Managerial economics and strategy

Cover
Brief Contents
Contents
Preface
Chapter 1 Introduction
	1.1 Managerial Decision Making
		Profit
		Trade‐Offs
		Other Decision Makers
		Strategy
	1.2 Economic Models
		MINI‐CASE Using an Income Threshold Model in China
		Simplifying Assumptions
		Testing Theories
		Positive and Normative Statements
		New Theories
	1.3 Using Economic Skills in Your Career
		Summary
Chapter 2 Supply and Demand
	MANAGERIAL PROBLEM Carbon Taxes
	2.1 Demand
		The Demand Curve
		The Demand Function
		USING CALCULUS Deriving the Slope of a Demand Curve
		Summing Demand Curves
		MINIv‐CASE Summing Corn Demand Curves
	2.2 Supply
		The Supply Curve
		The Supply Function
		Summing Supply Curves
	2.3 Market Equilibrium
		Using a Graph to Determine the Equilibrium
		Using Math to Determine the Equilibrium
		Forces That Drive the Market to Equilibrium
		MINI‐CASE Speed of Adjustment to New Information
	2.4 Shocks to the Equilibrium
		Effects of a Shift in the Demand Curve
		Q&A 2.1
		Effects of a Shift in the Supply Curve
		MINI‐CASE The Opioid Epidemic Reduces Labor Market Participation
		Q&A 2.2
		MANAGERIAL IMPLICATION Taking Advantage of Future Shocks
	2.5 Effects of Government Interventions
		Policies That Shift Curves
		MINI‐CASE Occupational Licensing
		Price Controls
		MINI‐CASE Venezuelan Price Ceilings and Shortages
		Sales Taxes
		Q&A 2.3
		MANAGERIAL IMPLICATION Cost Pass‐Through
	2.6 When to Use the Supply‐and‐Demand Model
		Managerial Solution Carbon Taxes
		Summary
		Questions
Chapter 3 Empirical Methods for Demand Analysis
	MANAGERIAL PROBLEM Estimating the Effect of an iTunes Price Change
	3.1 Elasticity
		The Price Elasticity of Demand
		MANAGERIAL IMPLICATION Changing Prices to Calculate an Arc Elasticity
		Q&A 3.1
		MINI‐CASE Demand Elasticities for Google Play and Apple Apps
		USING CALCULUS The Point Elasticity of Demand
		Elasticity Along the Demand Curve
		Q&A 3.2
		Other Types of Demand Elasticities
		MINI‐CASE Anti‐Smoking Policies May Reduce Drunk Driving
		Demand Elasticities over Time
		Other Elasticities
		Estimating Demand Elasticities
	3.2 Regression Analysis
		A Demand Function Example
		MINI‐CASE The Portland Fish Exchange
		Multivariate Regression
		Q&A 3.3
		Goodness of Fit and the Statistic
		MANAGERIAL IMPLICATION Focus Groups
	3.3 Properties and Statistical Significance of Estimated Coefficients
		Repeated Samples
		Desirable Properties for Estimated Coefficients
		A Focus Group Example
		Confidence Intervals
		Hypothesis Testing and Statistical Significance
	3.4 Regression Specification
		Selecting Explanatory Variables
		MINI‐CASE Determinants of CEO Compensation
		Q&A 3.4
		Functional Form
		MANAGERIAL IMPLICATION Experiments
	3.5 Forecasting
		Extrapolation
		Theory‐Based Econometric Forecasting
		Managerial Solution Estimating the Effect of an iTunes Price Change
		Summary
		Questions
	Appendix 3A The Identification Problem
Chapter 4 Consumer Choice
	MANAGERIAL PROBLEM Paying Employees to Relocate
	4.1 Consumer Preferences
		Properties of Consumer Preferences
		MINI‐CASE You Can’t Have Too Much Money
		Preference Maps
	4.2 Utility
		Utility Functions
		Ordinal and Cardinal Utility
		Marginal Utility
		USING CALCULUS Marginal Utility
		Marginal Rates of Substitution
	4.3 The Budget Constraint
		Slope of the Budget Line
		USING CALCULUS The Marginal Rate of Transformation
		Effects of a Change in Price on the Opportunity Set
		Effects of a Change in Income on the Opportunity Set
		Q&A 4.1
		MINI‐CASE Rationing
		Q&A 4.2
	4.4 Constrained Consumer Choice
		The Consumer’s Optimal Bundle
		Q&A 4.3
		MINI‐CASE Why Americans Buy More E‐Books Than Do Germans
		Q&A 4.4
		Promotions
		MANAGERIAL IMPLICATION Designing Promotions
	4.5 Deriving Demand Curves
	4.6 Behavioral Economics
		Tests of Transitivity
		Endowment Effects
		MINI‐CASE How You Ask the Question Matters
		Salience
		MANAGERIAL IMPLICATION Simplifying Consumer Choices
		Managerial Solution Paying Employees to Relocate
		Summary
		Questions
	Appendix 4A The Marginal Rate of Substitution
	Appendix 4B The Consumer Optimum
Chapter 5 Production
	MANAGERIAL PROBLEM Labor Productivity During Recessions
	5.1 Production Functions
	5.2 Short‐Run Production
		The Total Product Function
		The Marginal Product of Labor
		USING CALCULUS Calculating the Marginal Product of Labor
		Q&A 5.1
		The Average Product of Labor
		Graphing the Product Curves
		The Law of Diminishing Marginal Returns
		MINI‐CASE Malthus and the Green Revolution
	5.3 Long‐Run Production
		Isoquants
		MINI‐CASE Self‐Driving Trucks
		Substituting Inputs
		Q&A 5.2
		USING CALCULUS Cobb‐Douglas Marginal Products
	5.4 Returns to Scale
		Constant, Increasing, and Decreasing Returns to Scale
		Q&A 5.3
		MINI‐CASE Returns to Scale for Crocs
		Varying Returns to Scale
		MANAGERIAL IMPLICATION Small Is Beautiful
	5.5 Innovation
		Process Innovation
		MINI‐CASE Robots and the Food You Eat
		Organizational Innovation
		MINI‐CASE A Good Boss Raises Productivity
		MANAGERIAL IMPLICATION Technical Progress and Competitive Advantage
		Managerial Solution Labor Productivity During Recessions
		Summary
		Questions
Chapter 6 Costs
	MANAGERIAL PROBLEM Technology Choice at Home Versus Abroad
	6.1 The Nature of Costs
		Opportunity Costs
		MINI‐CASE The Opportunity Cost of an MBA
		Q&A 6.1
		Costs of Durable Inputs
		Sunk Costs
		MANAGERIAL IMPLICATION Ignoring Sunk Costs
	6.2 Short‐Run Costs
		MINI‐CASE Costs of Building a Guitar
		Common Measures of Cost
		USING CALCULUS Calculating Marginal Cost
		Cost Curves
		Q&A 6.2
		Production Functions and the Shapes of Cost Curves
		Short‐Run Cost Summary
	6.3 Long‐Run Costs
		MINI‐CASE Short Run Versus Long Run in the Sharing Economy
		Input Choice
		MANAGERIAL IMPLICATION Cost Minimization by Trial and Error
		MINI‐CASE The Internet and Outsourcing
		Q&A 6.3
		The Shapes of Long‐Run Cost Curves
		MINI‐CASE Economies of Scale at Google
		Q&A 6.4
	6.4 The Learning Curve
		MINI‐CASE Solar Power Learning Curves
	6.5 The Costs of Producing Multiple Goods
		MINI‐CASE Medical Economies of Scope
		Managerial Solution Technology Choice at Home Versus Abroad
		Summary
		Questions
	Appendix 6A Calculating Cost Curves
	Appendix 6B Long‐Run Cost Minimization
Chapter 7 Firm Organization and Market Structure
	MANAGERIAL PROBLEM Amazon’s Delivery Services
	7.1 Ownership and Governance of Firms
		Private, Public, and Nonprofit Firms
		MINI‐CASE Chinese State‐Owned Enterprises
		Ownership of For‐Profit Firms
		Firm Governance
	7.2 Profit Maximization
		Profit
		Two Steps to Maximizing Profit
		USING CALCULUS Maximizing Profit
		Q&A 7.1
		MANAGERIAL IMPLICATION Marginal Decision Making
		Social Responsibility
		MINI‐CASE Trends in Social Responsibility
		Forcing Firms to Maximize Profit: The Survivor Principle and Competition for Corporate Control
	7.3 Profits Over Time
		Interest Rates
		Investing and Profit Maximizing Over Time
		Q&A 7.2
		MANAGERIAL IMPLICATION Stock Prices Versus Profit
	7.4 The Make or Buy Decision
		Stages of Production
		Vertical Integration
		Profitability and the Supply Chain Decision
		MINI‐CASE Netflix
		MINI‐CASE The Gig Economy
		Market Size and the Life Cycle of a Firm
	7.5 Market Structure
		The Four Main Market Structures
		Comparison of Market Structures
		Disruptive Innovations and the Evolution of Market Structure
		Road Map to the Rest of the Book
		Managerial Solution Amazon’s Delivery Services
		Summary
		Questions
Chapter 8 Competitive Firms and Markets
	MANAGERIAL PROBLEM The Rising Cost of Keeping On Truckin’
	8.1 Perfect Competition
		Characteristics of a Perfectly Competitive Market
		Deviations from Perfect Competition
	8.2 Competition in the Short Run
		How Much to Produce
		Q&A 8.1
		USING CALCULUS Profit Maximization with a Specific Tax
		Whether to Produce
		MINI‐CASE Fracking and Shutdowns
		Q&A 8.2
		MANAGERIAL IMPLICATION Sunk Costs and the Shutdown Decision
		The Short‐Run Firm Supply Curve
		The Short‐Run Market Supply Curve
		Short‐Run Competitive Equilibrium
	8.3 Competition in the Long Run
		Long‐Run Competitive Profit Maximization
		The Long‐Run Firm Supply Curve
		MINI‐CASE The Size of Ethanol Processing Plants
		The Long‐Run Market Supply Curve
		MINI‐CASE Industries with High Entry and Exit Rates
		MINI‐CASE An Upward‐Sloping Long‐Run Supply Curve for Cotton
		Long‐Run Competitive Equilibrium
		Q&A 8.3
		Zero Long‐Run Profit with Free Entry
	8.4 Competition Maximizes Economic Well‐Being
		Consumer Surplus
		MANAGERIAL IMPLICATION Willingness to Pay on eBay
		MINI‐CASE Digital Surplus
		Producer Surplus
		Q&A 8.4
		Q&A 8.5
		Competition Maximizes Total Surplus
		MINI‐CASE The Deadweight Loss of Holiday Gifts
		Effects of Government Intervention
		Q&A 8.6
		Managerial Solution The Rising Cost of Keeping On Truckin’
		Summary
		Questions
Chapter 9 Monopoly
	MANAGERIAL PROBLEM Brand‐Name and Generic Drugs
	9.1 Monopoly Profit Maximization
		Marginal Revenue
		USING CALCULUS Deriving a Monopoly’s Marginal Revenue Function
		Q&A 9.1
		Choosing Price or Quantity
		Two Steps to Maximizing Profit
		USING CALCULUS Solving for the Profit‐Maximizing Output
		MINI‐CASE Apple’s iPad
		Q&A 9.2
		Effects of a Shift of the Demand Curve
		Q&A 9.3
		MINI‐CASE Taylor Swift Concert Pricing
		Q&A 9.4
	9.2 Market Power
		Market Power and the Shape of the Demand Curve
		MANAGERIAL IMPLICATION Checking Whether the Firm Is Maximizing Profit
		The Lerner Index
		Q&A 9.5
		Sources of Market Power
	9.3 Market Failure Due to Monopoly Pricing
		Q&A 9.6
	9.4 Causes of Monopoly
		Cost‐Based Monopoly
		Q&A 9.7
		Government Creation of Monopoly
		MINI‐CASE The Canadian Medical Marijuana Market
		MINI‐CASE Botox
	9.5 Advertising
		Deciding Whether to Advertise
		How Much to Advertise
		USING CALCULUS Optimal Advertising
		Q&A 9.8
		MINI‐CASE Super Bowl Commercials
	9.6 Internet Monopolies: Network Effects and Scale Economies
		Network Externalities
		MANAGERIAL IMPLICATION Introductory Prices
		Behavioral Network Externalities
		Two‐Sided Markets
		Natural Monopoly on the Internet
		MINI‐CASE Critical Mass and eBay
		Disruptive Technologies
		Managerial Solution Brand‐Name and Generic Drugs
		Summary
		Questions
Chapter 10 Pricing with Market Power
	MANAGERIAL PROBLEM Sale Prices
	10.1 Conditions for Price Discrimination
		Why Price Discrimination Pays
		MINI‐CASE Disneyland Pricing
		Which Firms Can Price Discriminate
		MANAGERIAL IMPLICATION Preventing Resale
		MINI‐CASE Preventing Resale of Designer Bags
		Not All Price Differences Are Price Discrimination
		Types of Price Discrimination
	10.2 Perfect Price Discrimination
		How a Firm Perfectly Price Discriminates
		Perfect Price Discrimination Is Efficient but Harms Some Consumers
		MINI‐CASE Botox Revisited
		Q&A 10.1
		Individual Price Discrimination
		MINI‐CASE Google Uses Bidding for Ads to Price Discriminate
	10.3 Group Price Discrimination
		Group Price Discrimination with Two Groups
		USING CALCULUS Maximizing Profit for a Group Discriminating Monopoly
		MINI‐CASE Age Discrimination
		Q&A 10.2
		Identifying Groups
		MANAGERIAL IMPLICATION Discounts
		Effects of Group Price Discrimination on Total Surplus
	10.4 Nonlinear Price Discrimination
	10.5 Two‐Part Pricing
		Two‐Part Pricing with Identical Consumers
		Two‐Part Pricing with Differing Consumers
		MINI‐CASE Available for a Song
	10.6 Bundling
		Pure Bundling
		Mixed Bundling
		Q&A 10.3
		Requirement Tie‐In Sales
		MANAGERIAL IMPLICATION Ties That Bind
	10.7 Peak‐Load Pricing
		MINI‐CASE Downhill Pricing
		Peak‐Load Pricing with a Capacity Constraint
		Dynamic Pricing
		Q&A 10.4
		Managerial Solution Sale Prices
		Summary
		Questions
Chapter 11 Oligopoly and Monopolistic Competition
	MANAGERIAL PROBLEM Gaining an Edge from Government Aircraft Subsidies
	11.1 Cartels
		Why Cartels Succeed or Fail
		MINI‐CASE Employer “No‐Poaching” Cartels
		Maintaining Cartels
		MINI‐CASE Cheating on the Maple Syrup Cartel
	11.2 Cournot Oligopoly
		Airlines
		USING CALCULUS Deriving the Cournot Equilibrium
		The Number of Firms
		MINI‐CASE Mobile Phone Number Portability
		Nonidentical Firms
		Q&A 11.1
		Q&A 11.2
		Mergers
		MINI‐CASE Airline Mergers
	11.3 Bertrand Oligopoly
		Identical Products
		Differentiated Products
		MANAGERIAL IMPLICATION Differentiating a Product Through Marketing
		MINI‐CASE Rising Market Power
	11.4 Monopolistic Competition
		MANAGERIAL IMPLICATION Managing in the Monopolistically Competitive Food Truck Market
		Equilibrium
		Q&A 11.3
		Profitable Monopolistically Competitive Firms
		MINI‐CASE Subsidizing the Entry Cost of Dentists
		Managerial Solution Gaining an Edge from Government Aircraft Subsidies
		Summary
		Questions
	Appendix 11A Nash‐Bertrand Equilibrium
Chapter 12 Game Theory and Business Strategy
	MANAGERIAL PROBLEM Dying to Work
	12.1 Oligopoly Games
		Dominant Strategies
		Best Responses
		Failure to Maximize Joint Profits
		MINI‐CASE Strategic Advertising
		Q&A 12.1
		Pricing Games in Two‐Sided Markets
	12.2 Types of Nash Equilibria
		Multiple Equilibria
		MINI‐CASE Cheap Talk in eBay’s Best Offer Market
		MINI‐CASE Timing Radio Ads
		Mixed‐Strategy Equilibria
		MINI‐CASE Competing E‐Book Formats
		Q&A 12.2
	12.3 Information and Rationality
		Incomplete Information
		MANAGERIAL IMPLICATION Solving Coordination Problems
		Rationality
		MANAGERIAL IMPLICATION Using Game Theory to Make Business Decisions
	12.4 Bargaining
		Bargaining Games
		The Nash Bargaining Solution
		Q&A 12.3
		USING CALCULUS Maximizing the Nash Product
		MINI‐CASE Nash Bargaining over Coffee
		Inefficiency in Bargaining
	12.5 Auctions
		Elements of Auctions
		Bidding Strategies in Private‐Value Auctions
		MINI‐CASE Experienced Bidders
		The Winner’s Curse
		MANAGERIAL IMPLICATION Auction Design
		Managerial Solution Dying to Work
		Summary
		Questions
Chapter 13 Strategies Over Time
	MANAGERIAL PROBLEM Intel and AMD’s Advertising Strategies
	13.1 Repeated Games
		Strategies and Actions in Dynamic Games
		Cooperation in a Repeated Prisoners’ Dilemma Game
		MINI‐CASE Tit‐for‐Tat Strategies in Trench Warfare
		Implicit Versus Explicit Collusion
		MINI‐CASE Signaling Drug Price Increases
		Finitely Repeated Games
	13.2 Sequential Games
		Stackelberg Oligopoly
		Q&A 13.1
		Credible Threats
		Q&A 13.2
	13.3 Deterring Entry
		Exclusion Contracts
		MINI‐CASE Pay‐for‐Delay Agreements
		Limit Pricing
		MINI‐CASE Pfizer Uses Limit Pricing to Slow Entry
		Q&A 13.3
		Entry Deterrence in a Repeated Game
	13.4 Cost and Innovation Strategies
		Investing to Lower Marginal Cost
		Learning by Doing
		Raising Rivals’ Costs
		Q&A 13.4
		MINI‐CASE Auto Union Negotiations
	13.5 Disadvantages of Moving First
		The Holdup Problem
		MINI‐CASE Venezuelan Nationalization
		MANAGERIAL IMPLICATION Avoiding Holdups
		Too‐Early Product Innovation
		MINI‐CASE Advantages and Disadvantages of Moving First
	13.6 Behavioral Game Theory
		Ultimatum Games
		MINI‐CASE GM’s Ultimatum
		Levels of Reasoning
		MANAGERIAL IMPLICATION Taking Advantage of Limited Strategic Thinking
		Managerial Solution Intel and AMD’s Advertising Strategies
		Summary
		Questions
	Appendix 13A A Mathematical Approach to Stackelberg Oligopoly
Chapter 14 Decision Making Under Uncertainty
	MANAGERIAL PROBLEM BP’s Risk and Limited Liability
	14.1 Assessing Risk
		Probability
		MINI‐CASE Risk of a Cyberattack
		Expected Value
		Q&A 14.1
		Variance and Standard Deviation
		MANAGERIAL IMPLICATION Summarizing Risk
	14.2 Attitudes Toward Risk
		Expected Utility
		Risk Aversion
		Q&A 14.2
		USING CALCULUS Diminishing Marginal Utility of Wealth
		MINI‐CASE Stocks’ Risk Premium
		Risk Neutrality
		Risk Preference
		MINI‐CASE Gambling
		Risk Attitudes of Managers
		Q&A 14.3
	14.3 Reducing Risk
		Obtaining Information
		MINI‐CASE Bond Ratings
		Diversification
		MANAGERIAL IMPLICATION Diversify Your Savings
		Insurance
		Q&A 14.4
		MINI‐CASE Flooded by Insurance Claims
	14.4 Investing Under Uncertainty
		Risk‐Neutral Investing
		Risk‐Averse Investing
		Q&A 14.5
		Oligopolistic R&D Investments Under Uncertainty
	14.5 Behavioral Economics and Uncertainty
		Biased Assessment of Probabilities
		MINI‐CASE Biased Estimates
		Violations of Expected Utility Theory
		Prospect Theory
		MANAGERIAL IMPLICATION Loss Aversion Contracts
		Managerial Solution BP’s Risk and Limited Liability
		Summary
		Questions
Chapter 15 Asymmetric Information
	MANAGERIAL PROBLEM Clawing Back Bonuses
	15.1 Adverse Selection
		Adverse Selection in Insurance Markets
		Products of Unknown Quality
		Q&A 15.1
		Q&A 15.2
		MINI‐CASE Reducing Consumers’ Information
	15.2 Reducing Adverse Selection
		Restricting Opportunistic Behavior
		Equalizing Information
		MANAGERIAL IMPLICATION Using Brand Names and Warranties as Signals
		MINI‐CASE Discounts for Data
		MINI‐CASE Adverse Selection and Remanufactured Goods
	15.3 Moral Hazard
		Moral Hazard in Insurance Markets
		Moral Hazard in Principal‐Agent Relationships
		MINI‐CASE Honest Cabbies?
		The Owner‐Manager Relationship
		MINI‐CASE Company Jets
		Q&A 15.3
	15.4 Using Contracts to Reduce Moral Hazard
		Fixed‐Fee Contracts
		Contingent Contracts
		Q&A 15.4
		MINI‐CASE Sing for Your Supper
		Q&A 15.5
	15.5 Using Monitoring to Reduce Moral Hazard
		Hostages
		MINI‐CASE Capping Oil and Gas Bankruptcies
		MANAGERIAL IMPLICATION Efficiency Wages
		After‐the‐Fact Monitoring
		Managerial Solution Clawing Back Bonuses
		Summary
		Questions
Chapter 16 Government and Business
	MANAGERIAL PROBLEM Licensing Inventions
	16.1 Market Failure and Government Policy
		The Pareto Principle
		Cost‐Benefit Analysis
	16.2 Regulation of Imperfectly Competitive Markets
		Regulating to Correct a Market Failure
		Q&A 16.1
		MINI‐CASE Natural Gas Regulation
		Regulatory Capture
		Applying the Cost‐Benefit Principle to Regulation
	16.3 Antitrust Law and Competition Policy
		Mergers
		MINI‐CASE Are Monopoly Mergers Harmful?
		Q&A 16.2
		Predatory Actions
		Vertical Relationships
		MINI‐CASE Piping Up About Exclusive Dealing
	16.4 Externalities
		MANAGERIAL IMPLICATION Disney Internalizes an Externality
	The Inefficiency of Competition with Externalities
		Reducing Externalities
		MINI‐CASE Pulp and Paper Mill Pollution and Regulation
		Q&A 16.3
		MINI‐CASE Why Tax Drivers
		The Coase Theorem
		MANAGERIAL IMPLICATION Buying a Town
	16.5 Open‐Access, Club, and Public Goods
		Open‐Access Common Property
		MINI‐CASE Spam
		Club Goods
		MINI‐CASE Piracy
		Public Goods
	16.6 Intellectual Property
		Patents
		Q&A 16.4
		MANAGERIAL IMPLICATION Trade Secrets
		Copyright Protection
		Managerial Solution Licensing Inventions
		Summary
		Questions
Chapter 17 Global Business
	MANAGERIAL PROBLEM Responding to Exchange Rates
	17.1 Reasons for International Trade
		Comparative Advantage
		Q&A 17.1
		MANAGERIAL IMPLICATION Brian May’s Comparative Advantage
		Increasing Returns to Scale
		MINI‐CASE Barbie Doll Varieties
	17.2 Exchange Rates
		Determining the Exchange Rate
		Exchange Rates and the Pattern of Trade
		MANAGERIAL IMPLICATION Limiting Arbitrage and Gray Markets
		Managing Exchange Rate Risk
	17.3 International Trade Policies
		Quotas and Tariffs in Competitive Markets
		MINI‐CASE Russian Food Ban
		Q&A 17.2
		Rent Seeking
		Noncompetitive Reasons for Trade Policy
		MINI‐CASE Protection of U.S. Steel, Aluminum, and Washing Machines
		Trade Liberalization and the World Trading System
		Trade Liberalization Problems
	17.4 Multinational Enterprises
		Becoming a Multinational
		MINI‐CASE What’s an American Car?
		International Transfer Pricing
		Q&A 17.3
		MINI‐CASE Profit Repatriation
	17.5 Outsourcing
		Managerial Solution Responding to Exchange Rates
		Summary
		Questions
Answers to Selected Questions
Definitions
References
Sources for Managerial Problems, Mini‐Cases, and Managerial Implications
Index
Credits