Economics of Strategy

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CHAPTER 8

ECONOMICS OF STRATEGY: CREATING AND CAPTURING VALUE

CHAPTER SUMMARY

This chapter is the first of two chapters on strategy. It concentrates on the basic ways firms can create and capture value. Chapter 9 uses game theory to study strategic interactions among a small number of identifiable rival firms. Chapter 8 presents a framework for discussing how firms create value. It also discusses the conditions under which a firm can capture value (either by having market power or, in certain cases, having superior factors of production). The economics of diversification are examined, and a framework for strategy formulation is presented. A mini-case (Wal-Mart.com) highlights some of the issues in the chapter and the answers for the associated discussion questions are included below. Most managerial economics books focus on a very limited set of decisions (for example, pricing, input selection and output), taking the market product, and its characteristics, as given; they also assume that a firm produces only one product. This chapter uses basic economic principles to analyze a broader set of corporate policies.

CHAPTER OUTLINE

STRATEGY
VALUE CREATION Production and Producer Transaction Costs Managerial Application—Dell Computers: Reducing Producer and Consumer Transaction Costs Consumer Transaction Costs Managerial Application—Creating Value: Reducing Consumer Waiting Time Managerial Application—Reducing Consumer Transactions Costs: Kraft Lunchables Managerial Application—Terrorist Attacks Affect Value Creation in the Airline Industry Other Ways to Increase Demand Product Quality Price of Complements Historical Application—Giving Away Razors to Increase Demand for Blades Price of Substitutes Managerial Application—Airlines Restrict Cell Phone Use New Products and Services Managerial Application—Technology and Value Cooperating to Increase Value Managerial Application—Advanced Photo System

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