Question

1.According to Porter, internal rivalry is likely to be more intense when ______.

	a.	consumer switching costs are low
	b.	industry (market) growth is slow
	c.	brand loyalty is significant
	d.	Both (a) and (b) are correct.

2.Which of the following is valuable in a standards war?

	a.	Competitive advantage.
	b.	Late mover advantage.
	c.	Early mover advantage.
	d.	Technological advantage.

3.The use of the SSNIP (Small but Significant Nontransitory Increase in Price) test presents some difficulties when it is to be used in non-merger investigations. One of the difficulties is referred to as the “cellophane fallacy”. Explain the main argument under the cellophane fallacy.

Answer 1

1. According to Porter, internal rivalry is likely to be more intense when consumer switching costs are low and industry (market) growth is slow. It is moe difficult to capture customers if he can switch freely from one product to another. Also, if the industry (market) growth is slow then there is more rivalry among the firms for market share. If the market is growing then the firms can earn better revenues.

Hence, the correct option is d.

2. Technological advantage is valuable in standards war. Standards war is a rivalry among firms who produce a particular type of technology for market survival and dominance. Therefore, the correct option is d.

3. The cellophane fallacy arises while assessing the market power of a monopolist by applying the SSNIP at the monopoly price. This happens because a monopolist will rationally increase price to a point where the product begins to attract more and more substitutes, the test would lead to more substitutability (broader product markets) than is justified, and erroneously infer a lack of market power.