ASRJC Theme 2A Firms' Strategies Lecture notes_2025

THEME 2: Firms’ Strategies and Market Failure Anderson Serangoon Junior College Economics Department A 1 THEME 2: FIRMS’ STRATEGIES AND MARKET FAILURE SYLLABUS CONTENT (H3)

THEME 2: Firms’ Strategies and Market Failure Anderson Serangoon Junior College Economics Department A 2 THEME 2: FIRMS’ STRATEGIES AND MARKET FAILURE CHAPTER 1: FIRMS’ STRATEGIES 1. STRATEGIES TO DEVELOP COMPETITIVE ADVANTAGE ➢ EFFICIENCY AND EQUITY • X-INEFFICIENCY • EQUITY • SOCIAL EFFICIENCY: ‘PARETO OPTIMALITY’ ➢ FIVE FORCES STRATEGIC MODEL • DETERMINING COMPETITIVE ADVANTAGE • ACHIEVING COMPETITIVE ADVANTAGE 2. STRATEGIES WITH RESPECT TO OTHER FIRMS’ DECISIONS ➢ COMPETITION AND COLLUSION • TACIT COLLUSION: PRICE LEADERSHIP • FACTORS FAVOURING COLLUSION • NON-COLLUSIVE OLIGOPOLY ▪ THE BERTRABD MODEL ▪ THE COURNOT MODEL ➢ GAME THEORY • SIMULTANEOUS AND SEQUENTIAL GAMES • COOPERATIVE AND NON-COOPERATIVE GAMES • THE THREE ELEMENTS OF GAMES • RISONER’S DILEMMA • PRICE COMPETITION • ADVERTISING Anderson Serangoon Junior College JC2 H3 Economics 2025

THEME 2: Firms’ Strategies and Market Failure Anderson Serangoon Junior College Economics Department A 3 Firms’ Strategies and Market Failure Overview In Theme 2, the decision-making approach will be explored further as we look into firms and their strategies, markets and market failure. In Theme 2.1.1͕, we look at firms’ strategies to achieve their primary goal of maximising profits. First, we will examine the economic aspects of Michael Porter’s Five Forces model and how it can be applied to help firms develop a competitive advantage. To a certain extent, firms have control over these decisions, but they cannot be made in isolation because they exist in dynamic market environments. We will thus look at how firms react strategically to each other’s decisions as we examine game theory and the economics of cooperation. Some important questions that will be explored are: • How does a firm develop competitive advantage in consideration of the nature and competitive intensity of the market? • What strategies should firms prioritise in their decision-making? • How do firms thrive in a dynamic market environment? • How should firms take into account the decisions of other economic agents in their own decision-making? 1. Strategies to develop competitive advantage Introduction In the theory of the firm, it is commonly assumed that the objective of the firm and its owner(s) is to maximise profits. As firms make decisions, these decisions will invariably affect firms’ profitability and efficiency as well as societal welfare. The different dimensions of efficiency include: • Productive efficiency • Allocative efficiency • Dynamic efficiency • X-inefficiency Economic efficiency says nothing about fairness or equity. A set of values and beliefs thus governs the choice of how equ