Final Notes Econ 106T
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This 5 page Study Guide was uploaded by Jacqueline Ho on Tuesday December 1, 2015. The Study Guide belongs to Econ 106T at University of California - Los Angeles taught by Simon Board in Fall 2015. Since its upload, it has received 14 views. For similar materials see Economics of Technology and E-Commerce in Economcs at University of California - Los Angeles.
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Date Created: 12/01/15
What a firm wants Sustainability hard to imitate immobile Competitive advantages Differentiation and uniqueness innovation Added value of a firm Total value of industry less the reduction in value if the firm is annihilated To increase profits need to increase added value Differentiation Vertical quality difference eg more leg space in a car 0 Higher quality gets higher profits but HQ is costly and raises prices Horizontal idiosyncratic difference eg blue versus red car Firms care about the marginal customer Competition becomes softer when the Hinrm increases quality and the LQ firm lowers quality Hoteling model As firms A and B move closer together price competition intensifies Therefore firms might move in a little but not all the way Cluster to be where demand is and attract customers Medium Voter Theorem the medium voter quotgets their way Price competition may cause firms or candidates to head to extremes rather than the center Strategies Cost lowcost standardized products Differentiated Vaue target customer segments stake out a HQ position Broad serve full range of customers with a single lowcost product or range of differentiated products Focus better if customer heterogeneity is important expertise in product isn t transferable Multihoming using multiple platforms Barriers to imitation lack of resources unprofitability managerial Porter s five six forces Rivals New Entrants Suppliers Buyers Substitutes Complements Business Models Differentiate Be the dominant firm the only firm or the one with the lowest cost Longtail distribution of demand follows the power law and has a fat tail with a lot of mass Middle is being squeezed while the big get bigger and the small also get bigger Fragmentation due to long tail and falling costs of production and distribution Firstmover advantage may deter future entry Build capacity limitentry pricing playing tough Information Goods Costly to produce cheap to reproduce Mostly sunk costs can t be recovered Copies produced at roughly constant perunit costs No natural capacity limits for additional copies Product Customization Content Creation Reproducibility amp Property Rights Experimentation amp Adaptation Platforms amp Market Design Product Trials Attention amp Search Firstdegree Price Discrimination personalized pricing sell to each user at a different price Know the customer demand Extract all consumer surplus Direct PD charge customers different prices based on observable characteristics of the customer Seconddegree PD versioning menu pricing offer a product line and let users choose the version appropriate to them Can be vertical differentiation with HQ and LQ products or horizontal differentiation for example with textbooks in different languages at different prices Quantity discounts Indirect PD make offers that re available to all and let them choose the best for themselves Thirddegree PD group pricing set different groups of consumers Can observe customer characteristics Optimal pricing with inverse elasticity rule for each group Monopolypricing rule profitmaximizing pricecost margin is 1elasticity demand Network effects the bigger the network the better the product or platform Larger network attracts more users and consumers Network tends to build on itself Network good good that has higher value the more customers use it Direct network effect users care inherently about other users Indirect network effect demand for the good depends on the provision of a complementary good which in turn depends on demand for the original good Lockin make consumers stay with the company or product and difficult to switch out of Lockin and switching costs are twosided Switching costs can explain quotprice wars when new markets open or new customers or firms enter Switching costs tend to reduce competition Total Switching Costs costs customer bears costs new supplier bears As a seller Stagger termination dates on contracts Extend contracts before they expire Entrench consumers Bribe customers or Sell to influential customers 0 Connector people with lots of quotweak ties o Maven people who accumulate knowledge 0 Salesmen people who can persuade others Too many versions creates a higher cost user confusion and reduces network effects BundHng Pure only sell bundle Mixed can sell bundle or components separately Can reduce dispersion of customer s willingnesstopay Framing Endowment effect customer sticks with default options Choice overload don t overwhelm the customer or else they are likely to buy nothing Reference effects anchoring product positioning etc Firms can advertise to shift demand like vertical differentiation With many firms ads soften price competition Platforms products and services that bring together groups of users in twosided networks One side is often subsidized Goal to generate quotcrossside network effects caring about other groups Positive sameside network effects created when drawing users to one side helps attract even more users to that side Sharing a network total market size will be greater less intense rivalry reduced marketing outlays Win quotwarquot have preexisting relationships with prospective users generate high expectations have a lot of money deep pockets in a war of attrition Avoid being enveloped by later companies change business model create partnerships or sue Twosided market depends on price discrimination and openness Incentive to innovate is muted for a leader cannibalization versus harvesting ti death Offensive patent strategy blocking protective Block alternatives to the main technology Identify important enabling technologies and patent them Defensive patent strategy Prevent competitors from producing innovations Defend yours product and prevent rival development patent gaps Hedonic regressionpricing a product s value is the sum of the values of the product s attributes Complements and comingled features interfere with calculating this Limit pricing set prices high without encouraging others to invest the sunk costs necessary to enter the market Aggressive pricing today slows or prevents entry tomorrow by taking some customers out Sales today reduce demand in the future or lock in customers Disruptive innovations follow a different set of rules kill established entities Fattening effect Lowering A s price will lower B s market share and then its price increasing competition Skeptical consumer effect Lowering A s price should increase A s market share and future profit lowering elasticity Coopetition tension between cooperation and competition prevalent in network industries Evolution offers backwards compatibility Revolution does not offer backwards compatibility Barriers to mobilization Standing risk Hold up risk Integration risk Favoritism risk Relationship risk Competitive risk Roger s Diffusion Model diffusion is a process through which new ideaproduct spreads Divides people into initiators and imitators Innovators techies willing to learn and tolerate initial problems venturesome Early adopters visionaries technology used to improve functions breakthroughs high risk and reward Early majority want incremental improvement evolutionary and not revolutionary less riskseeking Late majority conservatives Laggards skeptics Moore s chasm visionaries and pragmatists Must first sell to visionaries then significant change in marketing or sales strategy to sell to pragmatists Trademark phrase symbol design that identifies a product and distinguishes it from others Copyright grants creator of an original work exclusive rights to its use and distribution Patent exclusive right to idea for a limited time 3920 years for detailed public disclosure of an invention Incentives to innovate Push strategy fund RampD directly Pull strategy award winners success prizes
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