innovations increase the consumers’ willingness to pay for a product.
• Product innovations are generally more valuable than process innovations.
• Regarding the innovation incentives of a monopolist, the replacement effect always dominates the efficiency effect.
• When it comes to decide about R&D processes, firms often face a trade-off between the chances of achieving innovations with promising returns on the one side, and the risks of losing R&D investments on the other side.
• Directly after implementing a drastic innovation, the innovator can behave like a monopolist in the market.

Q6. Imagine you are the CEO of Nespresso, the monopolist for coffee capsules.

There are 1000 consumers:

• 600 are willing to pay 4 Euros per coffee capsule
• 400 are willing to pay 3 Euros per coffee capsule

Your production costs are 2 Euros per coffee capsule.

A consultancy firm has developed a new design concept for your coffee capsules. Their marketing department estimates that all of your consumers would be willing to pay 1 Euro more for coffee capsules in the new design. Your production costs are not affected.

The consultancy offers you to implement the new design for 500 Euros. Do you accept the deal?

• Yes
• No

Q7. Imagine you are the CEO of International Paper, one of ten international producers of printing paper. Every year, 1,000,000 kg of printing paper are sold worldwide.

You and your competitors are in perfect price competition. All companies have the same production costs of 500 Euros per 1,000 kg of printing paper and produce printing paper of the same kind and quality. The paper is sold in units of 1,000 kg.

You receive the exclusive offer to buy a license that enables you to use an innovative production process that lowers your production costs by 50%. Your strategic marketing department tells you that everybody will buy your printing paper if you set a price per unit that is 1 Euro lower than your competitors. From your operations department, you know that your company has the capacity to produce 1,000,000 kg of printing paper every year.

You are in the bargaining process for the yearly license fee. What is the value of the innovation (per year) to your company?

(Please type in just a number like 12000 for 12,000 Euros)

• 139000
• 189000
• 249000
• 289000

Q8. Imagine a monopolist has the opportunity to implement a process innovation that would reduce its production costs. The process innovation causes some costs.

• The probability that another company wants to enter the market is high.
• Which of the mentioned effects would you expect to dominate?
• Efficiency Effect
• Replacement Effect

Q9. You are a tire producer in a market with five competitors. All tires are of the same kind and quality. There are 100 consumers who are willing to pay 300 Euros for a set of tires. Currently, all firms in the market have production costs of 200 Euros and set a price of 200 Euros per set of tires.

You are now offered the exclusive rights to implement a process innovation that cuts your production costs by 50%. In order to maximize your profits, you could then set a price that is 1 Euro below your competitors.

What is the value of this innovation to you?

• 0 Euros
• 2,400 Euros
• 8,000 Euros
• 9,900 Euros
• 15,000 Euros
• 19,900 Euro

Q10. Basic Research…

• …is subject to knowledge spillovers.
• …can be protected easily by patents or copyrights.
• …is mainly done by companies and other private organizations
• …refers to the application of scientific knowledge to the solution of a specific problem.

### Week 6

Q1. What are typical assumptions in the Bertrand Paradox?

• All consumers know about all prices in the market.
• The consumers are loyal to one firm regardless of the price and quantity.
• The products are identical.
• The firms in the market decide about quantities simultaneously.
• The firms in the market interact repeatedly.

Q2. According to the Bertrand Paradox, firms with identical products end up in fierce competition and make zero profits. Which of the following aspects would change this outcome?

• The companies have not enough production capacity to serve the whole market.
• Additional firms enter the market.
• Different companies develop slightly different designs for their products.
• Some consumers do not know all prices.

Q3. Imagine you are the CEO of BubbleJoe, a company specialized on chewing gum with mint flavour. Your only competitor, BubbleYum, also focuses on chewing gum with mint flavour. How could you manage to avoid the Bertrand Trap and make positive profits?

• Open an additional production facility to signal your willingness to fight for the market.
• Introduce a loyalty program (“after buying 9 packages you get the 10th package for free”) and thus increase the switching costs.
• Change to the production of strawberry flavoured bubble gum.

#### Quiz 2: Product Differentiation

Q1. Imagine there are three different companies manufacturing smartphones. The smartphones have different colours and different memory capacities.

Which of the following statements are true in this context?

• The memory capacity is a form of horizontal product differentiation.
• In this situation, the companies make zero profits.
• The colour is a form of horizontal product differentiation.
• The colour is a form of vertical product differentiation.
• The memory capacity is a form of vertical product differentiation.

Q2. Next to the University of Paris, 1000 students live along a boulevard. Every morning two competing bakers come with their push carts to sell fresh baguette (same quality and taste).

The students love to eat fresh baguette for breakfast, but they are lazy to walk.

• The different locations of the students along the boulevard can also be interpreted as the strength of their preference for one of the baker’s baguettes.
• The pain from walking long distances to a baker can also be interpreted as the loss related to deviating from the ideal good.
• If the students enjoyed walking along the boulevard in the morning, the bakers would still make positive profits.
• The different locations of the push carts can be interpreted as vertical product differentiation.
• The bakers will locate their push carts at different ends of the boulevard. This way, they can avoid fierce price competition and charge higher prices.
• Choosing the optimal location is some kind of a Prisoner’s Dilemma.

#### Quiz 3: Pricing and Product Decisions

Q1. Porter suggests the following generic strategies for creating a defendable position and outperforming competitors in the industry:

• Market transparency
• Focus
• Ambidexterity
• Value chain reconfiguration
• Differentiation
• Judo economics

Q2. According to this graph, which strategy does C represent?

• Differentiation
• Focus
• Stuck in the middle
• Niche market
• Predatory pricing
• Value chain reconfiguration

Q3. What is true about Porter’s generic strategies?

• Firms with a differentiation strategy make higher profits than firms with a cost leadership strategy.
• Offering differentiated products at low prices guarantees high profits.
• The differentiation strategy usually requires a high market share.
• Each strategy requires different organizational arrangements, control procedures, incentive systems and resources.

#### Quiz 4: Designing Products Wisely

Q1. Coca Cola and Pepsi both sell bottled cola soft drinks. Their cola soft drinks have the same quality and price but taste differently. In the Hotelling Bertrand model, the difference in taste of Coca Cola and Pepsi is represented by…

• …the position of a consumer along the beach.
• …the different locations of the sellers along the beach.
• …the discomfort from walking of a consumer.

Q2. Imagine two firms are active in the same market. What can these firms do to avoid the Bertrand trap?

• They can make their prices more visible so that every consumer knows about the prices of all firms.
• They can make their products look more similar.
• They can limit their production capacity so that they cannot serve the whole market.
• They can raise structural entry barriers so that no more firms can enter the market.
• They can introduce loyalty programmes.

Q3. Imagine there are two companies offering the same kind of product: One firm is offering a low quality version and the other firm is offering a high quality version.

Given this market structure, the firm offering low quality…

• …will never realize positive profits.
• …can realize positive profits.
• …most likely realizes higher profits than the firm offering high quality.

Q4. Two products A and B are horizontally differentiated if…

…given equal prices, some consumers would choose product A whereas others would choose product B.

…given equal prices, every consumer would choose product A over product B (or product B over product A).

Q5. Which of the following assumptions lead to the unrealistic prediction of the Betrand Paradox:

• The consumers are infinitely price elastic.
• The consumers have different tastes.
• It is costly for the consumers to switch from one seller to the other seller.
• The firms do not have any capacity constraints.
• The firms’ products are identical.

Q6. Imagine you are the owner of an ice cream stall at Marienplatz, the city centre of Munich. You are known for selling low quality vanilla ice cream to affordable prices. Next door opens a Häagen Dazs store that sells premium vanilla ice cream for high prices.

Which of the following statements are true?

• You will not end up in perfect competition because the ice creams are horizontally differentiated.
• You will end up in perfect competition because the ice creams are horizontally differentiated.
• Competition decreases (ceteris paribus) with a high degree of heterogeneity between people who are willing to pay high prices for premium ice cream and people who prefer low quality ice cream to affordable prices.
• Competition decreases (ceteris paribus) when there are many people who are willing to pay high prices for premium ice cream.
• The better and more expensive the Hägen Dazs ice cream, (ceteris paribus) the more intense the competition.
• The simpler and cheaper the Hägen Dazs ice cream, (ceteris paribus) the lower the competition.

Q7. Imagine you are thinking about buying a new smartphone. At the retailing store, the sales person shows you the latest models from Apple, Samsung and HTC. Some smartphones use the new LTE transmission technology that allows you to surf the web much faster. Others are using the conventional 3G technology with lower transmission rates.

Which of the following statements are true?

• The different brands represent horizontal product differentiation.
• The different transmission technologies represent horizontal product differentiation.
• The smartphones are neither horizontally nor vertically differentiated.

Q8. Which of the following statements are true?

• For a cost leadership strategy it is important to charge aggressive prices to achieve a high market share.
• The cost leadership and the differentiation strategies need different organizational arrangements, control procedures, incentive systems and resources.
• The main idea of the differentiation strategy is to focus on a particular buyer group, product line or geographic market.
• A central element of the cost leadership strategy is minimizing costs in areas such as R&D, services, sales force and advertising.
• Implementing a hybrid strategy always leads to better results than following a cost leadership or differentiation strategy.

Q9. Burger King and McDonald’s sell burgers of the same price and quality but of different taste. Some consumers prefer burgers from Burger King, others like McDonald’s more than Burger King. According to the Hotelling Bertrand model, which of the following events have (ceteris paribus) a positive influence on the profits of the two fast food restaurants?

• Suddenly, much more people dine at fast food restaurants.
• McDonald’s changes the recipe of its burgers so that they now taste similar to the burgers from Burger King.
• The Burger King fans become more extreme and are no longer willing to eat any McDonald’s burger at all.

Q10. According to the Bertrand Paradox, two firms in the same market reach a Nash Equilibrium where both firms charge a price …

• …equal to their costs.
• …equal to the monopoly price.
• …that is adjusted to the current demand.
• …that is set by the government.

#### Quiz 5: Final-exam

Q1. Imagine British Telecom is the monopolist for landline phone calls in the UK. Every day, 50,000 minutes of phone calls are sold throughout the UK. British Telecom charges GBP 6 per minute.

Now a small company called London Calls enters the market. London Calls charges GBP 4 per minute and limits its network to the Greater London area where 50% of the UK’s overall minutes of phone calls are sold. London Calls can convince British Telecom that it will not extend its network further.

Assume that the quality of the phone calls is the same for British Telecom and London Calls. All consumers will switch to the supplier with the lower prices. There are no switching costs. The companies cannot charge different prices for different regions.

Will British Telecom attack London Calls?

• Yes
• No

Q2. Imagine now that the Olympic Games last for three weeks.

Coca Cola and Pepsi have to decide once at the beginning of each week at the same time how many cans they want to sell in the following week. The storage space on site is limited, so that they have to sell all the produced cans in the respective week.

Can this change the outcome of the game described in Question 8?

• Yes

No

Q3. Imagine Sony and Philips are working on a new optical disc storage medium designed to supersede the DVD and the Blu-Ray Disc. Each company develops its own technical standard. The company’s payoffs from the new product depend on which technical standard succeeds in the end. They are illustrated in the following payoff matrix.

• Sony has now the chance to speed up the construction of its production plant so that it will be ready earlier than Philips’ construction plant.
• What will be the outcome of the game?
• Sony receives payoffs of € 2mn / Philips receives payoffs of € 4mn
• Sony receives payoffs of € 4mn / Philips receives payoffs of € 2mn
• Sony receives payoffs of € 1mn / Philips receives payoffs of € 1mn

Q4. Which of the following statements are true?

• Firms which are direct competitors can also be complementors.
• A self-binding commitment changes a game from a simultaneous game to a sequential game.
• A monopolist in a market will consider deterring entry if this strategy changes the entrant’s expectations about the nature of post-entry competition.
• If two horizontally differentiated products have the same price, all consumers will prefer the same product.
• Strategic entry barriers arise from the nature of the industry and / or from the position of the incumbent within the industry.
• Cooperation between competitors in a market is more likely to be stable if ceteris paribus there are many competitors.
• Games with infinite repetitions can be solved via backwards induction.
• Judo Economics can only be successful if the entrants signal the incumbents that they do not intend to increase their capacity drastically in the future.
• Playing a commitment strategy always keeps a potential entrant out of the market.
• In repeated interactions between companies, cooperation is more likely if ceteris paribus future payments are more important.

Q5. Which of the following statements are true?

• In repeated interactions between companies, cooperation is more likely if ceteris paribus the interest rate is high.
• In a Prisoner’s Dilemma the players opt for the strategies that maximize joint payoffs.
• In sequential games, every Nash Equilibrium is sub-game perfect.
• In a Nash Equilibrium, any individual player cannot gain from unilaterally deviating from its strategy when all other players are playing their assigned strategies.
• Playing a game repeatedly always avoids inefficient solutions.

Q6. Imagine you are head of Sony Entertainment and responsible for the PlayStation game console. You have the chance to buy Arts Electronic, a company that sells a sports game for your console.

• Should you agree to this acquisition? Choose all the reasons for your decisions:
• Yes. You could now sell your console exclusively in a package with the sports game. Assuming that there is low competition for video consoles and high competition for video games, this increases the sales for the sports game and hence maximizes the overall profits of the combined company.
• Yes. You could now sell your console exclusively in a package with the sports game. Assuming that there is high competition for video consoles and video games, this increases the sales for the sports game and hence maximizes the overall profits of the combined company.
• Yes. You could now decrease the price for your game console and sell more devices which raises demand for the sports game. This bundling strategy may maximize the overall profits of the combined company.
• Yes. You could now decrease the price for your game console and sell more devices which raises demand for the sports game. This cross-subsidizing strategy may maximize the overall profits of the combined company.

Q7. Imagine McDonalds and Burger King operate fast food restaurants in New York City. The restaurants are located close to each other and are in fierce competition.

• To decrease competition and improve profitability…
• …Burger King could focus on offering beef burgers whereas McDonalds only sells chicken burgers. This is called vertical differentiation.
• …Burger King could sell premium burgers from organic sources whereas McDonalds offers ordinary burgers of standard quality. This is called vertical differentiation.
• …Burger King and McDonalds could reduce the density of their restaurants. This is called horizontal differentiation.
• …Burger King and McDonalds could reduce the density of their restaurants. This is called vertical differentiation.
• …Burger King could sell premium burgers from organic sources whereas McDonalds offers ordinary burgers of standard quality. This is called horizontal differentiation.
• …Burger King could focus on offering beef burgers whereas McDonalds only sells chicken burgers. This is called horizontal differentiation.

Q8. Imagine Coca Cola and Pepsi produce soft drinks of equal taste and quality. They are the only suppliers of soft drinks to the Olympic Games. They have a stall next to each other where they sell their soft drinks in cans that are specially designed for the event. The Olympic Games last for one week and both companies have to decide once and at the same time how many cans they want to sell.

In competition Coca Cola and Pepsi make each profits of € 180k. Instead of competing against each other Coca Cola and Pepsi could also cooperate and set monopoly quantities as if they would be an integrated monopolist. If both companies cooperate and set monopoly quantities they equally share the monopoly profits. A monopolist would achieve profits of €855 k. If one company is cooperative and the other one deviates, the cooperating company will achieve profits of €160 k whereas the deviating company will get profits of € 530k.

What will be the outcome of the game?

• Coca Cola will cooperate / Pepsi will cooperate
• Coca Cola will cooperate / Pepsi will deviate
• Coca Cola will deviate / Pepsi will cooperate
• Coca Cola will deviate / Pepsi will deviate

Q9. Which of the following statements are true?

• The patent office explicitly invites firms to present sleeping patents because they usually provide welfare to consumers.
• In special situations monopolists can have high incentives to invest in R&D.
• Product innovation comes at a fixed cost but usually decreases marginal cost.
• The value of innovation can be higher for firms in a competitive market than for a monopolist.

Q10. Apple (A) and Blackberry (B) compete in the market for smartphones. Both firms have to decide whether they want to engage in R&D for a new type of device with a 3D enabled haptic touchscreen. Because A is relatively more efficient in R&D, fixed costs for this R&D project are \$10mn for A and \$15mn for B. Both firms are equally likely to come up with a marketable innovation (probability p). Expected profits from the new technology are \$15mn if one firm manages to be alone in the market and \$5mn each if both firms come up with a product. We assume that there are no variable costs.

What is the expected payoff for A if both firms engage in R&D?

• 15p-10
• 15p-10p²-10
• p(1-p)10+5p²-15
• p(1-p)15+5p²-10

Q11. A strategy in the game theoretic sense is…

• …the determination of basic long-term goals and objectives of a firm.
• …the behaviour of a firm in a certain setting.
• …the description of the actions a player will undertake in any possible circumstance.
• …the best alternatives a player has.

…the behaviour of a player that leads to a Nash Equilibrium.

Q12. A way to credibly commit to a strategy is…

• …to make a sunk investment.
• …to decrease variable production costs.
• …to make sure that the opponent has full information.

Q13. Firms use patents to decrease competition, especially with sleeping patents.

• True
• False

Q14. Two products A and B are complements if…

• …B increases the users’ utility from A.
• …the demand for B decreases when the price of A drops.
• …A decreases the users’ utility from B.
• …the demand for B increases when the price of A drops.
• …the demand for A increases when the price of B drops.
• …A increases the users’ utility from B.
• …B decreases the users’ utility from A.
• …the demand for A decreases when the price of B drops.

Q15. An incumbent firm may prevent entry of a competitor by…

• …raising prices.
• …decreasing the cost of imitation.
• …changing the entrant’s expectations about post-entry competition.

Q16. Niche entry is an effective entry strategy if…

• …products are sufficiently differentiated.
• …incumbent and entrant are comparably large firms.
• …the entrant has a short-run perspective.

Q17. Let’s get back to the one period competition case (question 8). Imagine now that the stalls of Coca Cola and Pepsi are not located next to each other but at opposite ends of the Olympic Games site.

Does this change the companies’ profits compared to the situation in question 8?

• No
• Yes, the profits of both companies decrease.
• Yes, the profits of both companies increase.
• Yes, while the profits of Coca Cola decrease and the profits of Pepsi increase.

Q18. Imagine you are the CEO of Rolex. Your company and Breitling are the leading manufacturers of luxury watches.

• A UK based film production studio plans a new James Bond action movie and approaches you with a product placement offer: If you pay £ 2mn, James Bond will wear a Rolex watch in the movie. The production studio makes clear that they will make the same offer to Breitling if you don’t accept the deal.
• If you accept the deal, you can achieve additional gross profits of £ 1.5mn. Breitling’s gross profits decrease by £ 0.5mn.
• If Breitling accepts the deal and is lucky (probability = 50%), Breitling can achieve additional gross profits of £ 3mn. Your gross profits decrease by £ 1.5mn.
• If Breitling accepts the deal and is unlucky (probability = 50%), Breitiling can achieve additional gross profits of £ 2mn. Your gross profits decrease by £ 0.5mn.
• If neither Breitling nor you accept the deal, there is no change in gross profits.

Should you accept the deal?

• Yes
• No

Q19. A Nash Equilibrium usually contains dominated strategies.

• True
• False

Q20. Which of the following statements are false?

• Limit pricing means that firms are bound to a price cap introduced by the competition authority.
• Complete information makes it unnecessary to signal intensions.
• It is hard for researchers to find out which entry deterrence strategies are most effective in the real world.

Q21. Which of the following assumptions lead to the unrealistic prediction of the Bertrand paradox?

• Differentiated products
• Weak suppliers
• No capacity constraints
• Infinite price elasticity
• Powerful suppliers
• Perfect market transparency
• Imperfect market transparency
• Identical products

Q22. Applied research is more risky than basic research as a general rule.

• True
• False

Q23. The tradeoff between a replacement effect and an efficiency effect means that a monopolist has to decide between drastic innovation and process innovation.

• True
• False

Q24.The existence of substitutes makes a market less attractive, because…

• …the cross-price elasticity of substitutes is negative.
• …there are more firms in the market.
• …it affects the elasticity of demand of the focal product.

Q25. Pizza Hut and Domino’s Pizza bot sell pizzas at the city centre in Munich. Some consumers only like Pizza Hut, others prefer Domino’s Pizza. Most of the consumers make their choice dependent on prices. Each pizza stall can charge low, medium or high prices. The responding payoffs are illustrated in the payoff matrix below.

Which prices will the pizza stalls set, assuming that they are rational and profit maximizing?

• Pizza Hut – High Price / Domino’s Pizza – High Price
• Pizza Hut – High Price / Domino’s Pizza – Medium Price
• Pizza Hut – High Price / Domino’s Pizza – Low Price
• Pizza Hut – Medium Price / Domino’s Pizza – High Price
• Pizza Hut – Medium Price / Domino’s Pizza – Medium Price
• Pizza Hut – Medium Price / Domino’s Pizza – Low Price
• Pizza Hut – Low Price / Domino’s Pizza – High Price
• Pizza Hut – Low Price / Domino’s Pizza – Medium Price
• Pizza Hut – Low Price / Domino’s Pizza – Low Price