# Competitive Strategy Quiz Answers | 100 % Correct Answers Of Week (1-6)

## Competitive Strategy

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## Week-3

### Entering a New Market

1. 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

2. 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

 8

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

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

4. 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

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

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

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

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

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

8. Structural entry barriers can arise from…

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

9. 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.

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

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

### PRACTICE QUIZ  R & D and Innovation

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

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

2. 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.
• For product development it is also important to identify the relevant consumer groups.
• Basic research generates specific knowledge which is related to a concrete application.
• Applied research is about applying scientific knowledge to solve a specific problem.
• Applied research is all about developing new products.

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

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

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

### PRACTICE QUIZ  Incentives to Innovate

1. According to the replacement effect…

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

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

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

3. 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?

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

### PRACTICE QUIZ  Innovation & Competition

1. 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.

2. 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?

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

### Why Worry About Research and Development

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

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

2. 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?

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

3. 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

4. Sleeping patents…

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

5. Which of the following statements are true:

• Directly after implementing a drastic innovation, the innovator can behave like a monopolist in the market.
• Product innovations are generally more valuable than process innovations.
• In general, process innovations increase the consumers’ willingness to pay for a product.
• 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.
• 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.
• Regarding the innovation incentives of a monopolist, the replacement effect always dominates the efficiency effect.

6. 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

7. 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

8. 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?

• Replacement Effect
• Efficiency Effect

9. 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

10. Basic Research…

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

### Week- 6

1. What are typical assumptions in the Bertrand Paradox?

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

2. 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?

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

3. 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?

• 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.
• Open an additional production facility to signal your willingness to fight for the market.

### PRACTICE QUIZ Product Differentiation

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

2. 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.

• Choosing the optimal location is some kind of a Prisoner’s Dilemma.
• 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.
• 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.

### PRACTICE QUIZ  Pricing and Product Decisions

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

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

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

• Differentiation
• Focus
• Stuck in the middle
• Niche market
• Predatory pricing

Value chain reconfiguration

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

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

### Designing Products Wisely

1. 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.

2. 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 raise structural entry barriers so that no more firms can enter the market.
• They can limit their production capacity so that they cannot serve the whole market.
• They can introduce loyalty programmes.

3. 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.

4. 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).

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

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

6. 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.

7. 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.

8. Which of the following statements are true?

• A central element of the cost leadership strategy is minimizing costs in areas such as R&D, services, sales force and advertising.
• 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.
• For a cost leadership strategy it is important to charge aggressive prices to achieve a high market share.
• Implementing a hybrid strategy always leads to better results than following a cost leadership or differentiation strategy.

9. 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?

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

10. 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.

## Final-exam

1. 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

2. 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

3. 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

4. Which of the following statements are true?

• A monopolist in a market will consider deterring entry if this strategy changes the entrant’s expectations about the nature of post-entry competition.
• Cooperation between competitors in a market is more likely to be stable if ceteris paribus there are many competitors.
• In repeated interactions between companies, cooperation is more likely if ceteris paribus future payments are more important.
• Games with infinite repetitions can be solved via backwards induction.
• Strategic entry barriers arise from the nature of the industry and / or from the position of the incumbent within the industry.
• Firms which are direct competitors can also be complementors.
• 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.
• If two horizontally differentiated products have the same price, all consumers will prefer the same product.
• A self-binding commitment changes a game from a simultaneous game to a sequential game.

5. 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.

6. 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 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.
• 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 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.

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

8. 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

9. Which of the following statements are true?

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

10. 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

11. A strategy in the game theoretic sense is…

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

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

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

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

• True
• False

14. Two products A and B are complements if…

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

15. 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.

16. Niche entry is an effective entry strategy if…

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

17. 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.

18. 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

19. A Nash Equilibrium usually contains dominated strategies.

• True
• False

20. Which of the following statements are false?

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

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

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

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

• True
• False

23. 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

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

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

25. 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