MBA Class of 2002 MicroEconomics OctoberNovember 2000 Peter
MBA Class of 2002 Micro-Economics October-November 2000 Peter Swann MANCHESTER BUSINESS SCHOOL
Lectures 9 and 10: Strategy • Have learned about several economic tools • How can we use these to explore the effects of several aspects of strategy: – on cost conditions? – on demand conditions? – on the competitive context? MANCHESTER BUSINESS SCHOOL
Lecture 9: Strategy Part I Changing Costs and Preferences • R&D, Investment, Process Innovation – to reduce costs – to replace labour intensive by capital intensive – to increase economies of scope • Product Innovation – to increase demand – to increase market share – to increase market segmentation MANCHESTER BUSINESS SCHOOL
Lecture 9: Strategy Part I Changing Costs and Preferences, cont. . . • Advertising – to increase demand – to “reposition” product or service – to signal commitment • Building Switching Costs – to lock in customers MANCHESTER BUSINESS SCHOOL
R&D, Process and Product Innovation • Some definitions: – Research • Basic and Applied – Development – Invention • Patents – Innovation • Process • Product/Service MANCHESTER BUSINESS SCHOOL
R&D, Investment and Process Innovations Reduce Costs MANCHESTER BUSINESS SCHOOL
Total Cost Original Cost Curves (1) Total Cost Variable Cost Fixed Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
Total Cost Reduction in Fixed Costs Total Cost Variable Cost Fixed Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
Total Cost Original Cost Curves Total Cost Variable Cost Fixed Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
Total Cost Reduction in Marginal Costs Total Cost Variable Cost Fixed Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
![Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-11.jpg "Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity")
Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
![Unit Cost Reduction in Fixed Costs Marginal Cost [MC] [AC] Average Cost 0 Quantity](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-12.jpg "Unit Cost Reduction in Fixed Costs Marginal Cost [MC] [AC] Average Cost 0 Quantity")
Unit Cost Reduction in Fixed Costs Marginal Cost [MC] [AC] Average Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
![Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-13.jpg "Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity")
Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
![Unit Cost Reduction in Marginal Costs Marginal Cost [MC] [AC] Average Cost 0 Quantity](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-14.jpg "Unit Cost Reduction in Marginal Costs Marginal Cost [MC] [AC] Average Cost 0 Quantity")
Unit Cost Reduction in Marginal Costs Marginal Cost [MC] [AC] Average Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
Product Choice By The Producer Cost Willingness To Pay P 2 0 Q 1 Q 2 Q 3 Characteristic Score MANCHESTER BUSINESS SCHOOL
Reduction in Cost of Quality Willingness To Pay Cost 0 Characteristic Score MANCHESTER BUSINESS SCHOOL
Price Demand Supply S D 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Cost Reductions Shift Supply Curve Down and to the Right S D 0 Quantity MANCHESTER BUSINESS SCHOOL
Replace Labour Intensive Process by Capital Intensive Process MANCHESTER BUSINESS SCHOOL
Total Cost Original Cost Curves (1) Total Cost Variable Cost Fixed Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
Total Cost Higher Fixed Costs - Lower Marginal Cost Total Cost Fixed Cost Variable Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
![Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-22.jpg "Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity")
Unit Cost Original Cost Curves (2) Marginal Cost [MC] [AC] Average Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
![Unit Cost Higher Fixed Cost - Lower Marginal Cost [MC] [AC] Average Cost 0](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-23.jpg "Unit Cost Higher Fixed Cost - Lower Marginal Cost [MC] [AC] Average Cost 0")
Unit Cost Higher Fixed Cost - Lower Marginal Cost [MC] [AC] Average Cost 0 Quantity Produced MANCHESTER BUSINESS SCHOOL
Revenue, Cost, Profit Original Diagram Showing Profit Maximisation Cost Maximum Profit 0 Revenue Quantity MANCHESTER BUSINESS SCHOOL
Revenue, Cost, Profit Higher Fixed Cost - Lower Marginal Cost Maximum Profit Revenue Cost Profit 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Profit Maximisation MR Demand or AR MC 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Reduction in Marginal Cost - Regardless of Changes to Fixed Cost MR Demand or AR MC 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Aggregate Supply Curve Inelastic Moderately Elastic Replacing labour intensive by capital intensive makes supply more elastic Very Elastic 0 Quantity MANCHESTER BUSINESS SCHOOL
Process Innovations to Increase Economies of Scope MANCHESTER BUSINESS SCHOOL
Producer's Choice of Number of Brands Costs And Revenues Costs Revenues 0 20 40 60 80 100 Number Of Brands MANCHESTER BUSINESS SCHOOL
Costs And Revenues Increased Economies of Scope Revenues Costs 0 20 40 60 80 100 Number Of Brands MANCHESTER BUSINESS SCHOOL
Product Innovation to Increase Demand MANCHESTER BUSINESS SCHOOL
Price Profit Maximisation MR Demand or AR MC 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Product Innovation and Increased Demand or AR MR MC 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Elasticities of Demand Very Elastic Product Innovation will sometimes also make demand less elastic 0 Moderately Elastic Inelastic Quantity
Product Innovation to Increase Market Share MANCHESTER BUSINESS SCHOOL
Price and Willingness To Pay Characteristics Diagram 2 C B A Product Innovation Characteristic Score MANCHESTER BUSINESS SCHOOL
Product “Territories”: Which Customers buy which products? Not Quality Conscious A 0 B C D E F G Quality Conscious H I Slope of Customer’s WTP Line/Curve MANCHESTER BUSINESS SCHOOL
New Product “Territories”: After Innovation in Product B Not Quality Conscious A 0 B C B cuts deep into C’s territory, but only makes a modest intrusion into A’s territory D E F G Quality Conscious H I Slope of Customer’s WTP Line/Curve MANCHESTER BUSINESS SCHOOL
Product Innovation to Increase Market Segmentation MANCHESTER BUSINESS SCHOOL
Price I H G F WTP E A B C D Quality MANCHESTER BUSINESS SCHOOL
Product “Territories”: Which Customers buy which products? Not Quality Conscious A 0 B C D E F G Quality Conscious H I Slope of Customer’s WTP Line/Curve MANCHESTER BUSINESS SCHOOL
Product Innovation / Proliferation to Increase Segmentation Not Quality Conscious 0 Quality Conscious Slope of Customer’s WTP Line/Curve MANCHESTER BUSINESS SCHOOL
Price Second Degree Price Discrimination MC=AC D=AR 0 Quantity MANCHESTER BUSINESS SCHOOL
Advertising: Some Definitions • Informative – Latent Demand - depends on consumers being informed • “Transformative” - Persuasive – changes preferences – changes perceived “position” MANCHESTER BUSINESS SCHOOL
Advertising to Increase Demand MANCHESTER BUSINESS SCHOOL
Price Profit Maximisation MR Demand or AR MC 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Advertising and Increased Demand or AR MR MC 0 Quantity MANCHESTER BUSINESS SCHOOL
Price Elasticities of Demand Very Elastic Advertising can sometimes also make demand less elastic 0 Moderately Elastic Inelastic Quantity
Advertising to “Reposition” Product or Service MANCHESTER BUSINESS SCHOOL
Consumption of Product Y Indifference Curves When product Y is repositioned, it takes less of Product Y to deliver the same degree of consumer satisfaction Consumption of Product X
Price and Willingness To Pay Characteristics Diagram 2 C B A Advertising to Reposition Product Characteristic Score MANCHESTER BUSINESS SCHOOL
Advertising to Reposition Product Network Externalities Product 1 Increase perceived network externalities Product 2 0 Quality Increase perceived quality MANCHESTER BUSINESS SCHOOL
Advertising to Signal Commitment MANCHESTER BUSINESS SCHOOL
Advertising to Signal Commitment Perceived/Expected Network Externalities Product 1 Increase perceived network externalities Product 2 0 Quality MANCHESTER BUSINESS SCHOOL
Building Switching Costs to Lock in Customers MANCHESTER BUSINESS SCHOOL
Price and Willingness To Pay Characteristics Diagram 2 WTP before C B A WTP after Switching costs mean that changes in the product or service consumed reduce utility Characteristic Score MANCHESTER BUSINESS SCHOOL
Network Externalities Switching Costs Indifference curve after Product 1 Indifference curve before Product 2 0 Quality MANCHESTER BUSINESS SCHOOL
End of Lecture 9 • • Changing Costs and Preferences: R&D, Investment, Process Innovation Product Innovation Advertising Building Switching Costs MANCHESTER BUSINESS SCHOOL
![Exercises on Strategy Topics [for discussion at next session] • • Advertising Switching Costs](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-60.jpg "Exercises on Strategy Topics [for discussion at next session] • • Advertising Switching Costs")
Exercises on Strategy Topics [for discussion at next session] • • Advertising Switching Costs Innovative Pioneers Product Proliferation and Entry Barriers MANCHESTER BUSINESS SCHOOL
![Exercises from Last Session [for discussion today] • Repeated Games • Cartels MANCHESTER BUSINESS](http://slidetodoc.com/presentation_image_h/f5fccf6fd96a06908f66f7b6dd7cba1c/image-61.jpg "Exercises from Last Session [for discussion today] • Repeated Games • Cartels MANCHESTER BUSINESS")
Exercises from Last Session [for discussion today] • Repeated Games • Cartels MANCHESTER BUSINESS SCHOOL
- Slides: 61
