Industrial organization and strategy

Internet would have been a crucial part of Microsoft business, with the willingness to compete

in the internet arena, so he proposed to Netscape that Microsoft machines would run

explorer, while all the other machines would run Netscape. Obvoously Netscape refused

because 90% of PC used Microsoft and Netscape established an alliance with SUN

MICROSYSTEM which was a company manufacturing machines, with the aim of destroying

supremacy (and near monopoly in the operating system market). Microsoft had a better

reaction and in 1995 december Bill gates gave the famous Pearl harbour speech saying that

this alliance was threating Microsoft dominance and proceeded to create a strategy to enter

and dominate the internet market. To do that Microsoft undertook 3 steps:

PROUCT STRATEGY: trying to

develop a internet explorer

navigator by minimizing the gap

from a technological pov between

explorer and Netscape.

STRATEGIC TYING: explorer was

already installed in all pc with

Microsoft operating system, it’s tying 2 products: the os and the browser. So the customer

doesn’t need to do nothing they already have it in their pc.

DISTRIBUTION STRATEGY: Microsoft made agreement with distribution channel, especially

with those firms distributing machines used in corporations, in order to have explorer already

installed in their pcs. Thanks to this strategy, explorer went

from 4% to 90% and Netscape went

from 90% to 4%.

WHAT WE LEARNED: the Porter approach is static, the differentiation strategy and cost

strategy don’t allow firms to react properly when other companies do something. This is what

is called PARTNER INTERDEPENDENCY: for every move made by a firm, the other

firm does another move, so every decision

is based on other firms decisions, there is

an interdependency between firms

competing with each other, so we need a

tool to analyze this kind of

interdependency and strategically

act, and this is what ois is about. DEFINITIONS

OIS is at the intersection of 3 areas:

-THEORETICAL APPROACH that is able to consider the dynamic itnerdependecy that

there is in a real business.

-STRATEGIC APPROACH, approach that allows us to understand the kind of strategy

the firm uses to gain competitive advantage (we’ll do this by studying case studies in

class).

-EMPIRICAL APPROACH AND ECONOMETRIC ANALYSIS: related to anayssi of the

market, using data from market to understand how market is moving and evolving.

OIS & MARKET REGULATIONS: another important part of the subject is the one from the watch

dogs point of view: markets are regulated by market regulators (anti trust, central banks etc.)

so sometimes companies dominate market (google, microsoft) and this is dangerous for

consumers because they can loose their wellness so regulators try to reduce companies

power, so we’ll study how regulator can act to reduce companies dominance.

Class 2,3, 4 and 5 are the

fundamental ones. To study this subject we have to know the bases of microeconomics. This

topics are covered in the file “e-activity 1-review of microeconomics”.

MARK: 15% CASE STUDY, 15% GROUP RESEARCH AND BUSINESS CONTEST, 30% WRITTEN

EXAM, 40% ORAL EXAM.

LEZIONE 01 The lesson is about market power and dominant

firms. We’ll study this by analyzing the intel case

study, the competitive fringe which is a market

structure thatis between perfect competition and

monopoly (marketing appunti), the Coase’s

conjecture.

Intel case study Intel at the beginning was a very small

company, like a startup, but they were

very innovative. In 1971 they created the

first chip for PC and sold it to IBM to put

it into their computers but since IBM

didn’t want to be dependent on a single

supplier they forced Intel (which was a

very small company) to license their chip

to other manufacturers (AMD was the

leader, Cyrix was also big) and Intel

accepted because they were very small company. In 1981 this happened again. In 1985 Intel

refused to license their brand new 386 chip to others and IBM accepted; this allows intel to

gain over 60% of the market share. In 1989 they also launched a new compaign called “INTEL

INSIDE” because chips are not visible to the client, so to make their brand known also to

customers they put “Intel inside” on the pc running their chips.

In 1993 Intel was able to get 85% of

market share by using 3 strategies: a)

lowering the price of products with low

performance (486 chip), b) having

technological superiority with their new

products, c) brand awarness with “Intel

Inside”. STRATEGIES:

-R&D investments allowed

Intel to be able to introduce a

new chip every 4 years, while

thei competitors had a delay of

6 years to come up with the

same technology.

-capacity investments allowed

intel to use economies of scale (chips are very complicated to produce, becausee they must

be produced in a vacuum atmosphere.

-marketing investment: intel inside

So now we ask:

To answer these questions, we need to do some assumptions: Intel is the dominant firms

while AMD and Cyrix are

the fringe firms. The

competitive fringes don’t

have market power, they

act as “price taker” which

means they cant decide

the price so they offer an output depending on the price fixed by the domina

Il termine "competitive fringe" si riferisce a un gruppo di piccole imprese o concorrenti

minori che operano ai margini di un mercato dominato da poche grandi aziende (tipicamente

in un contesto di oligopolio).

Q = Q (p) is the supply curve of the fringe firms, it’s called supply because they are price

f f

takers, they cant have a demand, they can only take the price and supply chips to the market

left by the dominant firm.

Q market demand

m

Q the demand of the dominant firm. Q (p)= Q (p)- Q (p)

d d m f

All these quantities depend on the price and the only one who can set a price is the dominant

firm, so we can write the equation for the profit of the dominant firm which is

Pi = p* Q -C(Q (p)) where C is the cost of the firm and p*Q is the fatturato.

D d d

Now we have to maximize the equation of the profit and we get (la prima derivate x la seconda

normale + la seconda derivate per la prima normale):

the first term Q is the DIRECT EFFECT: the dominant firm, by increasing the price of 1$,

d

increases their profit of the quantity that the dominant firm is putting in the market.

The second term (p-dc/dQp) is the INDIRECT EFFECT: if we push the price too high, the

demand is going to decrease.

So the choice of the price is a trade off between these 2 effects.

We put the equation =0 and then,

since Qd=Qm-Qf we can substitute

these terms in the previous formula.

So the equation 2.4 becomes the

equation 2.6 below→

In the new equation 2.6, the term

dC/dQd is the MARGINAL COST so if we

extract the parentesi con questo marginal

cost from the equation we get: p-

MC=Q/(dQf-dQm) (dove al denominatore

sono stati cambiati di segno perche

portavamo Qd dall’altra parte col meno.

Poi dividiamo tutto per p e al primo

membro ottengo p-MC/p che sarebbe il

LEARNER INDEX (WHICH IS THE MARKET

POWER OF THE DOMINANT FIRM) mentre

al secondo membro divido e moltiplico anche per Qm, e in più divido e moltiplico solo la

prima parentesi del denominatore per Qf, OTTENGO→ al numeratore Qd/Qm che è il MARKET

SHARE DEL DOMINANT FIRM S , al denominatore Qf/Qm che è il MARKET SHARE DEL FRINGE

D

FIRM S che moltiplica EPSILON l’elasticità del fringe supplier, MENO EPSILON cioè l’lasticità

F F

del mercato. so we get this equation:

Il LEARNER INDEX L (WHICH IS THE MARKET POWER OF THE DOMINANT FIRM) is directly

D

proportional to the market share of the dominant firm (the larger the market share the higher