Managerial economics and business strategy

Cover
Title Page
Copyright Page
Dedication
About the Authors
Preface
Acknowledgments
Supplements
Brief Contents
Contents
CHAPTER 1 The Fundamentals of Managerial Economics
	HEADLINE: Amcott Loses $3.5 Million; Manager Fired
	INTRODUCTION
		The Manager
		Economics
		Managerial Economics Defined
	THE ECONOMICS OF EFFECTIVE MANAGEMENT
		Identify Goals and Constraints
		Recognize the Nature and Importance of Profits
			Economic versus Accounting Profits
			The Role of Profits
			The Five Forces Framework and Industry Profitability
		Understand Incentives
		Understand Markets
			Consumer–Producer Rivalry
			Consumer–Consumer Rivalry
			Producer–Producer Rivalry
			Government and the Market
		Recognize the Time Value of Money
			Present Value Analysis
			Present Value of Indefinitely Lived Assets
		Use Marginal Analysis
			Discrete Decisions
			Continuous Decisions
			Incremental Decisions
		Make Data-Driven Decisions
			Obtaining Estimates Using Regression
			Evaluating the Statistical Significance of Estimated Coefficients
			Regression for Nonlinear Functions and Multiple Regression
			A Caveat
	LEARNING MANAGERIAL ECONOMICS
	ANSWERING THE HEADLINE
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	APPENDIX A: THE CALCULUS OF MAXIMIZING NET BENEFITS
	APPENDIX B: EVALUATING THE OVERALL FIT OF THE REGRESSION LINE
	INSIDE BUSINESS 1–1: The Goals of Firms in Our Global Economy
	INSIDE BUSINESS 1–2: Profits and the Evolution of the Computer Industry
	INSIDE BUSINESS 1–3: Joining the Jet Set
CHAPTER 2 Market Forces: Demand and Supply
	HEADLINE: Samsung and Hynix Semiconductor to Cut Chip Production
	INTRODUCTION
	DEMAND
		Demand Shifters
			Income
			Prices of Related Goods
			Advertising and Consumer Tastes
			Population
			Consumer Expectations
			Other Factors
		The Demand Function
		Consumer Surplus
	SUPPLY
		Supply Shifters
			Input Prices
			Technology or Government Regulations
			Number of Firms
			Substitutes in Production
			Taxes
			Producer Expectations
		The Supply Function
		Producer Surplus
	MARKET EQUILIBRIUM
	PRICE RESTRICTIONS AND MARKET EQUILIBRIUM
		Price Ceilings
		Price Floors
	COMPARATIVE STATICS
		Changes in Demand
		Changes in Supply
		Simultaneous Shifts in Supply and Demand
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	INSIDE BUSINESS 2–1: Asahi Breweries Ltd. and the Asian Recession
	INSIDE BUSINESS 2–2: International Trade Agreements and the Supply Curve
	INSIDE BUSINESS 2–3: Unpopular Equilibrium Prices
	INSIDE BUSINESS 2–4: Price Ceilings and Price Floors around the Globe
	INSIDE BUSINESS 2–5: Globalization and the Supply of Automobiles
	INSIDE BUSINESS 2–6: Using a Spreadsheet to Calculate Equilibrium in the Supply and Demand Model
CHAPTER 3 Quantitative Demand Analysis
	HEADLINE: Walmart Hoping for Another Big Holiday Showing
	INTRODUCTION
	THE ELASTICITY CONCEPT
	OWN PRICE ELASTICITY OF DEMAND
		Elasticity and Total Revenue
		Factors Affecting the Own Price Elasticity
			Available Substitutes
			Time
			Expenditure Share
		Marginal Revenue and the Own Price Elasticity of Demand
	CROSS-PRICE ELASTICITY
	INCOME ELASTICITY
	OTHER ELASTICITIES
	OBTAINING ELASTICITIES FROM DEMAND FUNCTIONS
		Elasticities for Linear Demand Functions
		Elasticities for Nonlinear Demand Functions
	DATA-DRIVEN DEMAND CURVES
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	INSIDE BUSINESS 3–1: Calculating and Using the Arc Elasticity: An Application to the Housing Market
	INSIDE BUSINESS 3–2: Inelastic Demand for Prescription Drugs
	INSIDE BUSINESS 3–3: Using Cross-Price Elasticities to Guide Strategies in Digital Markets
	INSIDE BUSINESS 3–4: Using Big Data to Estimate Demand Elasticities for Millions of Gamers
CHAPTER 4 The Theory of Individual Behavior
	HEADLINE: Packaging Firm Uses Overtime Pay to Overcome Labor Shortage
	INTRODUCTION
	CONSUMER BEHAVIOR
	CONSTRAINTS
		The Budget Constraint
		Changes in Income
		Changes in Prices
	CONSUMER EQUILIBRIUM
	COMPARATIVE STATICS
		Price Changes and Consumer Behavior
		Income Changes and Consumer Behavior
		Substitution and Income Effects
	APPLICATIONS OF INDIFFERENCE CURVE ANALYSIS
		Choices by Consumers
			Buy One, Get One Free
			Cash Gifts, In-Kind Gifts, and Gift Cards
		Choices by Workers and Managers
			A Simplified Model of Income–Leisure Choice
			The Decisions of Managers
	THE RELATIONSHIP BETWEEN INDIFFERENCE CURVE ANALYSIS AND DEMAND CURVES
		Individual Demand
		Market Demand
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	APPENDIX: A CALCULUS APPROACH TO INDIVIDUAL BEHAVIOR
	INSIDE BUSINESS 4–1: Indifference Curves and Risk Preferences
	INSIDE BUSINESS 4–2: The Budget Constraint and Credit Cards
	INSIDE BUSINESS 4–3: Price Changes and Inventory Management for Multiproduct Firms
	INSIDE BUSINESS 4–4: Income Effects and the Business Cycle
	INSIDE BUSINESS 4–5: The “Deadweight Loss” of In-Kind Gifts
	INSIDE BUSINESS 4–6: Public Health Centers and Output-Oriented Incentives
CHAPTER 5 The Production Process and Costs
	HEADLINE: Boeing Loses the Battle but Wins the War
	INTRODUCTION
	THE PRODUCTION FUNCTION
		Short-Run versus Long-Run Decisions
		Measures of Productivity
			Total Product
			Average Product
			Marginal Product
		The Role of the Manager in the Production Process
			Produce on the Production Function
			Use the Right Level of Inputs
		Algebraic Forms of Production Functions
		Algebraic Measures of Productivity
		Isoquants
		Isocosts
		Cost Minimization
		Optimal Input Substitution
		Data-Driven Production Functions
	THE COST FUNCTION
		Short-Run Costs
		Average and Marginal Costs
		Relations among Costs
		Fixed and Sunk Costs
		Algebraic Forms of Cost Functions
		Long-Run Costs
		Economies of Scale
		Data-Driven Cost Functions
		A Reminder: Economic Costs versus Accounting Costs
	MULTIPLE-OUTPUT COST FUNCTIONS
		Economies of Scope
		Cost Complementarity
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	APPENDIX: THE CALCULUS OF PRODUCTION AND COSTS
	INSIDE BUSINESS 5–1: Where Does Technology Come From?
	INSIDE BUSINESS 5–2: Artificial Intelligence and Cost-Minimizing Inputs
	INSIDE BUSINESS 5–3: The Affordable Care Act, Employer Mandate, and Input Substitution
	INSIDE BUSINESS 5–4: International Companies Exploit Economies of Scale
CHAPTER 6 The Organization of the Firm
	HEADLINE: AT&T Finalizes Acquisition of Time Warner Inc.
	INTRODUCTION
	METHODS OF PROCURING INPUTS
		Purchase the Inputs Using Spot Exchange
		Acquire Inputs under a Contract
		Produce the Inputs Internally
	TRANSACTION COSTS
		Types of Specialized Investments
			Site Specificity
			Physical-Asset Specificity
			Dedicated Assets
			Human Capital
		Implications of Specialized Investments
			Costly Bargaining
			Underinvestment
			Opportunism and the “Hold-Up Problem”
	OPTIMAL INPUT PROCUREMENT
		Spot Exchange
		Contracts
		Vertical Integration
		The Economic Trade-Off
	MANAGERIAL COMPENSATION AND THE PRINCIPAL–AGENT PROBLEM
	FORCES THAT DISCIPLINE MANAGERS
		Incentive Contracts
		External Incentives
			Reputation
			Takeovers
	THE MANAGER–WORKER PRINCIPAL–AGENT PROBLEM
		Solutions to the Manager–Worker Principal–Agent Problem
			Profit Sharing
			Revenue Sharing
			Piece Rates
			Time Clocks and Spot Checks
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	APPENDIX: AN INDIFFERENCE CURVE APPROACH TO MANAGERIAL INCENTIVES
	INSIDE BUSINESS 6–1: The Cost of Using an Inefficient Method of Procuring Inputs
	INSIDE BUSINESS 6–2: What Determines Contract Length in Franchising?
	INSIDE BUSINESS 6–3: The Role and Growth of Outsourcing
	INSIDE BUSINESS 6–4: Incentives Matter for Performance
CHAPTER 7 The Nature of Industry
	HEADLINE: T-Mobile and Sprint Finalize Merger
	INTRODUCTION
	MARKET STRUCTURE
		Firm Size
		Industry Concentration
			Measures of Industry Concentration
			The Concentration of U.S. Industry
			Limitations of Concentration Measures
		Technology
		Demand and Market Conditions
		Potential for Entry
	CONDUCT
		Pricing Behavior
		Integration and Merger Activity
			Vertical Integration
			Horizontal Integration
			Conglomerate Mergers
		Research and Development
		Advertising
	PERFORMANCE
		Profits
		Social Welfare
	THE STRUCTURE–CONDUCT–PERFORMANCE PARADIGM
		The Causal View
		The Feedback Critique
		Relation to the Five Forces Framework
	OVERVIEW OF THE REMAINDER OF THE BOOK
		Perfect Competition
		Monopoly
		Monopolistic Competition
		Oligopoly
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	INSIDE BUSINESS 7–1: The 2017 North American Industry Classification System (NAICS)
	INSIDE BUSINESS 7–2: The Elasticity of Demand at the Firm and Market Levels
	INSIDE BUSINESS 7–3: The Evolution of Market Structure in the Computer Industry
CHAPTER 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets
	HEADLINE: McDonald’s New Buzz: Specialty Coffee
	INTRODUCTION
	PERFECT COMPETITION
		Demand at the Market and Firm Levels
		Short-Run Output Decisions
			Maximizing Profits
			Minimizing Losses
			The Short-Run Firm and Industry Supply Curves
		Long-Run Decisions
	MONOPOLY
		Monopoly Power
		Sources of Monopoly Power
			Economies of Scale
			Economies of Scope
			Cost Complementarity
			Patents and Other Legal Barriers
		Maximizing Profits
			Marginal Revenue
			The Output Decision
			The Absence of a Supply Curve
			Multiplant Decisions
		Implications of Entry Barriers
	MONOPOLISTIC COMPETITION
		Conditions for Monopolistic Competition
		Profit Maximization
		Long-Run Equilibrium
		Implications of Product Differentiation
	OPTIMAL ADVERTISING DECISIONS
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	APPENDIX: THE CALCULUS OF PROFIT MAXIMIZATION
	APPENDIX: THE ALGEBRA OF PERFECTLY COMPETITIVE SUPPLY FUNCTIONS
	INSIDE BUSINESS 8–1: Peugeot-Citro.n of France: A Price-Taker in China’s Auto Market
	INSIDE BUSINESS 8–2: Patent, Trademark, and Copyright Protection
	INSIDE BUSINESS 8–3: Product Differentiation, Cannibalization, and Colgate’s Smile
CHAPTER 9 Basic Oligopoly Models
	HEADLINE: Crude Oil Prices Fall, but Consumers in Some Areas See No Relief at the Pump
	INTRODUCTION
	CONDITIONS FOR OLIGOPOLY
	THE ROLE OF BELIEFS AND STRATEGIC INTERACTION
	PROFIT MAXIMIZATION IN FOUR OLIGOPOLY SETTINGS
		Sweezy Oligopoly
		Cournot Oligopoly
			Reaction Functions and Equilibrium
			Isoprofit Curves
			Changes in Marginal Costs
			Collusion
		Stackelberg Oligopoly
		Bertrand Oligopoly
	COMPARING OLIGOPOLY MODELS
		Cournot
		Stackelberg
		Bertrand
		Collusion
	CONTESTABLE MARKETS
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	APPENDIX: DIFFERENTIATEDPRODUCT BERTRAND OLIGOPOLY
	INSIDE BUSINESS 9–1: OPEC Members Can’t Help but Cheat
	INSIDE BUSINESS 9–2: Commitment in Stackelberg Oligopoly
	INSIDE BUSINESS 9–3: Price Competition and the Number of Sellers: Evidence from Online and Laboratory Markets
	INSIDE BUSINESS 9–4: Using a Spreadsheet to Calculate Cournot, Stackelberg, and Collusive Outcomes
CHAPTER 10 Game Theory: Inside Oligopoly
	HEADLINE: Bring Back Complimentary Drinks!
	INTRODUCTION
	OVERVIEW OF GAMES AND STRATEGIC THINKING
	SIMULTANEOUS-MOVE, ONE-SHOT GAMES
		Theory
		Applications of One-Shot Games
			Pricing Decisions
			Advertising and Quality Decisions
			Coordination Decisions
			Monitoring Employees
			Nash Bargaining
	INFINITELY REPEATED GAMES
		Theory
			Review of Present Value
			Supporting Collusion with Trigger Strategies
		Factors Affecting Collusion in Pricing Games
			Number of Firms
			Firm Size
			History of the Market
			Punishment Mechanisms
		An Application of Infinitely Repeated Games to Product Quality
	FINITELY REPEATED GAMES
		Games with an Uncertain Final Period
		Repeated Games with a Known Final Period: The End-of-Period Problem
		Applications of the End-of-Period Problem
			Resignations and Quits
			The “Snake-Oil” Salesman
	MULTISTAGE GAMES
		Theory
		Applications of Multistage Games
			The Entry Game
			Innovation
			Sequential Bargaining
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	INSIDE BUSINESS 10–1: Hollywood’s (not so) Beautiful Mind: Nash or “Opie” Equilibrium?
	INSIDE BUSINESS 10–2: Cola Wars in India
	INSIDE BUSINESS 10–3: Collusion in Canadian Gasoline Markets
	INSIDE BUSINESS 10–4: Multimarket Contact and Price Competition
	INSIDE BUSINESS 10–5: Entry Strategies in International Markets: Sprinkler or Waterfall?
CHAPTER 11 Pricing Strategies for Firms with Market Power
	HEADLINE: Mickey Mouse Lets You Ride “for Free” at Disney World
	INTRODUCTION
	BASIC PRICING STRATEGIES
		Review of the Basic Rule of Profit Maximization
		A Simple Pricing Rule for Monopoly and Monopolistic Competition
		A Simple Pricing Rule for Cournot Oligopoly
	STRATEGIES THAT YIELD EVEN GREATER PROFITS
		Extracting Surplus from Consumers
			Price Discrimination
			Two-Part Pricing
			Block Pricing
			Commodity Bundling
		Pricing Strategies for Special Cost and Demand Structures
			Peak-Load Pricing
			Cross-Subsidies
			Transfer Pricing
		Pricing Strategies in Markets with Intense Price Competition
			Price Matching
			Inducing Brand Loyalty
			Randomized Pricing
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	INSIDE BUSINESS 11–1: Pricing Markups as Rules of Thumb
	INSIDE BUSINESS 11–2: Is Price Discrimination Bad for Consumers?
	INSIDE BUSINESS 11–3: Bundling to Reduce Churn in Telecommunications
	INSIDE BUSINESS 11–4: The Prevalence of Price-Matching Policies and Other Low-Price Guarantees
	INSIDE BUSINESS 11–5: Kroger Combines Pricing Strategies
	INSIDE BUSINESS 11–6: Randomized Pricing in the Airline Industry
CHAPTER 12 The Economics of Information
	HEADLINE: Firm Chickens Out in the FCC Spectrum Auction
	INTRODUCTION
	THE MEAN AND THE VARIANCE
	UNCERTAINTY AND CONSUMER BEHAVIOR
		Risk Aversion
			Managerial Decisions with Risk-Averse Consumers
		Consumer Search
	UNCERTAINTY AND THE FIRM
		Risk Aversion
		Producer Search
		Profit Maximization
	UNCERTAINTY AND THE MARKET
		Asymmetric Information
			Adverse Selection
			Moral Hazard
		Signaling and Screening
	AUCTIONS
		Types of Auctions
			English Auction
			First-Price, Sealed-Bid Auction
			Second-Price, Sealed-Bid Auction
			Dutch Auction
		Information Structures
			Independent Private Values
			Correlated Value Estimates
		Optimal Bidding Strategies for Risk-Neutral Bidders
			Strategies for Independent Private Values Auctions
			Strategies for Correlated Values Auctions
		Expected Revenues in Alternative Types of Auctions
	ANSWERING THE HEADLINE
	SUMMARY
	KEY TERMS AND CONCEPTS
	CONCEPTUAL AND COMPUTATIONAL QUESTIONS
	PROBLEMS AND APPLICATIONS
	SELECTED READINGS
	INSIDE BUSINESS 12–1: Risk Aversion and the Value of Selling the Firm: The St. Petersburg Paradox
	INSIDE BUSINESS 12–2: Obfuscation to Counter Low Internet Search Costs
	INSIDE BUSINESS 12–3: Groucho Marx the Economist?
	INSIDE BUSINESS 12–4: Second-Price Auctions on eBay
	INSIDE BUSINESS 12–5: Auctions with Risk-Averse Bidders
MODULE GROUP A Strategies to Change the Business Environment
	INTRODUCTION
	MODULE 1: ENTRY PREVENTION
		Limit Pricing to Prevent Entry
		Theoretical Basis for Limit Pricing
		Limit Pricing May Fail to Deter Entry
		Linking the Preentry Price to Postentry Profits
			Commitment Mechanisms
			Learning Curve Effects
			Incomplete Information
			Reputation Effects
		Dynamic Considerations
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	INSIDE BUSINESS M1–1: Limit Pricing and the “Southwest Effect”
	MODULE 2: LESSENING COMPETITION
		Predatory Pricing
		Raising Rivals’ Costs
			Strategies Involving Marginal Cost
			Strategies Involving Fixed Costs
			Strategies for Vertically Integrated Firms
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	INSIDE BUSINESS M2–1: Business Strategy at Microsoft
	MODULE 3: RESTRUCTURING GAME TIMING
		First-Mover Advantages
		Second-Mover Advantages
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	INSIDE BUSINESS M3–1: First to Market, First to Succeed? Or First to Fail?
	MODULE 4: OVERCOMING NETWORK EFFECTS
		What Is a Network?
		Network Externalities
		First-Mover Advantages Due to Consumer Lock-In
		Using Penetration Pricing to “Change the Game”
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	SELECTED READINGS
	INSIDE BUSINESS M4–1: Network Externalities and Penetration Pricing by Yahoo! Auctions
MODULE GROUP B Government in the Marketplace
	INTRODUCTION
	MODULE 5: REGULATORY CONSTRAINT ON MARKET POWER
		Market Power
		Government Tools to Constrain Market Power
			Antitrust Policy
			Price Regulation
		Rent Seeking
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	INSIDE BUSINESS M5–1: European Commission Moves to Protect Small Businesses
	INSIDE BUSINESS M5–2: Electricity Deregulation
	MODULE 6: REGULATION OF MARKETS WITH EXTERNALITIES, PUBLIC GOODS, OR INCOMPLETE INFORMATION
		Externalities
			The Clean Air Act
		Public Goods
		Incomplete Information
			Rules against Insider Trading
			Certification
			Truth in Lending
			Truth in Advertising
			Enforcing Contracts
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	INSIDE BUSINESS M6–1: Canada’s Competition Bureau
	MODULE 7: GOVERNMENT POLICY AND INTERNATIONAL MARKETS
		Quotas
		Tariffs
			Lump-Sum Tariffs
			Excise Tariffs
	KEY TERMS AND CONCEPTS
	PRACTICE PROBLEMS
	SELECTED READINGS
CASE STUDY Spectrum—the Spawn of Time Warner Cable and Charter Communications—Navigates Challenges from Cord Cutting and Mobile Competition
	HEADLINE
	BACKGROUND
		Time Warner Cable History
		Cable Television History
		Broadband Internet
	BUSINESS AND MARKETS
		Video Programming
		Internet Services
		Telephone
	COMPETITION
		Cable Companies
			Comcast
			Comcast/Time Warner Cable Proposed Acquisition
			Charter Communications
			Other Cable Players
		Satellite
			AT&T DirecTV
			Dish Network
		Telephone Providers
			Verizon
			AT&T
			Other Companies
		Online Video Distributors
			Netflix
			Amazon Prime Video
			Hulu
			Google/YouTube
	SUPPLIERS
		Cable Networks
		Broadcast Networks
		Sports Programming
		Carriage Disputes
		Over-the-Top Content
	MARKET TRENDS AND CONSUMER BEHAVIOR
		Digital Video Recorders (DVRs)
		Cutting the Cord
		Going Mobile
	REGULATION IN THE CABLE INDUSTRY
		Carriage of Broadcast Television
		Cable Pricing Regulation
		Net Neutrality
		Connect America Fund
	CHALLENGES
	CASE-BASED EXERCISES
	MEMOS
	SELECTED READINGS AND REFERENCES
	APPENDIX: EXHIBITS
Glossary
Additional Readings and References
Name Index
General Index