Reference no: EM133137445

NCCB 5090 Business Strategy - Cornell University

The following are all True or False, and each is worth two points.

Question 1. The movie Wargames features a "credibility (or commitment) problem".

Question 2. Game theory tells us that it is usually wise to lower our outside options and to raise the added values of other players.

Question 3. Ryanair choosing to help "celebrate the birthday" of Aer Lingus exhibits a wise use of game theory by Ryanair.

Question 4. Remember the concepts from the Ryanair case and put yourself back in the time period of the case, while supposing that Ryanair is considering launching on a new route other than the London-Dublin route. Everything else equal, if Ryanair chooses to enter a new route on which there is substantial rail/ferry traffic, a price war on that route is more likely to follow.

Question 5. The example of Craigslist and eBay illustrates that if you want to understand what will happen in a game, the most important thing is to understand how actions affect the financial profitability of firms.

Question 6. Firm A and firm B make swords from valyrian steel (a particular kind of steel) and sell these swords to fans of the hit HBO series Game of Thrones (GoT) at extremely high and inflated margins. Making the swords is not very difficult but does require the valyrian steel. (Note that you do not need to know anything about the series GoT to answer this question.) Producing valyrian steel is simple if you have access to a mine. Until recently, valyrian steel was only found in two mines, both with abundant deposits of valyrian steel. One of the mines is owned by firm A and the other is owned by firm B. Now a new source of valyrian steel has been found and acquired by the Society for GoT Fans, a fan organization dedicated to making GoT fans happy. This will likely raise the profits of firms A and B (perhaps by reducing supplier power).

Question 7. Firm A and firm B make swords from valyrian steel (a particular kind of steel) and sell these swords to fans of the hit HBO series Game of Thrones (GoT) at extremely high and inflated margins. Making the swords is not very difficult but does require the valyrian steel. (Note that you do not need to know anything about the series GoT to answer this question.) GoT fans like to dress up like characters from the show, the more realistic the better, and everyone agrees that the best characters from the show carry valyrian swords and wear wolfskin clothing, as these are two strong complements. However, GoT fans have a limited budget to spend on such outfits. A long, glorious winter has led to a surge in the wolf population, and a consequent decline in the price of wolfskin clothing. This will likely raise the profits of firms A and B.

Question 8. Firms A and B are the two dominant players in the highly profitable market for high-tech farming tractors, controlling the entire market between them. These tractors can be programmed by farmer-operators to do many tasks. Because of a variety of technical issues and safety regulations, becoming certified to use any one of the two tractor systems is costly and time-consuming. The CEOs of these two companies would be wise to adopt a common industry-wide standard for technology and safety, that would allow a farmer-operator trained in this standard to use any high-tech tractor system.

Question 9. Firm X sell very different products, with those of Firm X specialized to help buyers in the industrial sector (who need many bells and whistles), and those of Firm Y specialized to help buyers in the consumer sector (who value ease of use and simplicity). There is likely to be a strong market power effect.

Question 10. As we know from class, Costco recently decided to vertically integrate into the supply of chickens. An important takeaway is that vertical integration decisions should focus almost exclusively on factors related to unit costs.

Question 11. There are five similar firms in a downstream market that purchase some important input X from a monopolistic upstream supplier M. Success in the upstream market requires extensive IP, all of which is owned by M. The downstream market is characterized by low product differentiation and low entry barriers. To reduce the power of their supplier, the downstream firms decide to consolidate. This is likely to substantially raise the long-run profits of these downstream firms.

Question 12. To keep complementors and reduce the threat of disintermediation, a simple but often effective strategy is for a platform to layer on value-creating activities that go beyond network effects.

Question 13. It is rare for a platform to exhibit both same-side and cross-side network effects.

Question 14. Suppose that Tony Corporation produces the VirtuoWorld AX, one of two virtual reality "metaverse" systems in the hotly competitive and rapidly growing metaverse market. The other main player is Macrohard. A very important consideration for consumers choosing between the two systems is the availability of applications and content. Third-party developers produce most of the applications and content. Tony earns profits from selling its (expensive) headsets, from a per-unit licensing fee for each application sold to end users, and also from a monthly subscription fee that end users pay. Currently, Tony is giving away for free "software development kits" that developers use to design applications/content specific to VirtuoWorld, but a consultant has pointed out that by charging a fee for developers to use these kits Tony could develop a new revenue source from developers. It is probably a good idea to charge for the software development kits.

Question 15. Consider the metaverse market described in the question above, but also for the current question suppose the following. Even though many consumers prefer the virtual-reality headset sold by Macrohard, Tony Corporation has a massive overall lead in the market with about 90% market share. Also, there are about ten times as many applications for the VirtuoWorld AX as there are for Macrohard's system. A consultant points out that if Tony were to ensure compatibility between its system and Macrohard's (so that a consumer using either system could use any application made for the VirtuoWorld AX), then Tony could earn licensing fees from selling applications to the 10% of consumers who use Macrohard's system. Following the consultant's advice probably makes sense for Tony Corporation.

Question 16. Two firms are each small players in a particular market (call these firms A and B). An important input for both firms is polished sapphire. Polished sapphire is also used in a vast number of other markets around the world. If Firm A and Firm B merge, there is likely to be a strong increase in the market power that A and B have over their suppliers.

Question 17. Both firm X and firm Y are shipping companies that use warehouses that are located in very similar parts of the country, and at any point in time each of these warehouses is typically 30% full. Everything else the same, learning this fact makes you think more highly of the possible synergy gains from the merger between X and Y.

Question 18. Cruise ships provide travelers with similar amenities as top of the line hotels. The profits of cruise companies have been high and increasing over recent years. Cruise companies are barely capable of satisfying demand, and these companies earn significant margins and heavily invest in new cruise ships. The majority (70%) of bookings are arranged by a multitude of small travel agencies all over the globe, typically for individuals or small groups of tourists. The remaining customers book their travel individually via phone or the cruise line's webpage. This situation reasonably contributes to the high profits of cruise companies.

The next three questions all involve the same set-up: Reconsider the Pirate game from class. As you will recall, there are three pirates, A, B, and C, each of whom is risk-neutral, is an expected-profit maximizer, and abides fairly by the rules of the game. The pirates play the following game to split up 100 coins. First Pirate A makes a proposal (about how to split up the coins), which all pirates then vote on. If a majority vote in favor of the proposal, the coins are split up accordingly and the game ends; a tie means that the proposal succeeds. If a majority does not vote in favor, the pirate who proposed the proposal is thrown off the boat, earns a payoff of negative one and is not eligible for future votes or to receive coins. It is known that the order of possible proposers is A, B, then C.

Now consider the following change: Pirate B (and only Pirate B) believes in fairness instead of maximizing his own profits, and will vote against any proposal that is perceived as unfair. In particular, Pirate B will vote against any proposal in which any pirate (who is still on the boat) receives two or more coins more than any other pirate (who is still on the boat) receives. Thus, for example, Pirate B would vote against a proposal such as "30 coins to A, 35 to B, 35 to C" on grounds of it being unfair to A, but would vote in favor of a proposal such as "34 coins to A, 33 to B, 33 to C." Additionally, because Pirate B believes in fairness, if Pirate B makes a proposal, this proposal will be as fair as possible (for the pirates still on the boat). Finally, it is commonly known among the pirates that B behaves in this manner.

Question 19. The most that Pirate A can get is 34 coins.

Question 20. Pirate C will receive at least 50 coins.

Question 21. Pirate B would receive more coins if A did not know that B "believes in fairness". (That is, B would receive more coins if A thought B were selfish like A and C are, but C knew that B believes in fairness.)

The next three questions all involve the same set-up: Starcrocks Coffee is in the midst of a major and rapid national and international expansion plan, with the goal of placing one of its coffee shops nearly everywhere in the world. In contrast, Blue Cup Coffee has decided to operate primarily a small collection of coffee shops in the large city Metropolis, whose residents are accustomed to and prioritize the finer things in life. Both chains are responding to the growing social trend of being perpetually caffeinated.

Running a coffee shop requires both an espresso machine (used to make espresso coffee which is served alone or as part of a latte or cappuccino) and baristas (who prepare and serve the coffee). Baristas differ in terms of natural ability and training. As far as espresso machines, both use recently developed technological marvels. Starcrocks has decided to use a "superautomatic" espresso machine that simply requires the barista to press a single button to make a coffee drink. Blue Cup Coffee has decided to use the Complexo3000, an Italian machine that is difficult to use (requiring many small and technical adjustments by the barista over the course of the day) but which allows the very best flavors to be extracted from the coffee beans. For both Starcrocks and Blue Cup Coffee, decisions about which types of espresso machines and baristas to use are made at a corporate level and so all shops within a chain must use the same machines and types of baristas as all other shops.

Question 22. Suppose that the time spent waiting for a drink at Blue Cup Coffee is longer than at Starcrocks. This means Blue Cup Coffee is "operationally inefficient" (that is, not on the cost-quality frontier).

Question 23. Blue Cup Coffee recently hired a consulting firm that reported that Blue Cup Coffee spends significantly more money than Starcrocks on training and wages for its baristas (in "real money" terms, that is controlling for any cost-of-living differences between Metropolis and other locations around the world). To stay competitive with Starcrocks, Blue Cup Coffee probably should not reduce its expenditures on baristas.

Question 24. Michael Butler, who writes a popular blog on strategy, recently observed that Starcrocks could, if it wanted to, change its corporate decision and install Complexo3000 machines in all of its locations worldwide. Michael Butler added that "If Blue Cup Coffee makes any money, Starcrocks will just copy Blue Cup Coffee. I suggest selling any stock you hold in Blue Cup Coffee." Michael Butler's reasoning and conclusion are probably correct.

Attachment:- Business Strategy.rar