Homework for Chapter 7 (modified end-of-chapter questions, plus additional questions)

(12 points possible)

12. Briefly explain why firms operating with significant excess capacity are more likely to instigate price wars. (2 points)

14. It is often argued that price wars may be more likely to occur during low-demand periods than high-demand periods.

a.What factors that might support this implication? (1 point)

b.Might some other factors reverse this implication? (1 point)

15. Why does Sutton draw a distinction between endogenous sunk costs, such as advertising, and other sunk costs, such as capital investments? (2 points)

Background for Questions A and B: Walmart publicly announced in 2009 that it would build a new Walmart Super Center near the corner of Staples and Lipes in Corpus Christi - its first venture into the fast growing, high income, south side of the city. Very soon after that announcement, the land that Walmart was seeking to build on was sold to a firm that would not allow Walmart to build. It later became public knowledge that the H-E-B grocery store firm had purchased that land, and that H-E-B was planning to build a new H-E-B plus Store less than mile away, at the corner of Staples and Saratoga. Walmart - with no announcement - later built a smaller store at the corner of Cimarron and Saratoga, about one mile from the new H-E-B plus Store, because local environmental issues/ordinances did not allow for a vehicle maintenance & repair department.

A.As you are answering the questions below, recall that burning all but one of his ships made a useful, powerful - strong - strategic commitment for Cortes in Mexico.

a.Does this move of HEB appear to be a strong strategic commitment? Explain. (2 points)

b.Does the move of Walmart appear to be a strong strategic move? Explain. (2 points)

B.Explain:

(1) The direct effect of HEB's move. (1 point)

(2) The strategic effect of HEB's move. (1 point)