Strategy glossary of terms

From Economics of Strategy, 5th Ed., by Besanko, Dranove, Shanley, and Schaeffer
(with edits) and other sources*

Asset specificity - Assets or investments for a specific business relationship or

transaction that have a higher value for that transaction than for any other purpose. For
example, if a supplier builds a specialized machine to make parts that are only useful to
one particular buyer, the machine has asset specificity and the supplier is making a
relationship-specific investment.

Backward integration - An organizational arrangement in which a downstream firm buys

or owns that assets of upstream production, so that the downstream firm has control
over both operations.

Barriers to entry - Factors that allow incumbent firms to earn positive economic profits
by making it unprofitable for newcomers to enter the industry.

Concentration - A measure of the number of firms (and their respective market shares)
in an industry. An industry with high concentration has only a few firms, in the limit
approaching a monopoly market. An industry with low concentration has many firms, in
the limit approaching a competitive market.

Downstream - Producers are downstream from the firms that supply them with raw
materials. Distributors are downstream from the firms making the products the
distributors are selling.

Economies of scale - Indicates that average costs decrease as the level of output
increases.

Economies of scope - The cost savings that a firm achieves as it increases the variety
of activities it performs, such as the variety of goods it produces.

Experience/learning curve - Refers to the advantages that flow from accumulated

experience and know-how. For example, if a firm can produce a product at increasingly
lower costs as the cumulative amount of experience producing the product increases.
Note this is not the same as economies of scale, which refers to the advantages from
producing more output at a given point in time (as opposed to cumulative output up to
that time).

Facilitating practice - Actions that firms can take to facilitate collusive behavior. This
collusive behavior is usually tacit (that is non-explicit). For example, it can be a
facilitating practice for a firm to publicly announce (e.g., via a press release or to a
reporter for the Wall Street Journal) an increase in the price of their product in advance
so that other firms making the same product know to also increase their prices.
Forward integration - An organizational arrangement in which an upstream firm buys or
owns that assets of downstream production, so that the upstream firm has control over
both operations.

Holdup problem - A problem that arises when a party in a contractual relationship

exploits the other party's vulnerability due to relationship-specific assets. For example,
suppose a buyer contracts with a supplier to supply specialized parts to the buyer, and
these parts are only useful to this particular buyer. The supplier builds a machine to
make these parts. Once the machine is built, the buyer then has increased negotiating
power over the supplier since the supplier's machine is useless for any other purpose.
Unless the supplier is protected by contractual terms, the buyer may then be able to
"holdup" (metaphorically as in a robbery) the supplier by demanding lower prices.

Horizontal (e.g., horizontal competitive relationship, horizontal merger) - Used in

reference to competitors as opposed to relations with buyers or suppliers. For example,
a horizontal merger is a merger of firms in the same industry producing the same or
similar products.

Joint venture - A particular type of strategic alliance in which two or more firms create,
and jointly own, a new independent organization.

Minimum efficient scale - The smallest level of output at which economies of scale are
exhausted.

Network externalities - Refers to when additional consumers join a network of users,

thereby creating a positive external benefit for consumers who are already part of the
network. For example, sending an SMS from one iPhone to another iPhone is free, so
the more iPhone users, the more free SMS messages one can send.

Predatory pricing - The practice of setting a low price (compared to costs) with the intent
of driving new entrants or existing firms out of the industry.

Relationship-specific assets/investments - See asset specificity.

Strategic alliance - An agreement between two or more firms to collaborate on a project

or to share information or productive resources.

Switching costs - Refers to costs incurred by buyers when they switch to a different
seller/supplier. Note this includes retail buyers who are switching between consumer
products and services, and also manufacturers higher up in the value chain, who would
switch between suppliers.

Vertical (e.g., vertical trading relationship, vertical merger, vertical chain) - Used in
reference to a firm with respect to either a supplier (upstream) or buyer (downstream).
For example, a firm has a vertical trading relationship with its supplier.
Upstream - Suppliers are upstream to the firm to which they supply. Producers are
upstream from their distributors. Etc.

*If you like me to add a term to the glossary, please email me.