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Chapter 14: Problem 4

Michael Porter argued that in many industries, "strategies converge and competition becomes a series of races down identical paths that no one can win." Briefly explain whether firms in these industries will likely earn economic profits.

Short Answer

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Firms in industries where strategies converge and competition becomes a series of races down identical paths are unlikely to earn sustained economic profits. The similarity in strategies and lack of differentiation often lead to price wars, which tend to erode profit margins. Furthermore, the absence of innovation can limit growth prospects, negatively affecting long-term profitability.

Step by step solution

01

Understanding Porter's Argument

Porter's argument suggests that strategies in some industries are so similar they converge, leading to competition that travels down the same path. Instead of innovating or distinguishing themselves, firms in these industries operate identically. This scenario often results in a race to the bottom, where companies are constantly trying to undercut each other's prices or improve their efficiencies to capture market share.
02

Understanding Economic Profits

Economic profit is the difference between a firm's total revenue and the opportunity cost of its production. It includes explicit and implicit costs, where explicit costs refer to direct costs such as labor and material costs, and implicit costs are the opportunity costs of using resources in one way instead of another.
03

Relating Porter's Argument to Economic Profits

In industries with converging strategies, competitive advantages may be few and fleeting due to the similarity of operations. Companies may be forced to cut prices in an effort to maintain their market share, which can reduce economic profit. Furthermore, the lack of innovation may limit growth opportunities, impacting long-term profitability. Hence, it is plausible that firms in these industries may experience difficulties in achieving sustained economic profits.

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Most popular questions from this chapter

An article in Forbes described these characteristics of the airline industry: "Airlines aren't like normal consumer businesses.... Infrastructure including aircraft, gates and runways takes years to put in place. Capacity rebalancing in response to demand shifts isn't easy and idle infrastructure of this magnitude is very expensive." Do the characteristics referred to in the article help explain why the airline industry is an oligopoly? Briefly explain.

Under "early decision" college admission plans, students apply to a college in the fall and, if they are accepted, they must enroll in that college. Some critics of early decision plans, including some college presidents, argue that the plans put too much pressure on students to decide early in their senior year in high school which college to attend. Some college administrators have proposed abolishing early decision plans, but as a columnist in the New York Times noted, "It's more prevalent than ever, with some selective schools using it to fill upward of 40 percent of their incoming freshman class." If many college administrators believe that early decision plans should be abolished, why do their schools continue to use them? Can game theory help analyze this situation?

(Related to the Apply the Concept on page 489) The U.S. Department of Justice investigated whether the four major U.S. airlines were colluding. Some analysts believed the airlines were restraining increases in capacity by failing to buy more planes or fly additional routes in order to reduce pressure to cut ticket prices. An airline industry analyst commented on the investigation, "I don't sense that the executives talk to each other. They actually hate each other, truth be told. But with so few of them left, there's almost a natural oligopoly." a. What does the analyst mean by "a natural oligopoly"? b. Would it be necessary for the airline executives to talk to each other to collude? Briefly explain.

Suppose there are four large manufacturers of toilet tissue. The largest of these manufacturers announces that it will raise its prices by 15 percent due to higher paper costs. Within three days, the other three large toilet tissue manufacturers announce similar price hikes. Would this decision to raise prices be evidence of explicit collusion among the four companies? Briefly explain.

World War I began in August 1914 and on the Western Front quickly bogged down into trench warfare. In Belgium and northern France, British and French troops were dug into trenches facing German troops a few hundred yards away. The troops continued firing back and forth until a remarkable event occurred, which historians have labeled "The Christmas Truce." On Christmas Eve, along several sectors of the front, British and German troops stopped firing and eventually came out into the area between the trenches to sing Christmas carols and exchange small gifts. The truce lasted until Christmas night in most areas of the front, although it continued until New Year's Day in a few areas. Most of the troops" commanding officers were unhappy with the truce- they would have preferred the troops to keep fighting through Christmas - and in the future they often used a policy of rotating troops around the front so that the same British and German troops did not face each other for more than relatively brief periods. Can game theory explain why the Christmas Truce occurred? Can game theory help explain why the commanding officers' strategy was successful in reducing future unauthorized truces?
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