Competitive Solutions: The Strategist’s Toolkit

423 Pages·2002·4.75 MB·English

by  R. Preston McAfee

COMPETITIVE SOLUTIONS
Competitive Solutions
The Strategist’s Toolkit R. Preston McAfee
PRINCETON UNIVERSITY PRESS
Princeton and Oxford
Copyright © 2002 by Princeton University Press
Published by Princeton University Press, 41 William Street, Princeton, New Jersey
08540
In the United Kingdom: Princeton University Press, 3 Market Place, Woodstock,
Oxfordshire OX20 1SY
All Rights Reserved
LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA
McAfee, R. Preston.
Competitive solutions : the strategist’s toolkit / R. Preston McAfee.
p. cm.
Includes bibliographical references and index.
ISBN 0-691-09646-5 (alk. paper)
1. Strategic planning. 2. Business planning. 3. Decision making. 4. Game theory.
5. Pricing. 6. Antitrust law. 7. Industrial management. 8. Competition. 9. Strategic
planning—Case studies. I. Title.
HD30.28 .M3815 2002
658.4′012—dc21 2002020102
British Library Cataloging-in-Publication Data is available
This book has been composed in Adobe Garamond
Printed on acid-free paper. ∞
www.pup.princeton.edu
Printed in the United States of America
1 3 5 7 9 10 8 6 4 2
FOR ELLIE AND KRISTIN
Contents
xiii
Preface
Preamble xiii
Contents xvi
What Is Strategy? xviii
Acknowledgments xix
1. Introduction 1
Executive Summary—Introduction 7
2. Industry Analysis 9
The Five Six Forces 9
Entry 11
Buyer Bargaining Power 16
Supplier Bargaining Power 18
Substitute Products 18
Rivalry 19
Complements—The Sixth Force 23
Strategies for Complements 26
Industry Structures 27
Fragmented Industry 28
Dominant Firm 30
Tight Oligopoly 33
Loose Oligopoly 34
Executive Summary—Industry Analysis 34
3. Firm Strategies 36
Value/Cost Strategies 36
Quality Choice without Competition 37
Games and Best Responses 38
The Effects of Competition on Quality Choice 42
Accommodation and Dissuasion 44
Low-Cost Strategy 45
Cream-Skimming 47
Coherent Strategies 48
The Three-Layer Model 50
Stuck in the Middle 56
Dealing with Competitors 57
Executive Summary—Firm Strategies 58
4. Differentiation 61
Competition in Differentiated Products 63
Creating Synergies 70
Quality Complementarities 74
Networks 75
Technological Races 78
Patent Strategy 80
Hedonic Prices 85
Executive Summary—Differentiation 89
5. Product Life Cycle 91
Introduction 95
Growth 97
Maturity 98
Decline and Replacement 101
Summary of the Product Life Cycle 105
The Life Cycle for Durable Goods 108
Executive Summary—Product Life Cycle 112
6. Cooperation 113
Cooperation on a Variety of Issues 113
Tacit Collusion 116
Shared Interest 116
Punishment 119
Recovery 124
Problems of Tacit Cooperation in Price 127
Confessions 128
Many Producers 129
Differentiated Products 129
Reaction Time 130
Environmental Randomness 132
Motivating Managers 132
Efficient Allocation within a Cartel 133
Unenforceable Contracts 135
Risky Communication 135
Small or Failing Firms 135
Entry and Substitutes 136
Competition in Other Dimensions 137
Solutions to Tacit Cooperation Problems 138
Industry Association 138
Published Price Lists 139
Exclusive Territories 139
Preannouncing Future Price Increases 140
The Capture Theory 140
Incrementalism 141
Multimarket Contact 142
Multilevel Contact 144
Unused Capacity 144
Grow or Crush Small or Bankrupt Firms 145
Executive Summary—Cooperation 146
7. Organizational Scope 148
Make or Buy Decisions 151
Tapered Integration 158
The Multidivisional Firm 160
Transaction Costs 163
Prices or Quantities 170
Net Present Value 172
Project Selection and Risk Assessment 179
Executive Summary—Organizational Scope 184
8. Incentives 187
Agency 188
Efficiency Wages 191
Making Firms More Aggressive 192
Agent Selection 193
Managing Creative Talent 194
Multitasking 195
Common Agency 199
Tournaments and Yardstick Competition 201
Ratchet Effect 202
Executive Summary—Incentives 203
9. Antitrust 204
Major Laws 204
Sherman Act (1890) 205
Clayton Act (1914) 206
FTC Act (1914) 209
Exemptions and Special Treatment 210
Predation, Foreclosure, and Tying 211
Mergers 214
DOJ Guidelines for Horizontal Mergers 216
Vertical Mergers and Antitrust Enforcement 221
Executive Summary—Antitrust 224
225
10. Elementary Statistics
Opinion Polls 226
The Precision of Statistics 234
The Normal Distribution or Bell Curve 236
Conditional Probabilities and Correlation 239
The Predator Theory of Tornadoes 244
Sample Selection Bias 246
The Hot Hand 247
Option Values 251
Scenario Analysis 255
Executive Summary—Elementary Statistics 258
260
11. Pricing
Illustrative Examples 262
International Pricing by the Pharmaceutical Companies 262
Methyl Methacrylate 262
Hand-Me-Down by Armani 264
IBM LaserPrinter E 264
Sony MiniDisc 265
An Electric Utility’s Individualized Pricing 265
IBM’s Punchcard Metering 266
Buying Paint from an Airline 266
Direct Price Discrimination 268
Indirect Price Discrimination 273
Coupons 273
Quantity Discounts 274
Product Branding 276
Product Bundling 277
Peak-Load Pricing 278
Yield Management 281
Theatrical Yield Management 284
Robert Crandall on Airline Pricing 285
Competition and Price Discrimination 288
How to Soften Price Competition 289
Opportunism and Exclusive Dealing 289
Create Competition by Licensing 292
Vertically Integrate with the Buyers 292
Long-Term Contracts 292
Exclusive Contracts 293
Most-Favored-Customer Clauses 293
Uniform, Simple Contracts 294
Pricing of Complements 295
Price Dispersion and the Theory of Sales 297
Executive Summary—Pricing 300
303
12. Auctions
Bidding 303
The English Auction 304
The Sealed-Bid Auction 305
The Winner’s Curve 307
Updating 311
Selling Strategy and Auction Design 312
When to Auction? 320
Executive Summary—Auctions 322
324
13. Signaling
Signaling in Action 324
Law Firms’ Marbled Buildings 324
Service Plans and Warranties 325
The $25,000 Rolex Watch 327
Body Language 327
Education 328
Full Product Line 331
Appearing Informed in an Auction 333
Tylenol Recall 333
Lemons 337
Introductory Offers and Advertising 340
Entry Deterrence 342
Leadership 344
Acting Tough 345
Vaporware 348
Product Failures 349
Signaling Psychosis 350