Cost and Benefit Advantage

Cost Advantage Benefit Advantage
 * More cost efficient firms drive the less cost efficient firms out
 * Replacement Effect occurs when the most efficient firm becomes more efficient and takes its own place as the cheapest.
 * Less competition means less incentive to become more cost efficient. Replacement effect happens rarely.
 * Incremental and Disruptive cost reduction.
 * Incremental does not do much.
 * Disruptive changes the market drastically. The cost is much lower than all the others. Compare MC, marginal cost, of pre-innovation and post-innovation.
 * Differentiation index some random greek letter. If = 1 then homogenous. If = 0 then completely differentiated.
 * Hotelling(Horizontal Differentiation)
 * On street. Products more or less homogenous. The only difference is the distance the consumers have to travel.
 * Need to find the indifferent customer. Equate the willingness to pay. Willingness to pay is value/utility gained from product/service minus personal cost, in this case, distance. In this case, the indifferent will be in terms of x, the consumer because profit = (p-c)x.
 * Find what will satisfy the indifferent customer and apply it to profit maximisation problem to find optimal price and distance.
 * Find p1,p2 and l. Differentiate the profit function(one exists for each of the two firms) in terms of p1, p2 and l.
 * Demand Effect - fixed price, less differentiation leads to more demand
 * Rivalry Effect - increasing differentiation softens competition
 * Vertical Differentiation
 * Also need to find indifferent customer. Find the utility(the theta) associated with quality. Surplus from quality*taste for quality - price is the utility. Equate the two different utilities to find indifferent.
 * Demand is the indifferent utility and 1 - indifferent utility each
 * Question solving
 * Find utility function of high qual and low qual
 * will have a variable for individual customer preference
 * Equate them and find the indifferent preference, the indifferent customer. Don't care which one to buy. This is the quantity.
 * Profit maximise. Put in the profit function the indifferent customer/preference. Diff by low qual/high qual price. This is the best response of price to another's price and qual.
 * Do the same for the other price. Will get in terms of other firm's price and in quality.
 * Equate them and find purely in terms of quality.
 * Insert back into profit function the price in terms of quality. Now profit is only in terms of quality of the two rival firms.
 * If rival chooses high I choose low.