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Please read the article below that appeared in the printed edition of the The Washington Post on March 26, 2023. Then answer the following prompt(s) in your initial post Gordon Moore Intel co-founder obituary in The Washington Post (March 26, 2023) Gordon Moore Intel co-founder obituary in The Washington Post (March 26, 2023) – Alternative Formats a) How is the article related to the conceptual material from Chapter 6? Elaborate in 50-75 words.b) How is the article related to the conceptual material from Chapter 8? Elaborate in 50-75 words.c) How is the article related to the conceptual material from any one of the chapters from 1 through 5? Elaborate in 50-75 words.d) What did you learn from the article that you can use in your career going forward? You can draw upon any aspect of the article; your answer may have zero connection to the material from MGMT 471. Elaborate in 50-75 words.Organize your answer neatly to make it easy for the reader: a) Use a separate paragraph for each sub-question and leave a single-line spacing between paragraphs. Avoid writing your entire answer as one long paragraph. b) Reference the line numbers from the article in each sub-question.
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Chapter 8
DEFENDING AGAINST RIVALS
AS A DOMINANT FIRM
The Role of Deterrent Actions
or almost 100 years, American Telephone and Telegraph
Company (A T & T) had a monopoly in providing long-distance
telephone services. In the late 1960s, the long-distance market was opened
to competition, and A T & T responded aggressively to new competitors such
as MCI by sharply lowering prices. Despite the subsequent divestiture of its
local Bell System companies in 1984 and the deregulation of the industry in
1996, which allowed long-distance and local telephone companies to
compete in each other’s markets, A T & T has been able to maintain its
leadership in the long-distance market, holding steady with market share
of about 35 percent in 2003. Its closest rival, MCI, has less than 20 percent
of the market.1
General Motors has dominated its industry since 1931, when it moved
past Ford Motor Company to become the number 1 U.S. automobile maker.
Between 1976 and 1983, GM products accounted for nearly 60 percent of
domestic auto production; over that period, GM engaged in aggressive
product proliferation, fully occupying the available product space to discourage entry, and established a ubiquitous, exclusive distribution network
that constituted a considerable entry barrier.2 Although GM’s market
share has eroded in recent years and Toyota has surpassed Ford to number
2 in market share, GM is still the number 1 domestic auto manufacturer
with around 27 percent of the U.S. market in 2002.3
These two examples illustrate that industry leaders can act to defend
their positions and maintain long-term dominance. Whereas chapter 6
detailed how firms with limited resources can act by undertaking entrepreneurial actions, and chapter 7 described how firms with superior resources can exploit and enhance their advantages with Ricardian actions,
this chapter examines how firms with dominant market share can exploit
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F
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and protect their market power advantage. Table 8.1 highlights key distinctions among the entrepreneurial actions discussed in chapter 6, the
Ricardian actions discussed in chapter 7, and the deterrent actions discussed in this chapter. Dominant firms are strong enough to fight and win
head-on battles with fringe competitors and new entrants. These ‘‘Goliaths’’ have the enviable, but not easy, task of fending off the fledgling
‘‘Davids’’ of the marketplace. Goals for firms in dominant market positions
are to deter market entry and protect their superior relative resource
advantages.
Recall from chapter 5 that the three central components of the action
model of advantage are resources, competitive action and reaction, and
competitive advantage. Figure 8.1 shows the links of the model discussed
here. This chapter examines how dominant firms protect their advantage
through deterrent actions and reactions, which we define as competitive
moves made from a position of market power. Only dominant firms can
make deterrent moves. Moreover, deterrent actions and reactions are
specific moves that firms take to both exploit and protect their strong
market positions.
We use the term ‘‘deterrent’’ to describe actions based on a critical
resource component, strong market position, or high market share. The
term is not meant to suggest that dominant firms should engage in tactics
Table 8.1 Key Distinctions among Entrepreneurial, Ricardian,
and Deterrent Actions
Entrepreneurial
Actions
Ricardian
Actions
Deterrent
Actions
Avoid rivals
Opportunity based
Spontaneous,
based on
opportunities
created
from
disequilibrium
No guidance on
conformance;
newness
Engage rivals
Resource based
Deliberate outcome
of plan to exploit
resources
Deter rivals
Market based
Deliberate
outcome of plan
to defend
resource
platform
Conform to criterion
of economic
efficiency
or maximization
Credit
Credit goes to
discoverer
Outcome
Unpredictable
Credit goes to
owner
of resource
Predictable
Conform to the
criterion
of long-term
profit
maximization,
but not economic
efficiency
Avoid credit
Copyright © 2005. Oxford University Press, Incorporated. All rights reserved.
Category
Goal
Source
Intent
Criteria for
evaluation
Predictable
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Figure 8.1 Exploiting Advantage by Deterrent Actions.
that improperly restrict competition. We do not think deterrent actions, as
we use the term, are unethical or illegal. Indeed, the final section of this
chapter explores in some detail the antitrust proscription of illegal monopolization of an industry to help managers distinguish between deterrent
actions, which properly take advantage of strong market positions, and
actions that constitute illegal monopolization of an industry. However,
firms with strong market positions should anticipate close antitrust scrutiny and frequent legal challenges, particularly in the form of private antitrust suits initiated by competitors.
We first explore the market position resource advantage. The notion of
market share as a resource is explained, as are reputation and experience—
additional resources that often accompany market leadership. Next, we
describe deterrent actions that slow the rate of competitive reaction, expansion by fringe challengers, and new entry. We then use a game theory
framework to analyze the actions and competitive reactions that market
leaders use to achieve competitive advantage. A critical concern for managers of firms in dominant positions is the antitrust statutes pertaining to
monopolization and attempted monopolization. Accordingly, we examine in
some detail how monopolization prohibitions have been interpreted and
what types of behavior might attract suits by the Justice Department.
Market Position as a Resource
The resource-based view of the firm highlights tangible and intangible
resources of the firm.4
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However, a firm’s market position, while clearly of a different nature
from intangible resources, can also be an important asset. Market position
is defined as a firm’s market share, and its value is supported by IO and
strategy research showing significant positive relationships between market share and profitability.5 Moreover, large market share is rare, held by
only one or a few firms in a given market, and difficult to copy. In addition,
high market share is often a key objective of smaller firms. Consider as
examples BMW’s goal to ‘‘beat out Mercedes-Benz as the number one
maker of premium cars in the world’’ and not to ‘‘accept the position of
number two,’’6 Fox News’s resolve to overtake CNN in cable news,7 Nike’s
vow to take the lead in the athletic shoe market, DEC’s determination to
regain the number 2 position in the workstation market and then to be
number 1, and Ford’s goal to be number 1 and supplant GM in the auto
industry for the first time since 1931.8
The value of incumbency and the range of strategies employed to deter
other firms from gaining leadership positions are well documented.9 The
notion that market share is a resource is also supported by research on
first-mover advantages and switching costs.10 Firms with a strong customer base in a given period have a significant advantage in competing for
customers in ensuing periods. Consumer inertia—selection of the same
products as in the past from force of habit—is strong. For many products,
however, more explicit switching costs are incurred in choosing a firm
different from the one chosen in the past. For example, a consumer who
opts to do his or her checking account business with a different bank must
go through the trouble of making sure all checks have come in, closing the
account with the original bank, and opening an account with a new bank.
Switching costs strongly deter consumers from making such changes and
clearly work to the advantage of firms with strong market positions. In
other words, a firm with a strong market position for a product or service
with high switching costs has a head start in subsequent periods over firms
with fewer customers. Firms with high market share also frequently have
economies of scale in manufacturing, marketing, and finance that can lead
to cost advantages as described in chapter 7.
Additionally, in conjunction with their market position, market leaders
often have a multidimensional array of resources, including reputation and
experience. In general, a firm’s reputation has important consequences in
the marketplace. A firm can have a reputation as an aggressive instigator
of rivalry or as an aggressive responder to rivals’ efforts to make inroads
into its customer base.11 Alternatively, a firm can be largely passive, with a
docile or live-and-let-live image. Reputation has been studied both in the
management literature and with IO game theory models. A firm’s reputation has been discovered to affect rivals’ tendencies to imitate actions and
the number and speed of responses to competitive actions.12
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Reputation can be either an asset or a liability. It is an asset if it influences rivals’ actions in a desirable way and a liability if it helps rivals
predict or anticipate competitive moves or responses. Reputation is particularly relevant for market share leaders. Large firms tend to receive
greater scrutiny than smaller firms, so other firms have knowledge about
market share leaders.13 Because of their enhanced visibility, large firms
should ensure that their reputations are favorable. We will examine the
role of reputation-enhancing actions in a game theory context later.
Kodak is a good example of a firm using its leadership reputation to
influence rivals. Kodak’s dominance in the photographic industry was
derived from its leadership in film technology. From its first introduction of
color film for amateur photographers, Kodak was able to outdistance every
other film company in almost every aspect of photography. Kodak was the
first to foresee potential for color slides and prints in the consumer market.
In fact, not until 1954, when the Justice Department forced Kodak to sell
film and processing separately, were competitors able to participate in the
color photography products market. Over the 20-year period that Kodak
garnered all of the film and processing profits of the color market, it was
able to prevent the formation of independent photofinishing laboratories
with its reputation as a fierce competitor.
Even after the Justice Department decree, Kodak was able to improve on
its previous success by constantly forcing competitors to upgrade their
quality. Most competitors simply did not have the research expertise to
continue the fight. During the 1950s, Kodak effectively displaced all foreign
and domestic competitors from the amateur photography market in the
United States. In addition, it successfully defended itself from major competitors such as Bell & Howell and Du Pont. Du Pont described how its
color film research program failed against Kodak’s market dominance.
Each time it was able to improve its film to meet Kodak’s high quality,
Kodak film would mysteriously become even better. In 1961, when Du
Pont’s film was finally ready for introduction to the amateur market, at a
cost to tens of millions of dollars, Kodak responded to the action with
Kodachrome II, a color slide film with much better quality than the original
against which the Du Pont entry was targeted. Du Pont eventually withdrew its product from the market. Kodak’s well-known reputation for
taking on any foe has since caused other rivals to reevaluate plans. In
1976, most competitive color film products were sold at a slight premium
over Kodak’s prices. In fact, most of Kodak’s competitors owed their existence to a small group of users who wanted to avoid the mass market
image of Kodak.14 Kodak has maintained its dominance in film sales, with
close to 70 percent of the U.S. market in the 2000s, and leveraged that
market position to take advantage of growth opportunities arising from
globalization and digital imaging technology. Internationally, Kodak holds
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a strong presence in Europe and Japan and in emerging foreign markets
like eastern Europe. In the digital arena, Kodak leads in photo-quality
paper for inkjets with a 40 percent market share and holds a number 2
position behind Sony in the U.S. (and among the top three in the world) for
digital camera sales.15
In chapter 1 we described the extreme competition between Ralston
Purina and rivals in the pet food industry, and in chapters 5 and 7 we
discussed Microsoft and eBay’s dominance in the software and online
auction industry, respectively. Each of these firms has developed a reputation in its industry as a very aggressive industry leader that fights at all
costs to win. By aggressively engaging Quaker Oats with product imitations, a huge array of new products, amid significant price cutting, Ralston
forced Quaker to exit the industry and built a reputation for combative
behavior. That reputation signals its willingness to fight to all current
rivals and potential entrants. Similarly, by hawkishly attacking Apple and
IBM with low prices, aggressive marketing campaigns, and product updates, Microsoft developed a reputation for aggressive, belligerent behavior.
Likewise, by leveraging its network effects of a large customer base and
launching a series of preemptive moves such as marketing alliances and
user feedbacks, eBay minimized the competitive threat of Amazon.com’s
entry into online auctions.
In addition to reputation, dominant firms often have an experience
resource advantage. Specifically, as discussed in chapter 5, prior experience
with manufacturing processes and other aspects of firm operations can
give a firm a learning curve advantage over less experienced rivals. In this
respect, the Ricardian cost advantages discussed in chapter 5 intersect with
the market share advantage examined in this chapter.
Deterrent Actions to Exploit
a Strong Market Position
We define deterrent actions and reactions as moves taken by dominant
firms to deter rivals and defend market position.16 A substantial literature
in industrial organization economics considers the set of strategies a firm
can employ to deter entry and prolong a strong market position. Deterrent
moves include limit pricing, predatory pricing, product proliferation, aggressive/preemptive innovation, information manipulation, price leadership, learning curve effects, and similar tactics. Each is discussed in turn.
We note that while dominant firms with resource advantages vis-à-vis
their rivals can clearly pursue Ricardian advantages to further enhance
market position, the focus here is on the more defensive deterrent actions
designed to protect or slow the erosion of market share.
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Limit Pricing
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Limit pricing involves setting a lower price than would otherwise be most
profitable to inhibit or slow the rate of new entry.17 A firm with a strong
market position could choose to exploit its market power by charging high
prices and obtaining maximum short-term profit. However, over time the
high prices and profit will attract entry and responses by competitors,
which will erode the firm’s market position. Alternatively, the firm could
focus solely on inhibiting response by charging very low prices. It thus
would retain its market leadership over a longer period, but obtain relatively small profit in each period. With limit-pricing action, a firm chooses
the middle ground between those two options, charging a price lower than
the one that would maximize short-term profit in an effort to inhibit entry
but riot so low as to eliminate profit and entry completely. A firm engaging
rivals with limit-pricing actions will generally lose market share over time
in a gradual, almost calculated way but reap substantial excess profit while
dominant. In other words, a dominant firm prices to maximize net present
value of revenues in the long term and, in so doing, concedes market share
to challengers over time. General Motors’ use of a limit pricing strategy is
an example.
General Motors first earned leadership through its wide range of model
offerings and its yearly model modification. According to James Brian
Quinn, who conducted an extensive study of GM’s practices,
GM had developed a complete spectrum of automobiles, consisting of five
well-known lines. Each line had several models, occupied a specified
price-quality niche, changed its styles annually, and competed not just
with other manufacturers but also—at the margin—with other GM
lines. This basic posture continued through the 1950s and well into the
1960s. Each line fulfilled a designated portion of GM’s goal ‘‘to supply a
car for every purse and every purpose.’’18
In many ways, GM has been the leader of the domestic auto industry. As of
1983, GM had nearly twice as many dealer outlets as Ford, its largest
competitor since the 1940s. GM outspent its rivals on overall advertising in
1982, but spent the least per new car sold. GM is also the price leader, as it
appears to lead or prevent price increases by Ford and Chrysler. During the
period from 1947 to 1983, GM had the highest average profit rate, 19.5
percent.
Scholars examining the U.S. auto industry have concluded that GM
apparently followed a limit-pricing strategy for years. It priced below shortterm profit-maximizing levels but above competitive levels. Market share
was gradually conceded to the Japanese.19 However, had GM priced at
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higher levels to maximize short-term profit—that is, not pursued a limitpricing strategy—its market position would have eroded much more rapidly, as its higher prices would have made entry even more attractive to
other producers.
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Predatory Pricing
One very aggressive form of limit pricing has been called predatory pricing.
The term was popularized in the late nineteenth century to describe how
firms use low prices to drive rivals out of business. The idea behind predatory pricing is that a firm lowers its price until it is below competitors’
average cost, thereby forcing competitors to lower their prices below average cost and thus lose money. If rivals fail to cut their prices, they will
lose all customers to the lower price player. If they do cut their prices, they
will eventually go bankrupt because the prices will be lower than cost.
After the competitors have been forced out of the market, the predatory
firm raises its price, compensating itself for the money its lost while engaging in predatory pricing and thereafter earning higher profit.20
Predatory pricing theory developed with the famous Standard Oil
Company case in which John D. Rockefeller was accused of cutting prices
to drive competitors, such as Pure Oil Company, out of business. A more
recent example involved Wal-Mart. In 1993, a state court in Arkansas
ruled that the country’s largest retailer was illegally engaging in predatory
pricing by selling pharmacy products below its costs.21 The Arkansas court
ruled that Wal-Mart’s pricing policies, as carried out in its discount stores,
had the purpose ‘‘of injuring competitors and destroying competition’’ as
defined in the Arkansas Unfair Trade Practices Act. The court awarded
$289,407 in damages and enjoined Wal-Mart’s stores from selling items
below cost. The court ruled that Wal-Mart’s competitors were hurt because
below-cost pricing and the advertising of below-cost prices decreased their
growth in sales and profit. The decision was later reversed, and Wal-Mart
raised its prices.
Predatory pricing cases have also been brought in the airline industry.
For example, Continental charged that American was setting prices ‘‘that
would result in ruinous losses to weaken and destroy competitors.’’22 In
1993, a Texas court rejected Continental’s claims that American was
trying to drive competitors out of business.
A special case of predatory pricing is addressed in the so-called antidumping laws. In the context of international trade, ‘‘dumping’’ occurs
‘‘when a foreign manufacturer sells a product in the U.S. at a lower price
than is charged in the home market.’’23 An example of this predatory
pricing occurred in 1987 when the U.S. Department of Commerce ruled
that ‘‘Japanese companies violated international trade laws by failing to
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increase their price to match the sharp rise in the value of the yen.’’24
According to the Commerce Department, Japanese prices declined 23 percent from 1985 to 1987. The Commerce Department forced Japanese
companies to raise their prices. In 1991 the Commerce Department
charged the Japanese with dumping minivans in the U.S. market at prices
30 percent lower than those in their home market and imposed tariffs on
Japanese products. Later in the chapter we discuss the relevant antitrust
laws in detail. In short, if the dominant firm can establish that it is not
pricing below cost, predatory pricing will generally be ruled ‘‘fair’’ and
legal. As such, it can be a strong deterrent to fringe competitors.
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Deterring Entry through
Product Proliferation
Beyond limit and predatory pricing is a wider set of actions that deter
rivals. Advertising and promoting a new product so intensively that strong
brand loyalties deter entry and/or challenge by weaker firms25 and investing in excess capacity to reduce attractiveness of challenge26 are two
examples. Interestingly, firms can also maintain a dominant position
through excessive brand or product proliferation. An example of such
behavior is found in the ready-to-eat cereal market.27 The industry has
been dominated collectively by four firms: Kellogg, General Mills, Kraft’s
Post, and Pepsi’s Quaker Oats. In this instance, deterrent actions have been
taken collectively, or in concert, by dominant oligopolists to protect their
market positions. Over time the firms have strategically introduced a
profusion of new products. From 1950 to 1972, the leading producers put
more than 80 brands into general distribution. The goal has been to
market enough different products to fill market niches, as well as available
shelf space in supermarkets, and thus deter entry. That strategy has been
largely successful in enabling the dominant firms to retain their strong
position; however, it has been labeled an anticompetitive practice and was
the subject of a Federal Trade Commission investigation in the 1970s.28
Defensive Innovation Actions
Firms in dominant positions can also engage in aggressive innovative activity. The lines between innovation to build a Ricardian advantage, as
discussed in chapter 5, and innovation to protect a dominant market position are somewhat blurred. One distinguishing characteristic of the latter
is preemptive patenting to secure persistence of dominant market position.29 A dominant firm can maintain its market position by patenting new
technologies before potential competitors, even if such patents are never
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used or licensed to others. Patents that are never used or licensed are called
sleeping patents. This strategy was brought to light in a 1970s antitrust
case in which SCM Corporation charged that Xerox Corporation was
maintaining a ‘‘patent thicket’’ of sleeping patents to preempt rivals anticompetitively. Although the ruling held that Xerox had indeed successfully
protected its market with a ‘‘patent thicket,’’ it also held that SCM was not
entitled to any damages because Xerox had lawfully acquired its patents, and its subsequent refusal to license was permitted under the patent
laws.30 More recent examples include industry leaders such as Intel, IBM,
Motorola, and Sun Microsystems in the technology industries, which enjoy
a competitive advantage over new entrants and smaller firms through
patent rights from their existing portfolios and the use of cross-licensing
agreements to exchange intellectual property with each other.31
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Manipulation of Information
to Deter Response
Manipulating information can be a key action to deter response. For example, firms with several divisions can obscure information about profitable product lines so as not to attract entry.32 One firm that strategically
manipulated information to keep competitors at bay is A T & T. Despite
major changes in the telephone industry’s competitive environment,
A T & T remains dominant in the long-distance market. In 1990 it still had
70 percent of the market, down from about 90 percent in 1980. Its closest
rival, MCI, had only 15 percent of the market. In addition, even though its
market share has dropped, A T & T has grown in terms of volume, and
while its prices have declined, its profit has remained high.33
When initially faced with competition from MCI and other nascent longdistance providers, A T & T retained its position by cutting prices and focusing on its advantages to limit the growth of its competitors. A T & T
emphasized its reputation and longstanding customer relationships, raising
customers’ switching fears. It also capitalized on and promoted the historical advantages of its network. A T & T had a more extensive network,
with lower construction costs, than its rivals. The fact that its long-distance
service was less reliant on local telephone companies than that of the
independent providers was another cost advantage. A T & T also had advantages in its 800 number and international services, which the independents were not immediately able to provide. The A T & T network was
a result of decades of research, knowledge, and skills that continued to
expand; competitors could never accumulate all that A T & T possessed.
A T & T also had lower capital costs as its risk level was much lower than
that of its competitors. Its profit could have easily covered any investment
costs it incurred.34
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A T & T responded quickly to market incursion with price discrimination, lowering prices where competition arose but holding prices high in
other markets where it retained a monopoly. An integral part of this
strategy was strategic manipulation of information.35 In particular, A T & T
was alleged to have strategically obfuscated and withheld cost information
from the Federal Communications Commission (FCC) so that regulators
could not determine whether prices in competitive markets were reasonable. Specifically, when the company met its new competitors with aggressive low prices, regulators tried to investigate whether those prices
were justified on the basis of costs. The FCC investigation of costs dragged
on for nearly two decades and was never resolved, but A T & T was accused
of withholding the kind of cost data that might have caused its aggressive
pricing to be prohibited in competitive markets. This and several other
A T & T competitive tactics were deemed improper by the U.S. Department
of Justice in its 1970s’ antitrust suit. The suit ultimately led to a consent
decree in 1982 and the breakup of the Bell System in 1984.36
Copyright © 2005. Oxford University Press, Incorporated. All rights reserved.
Price Leadership
Dominant firms can exert price leadership in an industry. They can set
prices so that a desired level of profit is achieved. Importantly, rivals do not
undercut the leader’s prices in an effort to gain market share, as any such
aggressive pricing would provoke severe retaliation from the dominant
firm. U.S. Steel provides an example of successful price leadership.
U.S. Steel was formed in 1901 through a merger of 10 large steel
producers and finishers, and it held a large share of Minnesota iron ore
reserves. At that time, it was the largest firm ever, and the first U.S. billiondollar corporation. According to a study by Leonard Weiss, U.S. Steel
controlled 44 percent of steel-ingot capacity and 66 percent of output in
the early 1900s.37 Its competitors each had approximately 5 percent of the
market or less. Other large steel firms came into being, but, with the exception of the World War II period, U.S. Steel had the power to set prices
until the 1960s. Even though U.S. Steel ‘‘set’’ domestic steel prices, it
survived an antitrust case that lasted from 1911 to 1920.
U.S. Steel’s strength in the first half of the century was enhanced by
policies set by Judge Gary, the chairman of U.S. Steel for many years.
Between 1907 and 1911, he established the ‘‘Gary dinners,’’ at which
policy was discussed by the leaders of all the steel industry firms. Although
no written collusive agreement was made, firms generally followed the lead
of U.S. Steel.
In general, price leadership occurs when prices are known and stable for
a given period of time. Periodically, the dominant firm will take the lead in
altering prices, for example, raising prices in conjunction with issuance of
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new models of a product. Other firms soon follow its lead, raising their
prices by the same amount. If there is no formal agreement to raise prices
in consort, such behavior is generally permissible under the ant
