Managerial Economics: Applications, Strategy, and Tactics

Cover Page......Page 1
Title Page......Page 4
Copyright Page......Page 6
Dedication......Page 7
Preface......Page 18
About the Authors......Page 22
Brief TABLE OF CONTENTS......Page 8
Contents......Page 9
PART I INTRODUCTION......Page 25
Managerial Challenge: How to Achieve Sustainability: Southern Company......Page 26
What is Managerial Economics?......Page 28
The Decision-Making Model......Page 29
The Role of Profits......Page 30
Objective of the Firm......Page 32
Separation of Ownership and Control: The Principal-Agent Problem......Page 33
Implications of Shareholder Wealth Maximization......Page 37
What Went Right/What Went Wrong: Eli Lilly Depressed by Loss of Prozac Patent......Page 38
Summary......Page 43
Exercises......Page 44
Case Exercise: Designing a Managerial Incentives Contract......Page 45
Case Exercise: Shareholder Value of Wind Power at Hydro Co.: RE < C......Page 47
Managerial Challenge: Why Charge $25 per Bag on Airline Flights?......Page 50
Demand and Supply: A Review......Page 51
Marginal Analysis......Page 65
The Net Present Value Concept......Page 69
Meaning and Measurement of Risk......Page 73
What Went Right/What Went Wrong: Long-Term Capital Management (LTCM)......Page 77
Risk and Required Return......Page 78
Exercises......Page 80
Case Exercise: Revenue Management at American Airlines......Page 82
PART II DEMAND AND FORECASTING......Page 84
Managerial Challenge: Health Care Reform and Cigarette Taxes......Page 85
Demand Relationships......Page 87
The Price Elasticity of Demand......Page 92
International Perspectives: Free Trade and the Price Elasticity of Demand: Nestlé Yogurt......Page 105
The Income Elasticity of Demand......Page 106
Cross Elasticity of Demand......Page 110
The Combined Effect of Demand Elasticities......Page 112
Summary......Page 113
Exercises......Page 114
Case Exercise: Polo Golf Shirt Pricing......Page 116
Managerial Challenge: Global Warming and the Demand for Public Transportation......Page 118
Estimating Demand Using Marketing Research Techniques......Page 121
Statistical Estimation of the Demand Function......Page 122
A Simple Linear Regression Model......Page 124
Using the Regression Equation to Make Predictions......Page 129
Multiple Linear Regression Model......Page 137
Summary......Page 141
Exercises......Page 142
Case Exercise: Soft Drink Demand Estimation......Page 146
Introduction......Page 149
Nonlinear Regression Models......Page 155
Exercises......Page 158
Managerial Challenge: Excess Fiber Optic Capacity at Global Crossing Inc.......Page 160
Selecting a Forecasting Technique......Page 162
What Went Right / What Went Wrong: Crocs Shoes......Page 163
Deterministic Trend Analysis......Page 164
Smoothing Techniques......Page 170
Barometric Techniques......Page 177
Survey and Opinion-Polling Techniques......Page 178
Econometric Models......Page 182
Stochastic Time-Series Analysis......Page 186
Forecasting with Input-Output Tables......Page 189
Summary......Page 190
Exercises......Page 191
Case Exercise: Cruise Ship Arrivals in Alaska......Page 195
Case Exercise: Lumber Price Forecast......Page 196
Managerial Challenge: Financial Crisis Crushes U.S. Household Consumption and Business Investment: Will Exports to China Provide the Way Out?......Page 198
Introduction......Page 201
Import-Export Sales and Exchange Rates......Page 202
International Perspectives: Collapse of Export and Domestic Sales at Cummins Engine......Page 204
Outsourcing......Page 206
China Trade Blossoms......Page 208
The Market for U.S. Dollars as Foreign Exchange......Page 210
Determinants of Long-Run Trends in Exchange Rates......Page 214
Purchasing Power Parity......Page 218
What Went Right / What Went Wrong: GM, Toyota, and the Celica GT-S Coupe......Page 222
International Trade: A Managerial Perspective......Page 227
Free Trade Areas: The European Union and NAFTA......Page 237
Largest U.S. Trading Partners: The Role of NAFTA......Page 240
Perspectives on the U.S. Trade Deficit......Page 245
Summary......Page 247
Exercises......Page 248
Case Exercise: Elaborate the Debate on NAFTA......Page 249
6A Foreign Exchange Risk Management......Page 250
PART III PRODUCTION AND COST......Page 252
Managerial Challenge: Green Power Initiatives Examined: What Went Wrong in California’s Deregulation of Electricity?......Page 253
The Production Function......Page 255
Production Functions with One Variable Input......Page 258
What Went Right / What Went Wrong: Factory Bottlenecks at a Boeing Assembly Plant......Page 260
Determining the Optimal Use of the Variable Input......Page 265
Production Functions with Multiple Variable Inputs......Page 266
Determining the Optimal Combination of Inputs......Page 271
A Fixed Proportions Optimal Production Process......Page 273
Measuring the Efficiency of a Production Process......Page 275
Returns to Scale......Page 276
Summary......Page 282
Exercises......Page 283
Case Exercise: The Production Function for Wilson Company......Page 286
7A Maximization of Production Output Subject to a Cost Constraint......Page 288
Exercise......Page 289
Renewable Resources......Page 290
Exhaustible Natural Resources......Page 293
Exercises......Page 297
Managerial Challenge: US Airways Cost Structure......Page 298
The Meaning and Measurement of Cost......Page 299
Short-Run Cost Functions......Page 304
Long-Run Cost Functions......Page 309
Economies and Diseconomies of Scale......Page 310
International Perspectives: How Japanese Companies Deal with the Problems of Size......Page 315
Exercises......Page 318
Case Exercise: Cost Analysis......Page 321
8A Long-Run Costs with a Cobb-Douglas Production Function......Page 324
Exercises......Page 327
Managerial Challenge: How Exactly Have Computerization and Information Technology Lowered Costs at Chevron, Timken, and Merck?......Page 328
Estimating Cost Functions......Page 329
What Went Right / What Went Wrong: Boeing: The Rising Marginal Cost of Wide-Bodies......Page 332
Break-Even Analysis......Page 340
Summary......Page 350
Exercises......Page 351
Case Exercise: Cost Functions......Page 353
Case Exercise: Charter Airline Operating Decisions......Page 354
PART IV PRICING AND OUTPUT DECISIONS: STRATEGY AND TACTICS......Page 356
Managerial Challenge: Resurrecting Apple......Page 357
Introduction......Page 358
Competitive Strategy......Page 359
What Went Right / What Went Wrong: Xerox......Page 360
Porter’s Five Forces Strategic Framework......Page 365
A Continuum of Market Structures......Page 375
Price-Output Determination under Pure Competition......Page 378
Price-Output Determination under Monopolistic Competition......Page 384
What Went Right / What Went Wrong: The Dynamics of Competition at Amazon.com......Page 385
Selling and Promotional Expenses......Page 386
Competitive Markets under Asymmetric Information......Page 391
Solutions to the Adverse Selection Problem......Page 395
Summary......Page 400
Exercises......Page 401
Case Exercise: Blockbuster, Netflix, and Redbox Compete for Movie Rentals......Page 403
Case Exercise: Saving Sony Music......Page 404
Managerial Challenge: Dominant Microprocessor Company Intel Adapts to Next Trend......Page 405
Sources of Market Power for a Monopolist......Page 406
What Went Right / What Went Wrong: Pilot Error at Palm......Page 410
Price and Output Determination for a Monopolist......Page 411
The Optimal Markup, Contribution Margin, and Contribution Margin Percentage......Page 416
Regulated Monopolies......Page 420
The Economic Rationale for Regulation......Page 423
Summary......Page 425
Exercises......Page 426
Case Exercise: Differential Pricing of Pharmaceuticals: The HIV / AIDS Crisis......Page 429
Managerial Challenge: Are Nokia’s Margins on Cell Phones Collapsing?......Page 432
Oligopolistic Market Structures......Page 434
Interdependencies in Oligopolistic Industries......Page 438
Cartels and Other Forms of Collusion......Page 440
International Perspectives: The OPEC Cartel......Page 445
Price Leadership......Page 452
Avoiding Price Wars......Page 457
What Went Right / What Went Wrong: Good-Better-Best Product Strategy at Kodak and Marriott......Page 460
Exercises......Page 463
Case Exercise: Cell Phones Displace Mobile Phone Satellite Networks......Page 465
Managerial Challenge: Large-Scale Entry Deterrence of Low-Cost Discounters: Southwest, People Express, Value Jet, Kiwi, and JetBlue......Page 467
Oligopolistic Rivalry and Game Theory......Page 468
Analyzing Simultaneous Games......Page 473
The Escape from Prisoner’s Dilemma......Page 478
Analyzing Sequential Games......Page 487
Business Rivalry as a Self-Enforcing Sequential Game......Page 490
Credible Threats and Commitments......Page 494
Mechanisms for Establishing Credibility......Page 495
Replacement Guarantees......Page 496
Summary......Page 503
Exercises......Page 504
Case Exercise: International Perspectives: The Superjumbo Dilemma......Page 508
Pre-commitments Using Non-Redeployable Assets......Page 511
Customer Sorting Rules......Page 514
Tactical Insights about Slippery Slopes......Page 518
Exercises......Page 520
Managerial Challenge: Pricing of Apple Computers: Market Share versus Current Profitability......Page 522
A Conceptual Framework for Proactive, Systematic-Analytical, Value-Based Pricing......Page 523
Optimal Differential Price Levels......Page 526
Differential Pricing in Target Market Segments......Page 535
What Went Right / What Went Wrong:Price-Sensitive Customers Redeem......Page 540
Pricing in Practice......Page 546
The Practice of Revenue Management, Advanced Material......Page 552
Summary......Page 563
Exercises......Page 564
PART 5 VORGANIZATIONAL ARCHITECTURE AND REGULATION......Page 568
Managerial Challenge: Controlling the Vertical: Ultimate TV......Page 569
The Role of Contracting in Cooperative Games......Page 570
Corporate Governance and the Problem of Moral Hazard......Page 576
What Went Right / What Went Wrong: Moral Hazard and Holdup at Enron and WorldCom......Page 579
The Principal-Agent Model......Page 580
What Went Right / What Went Wrong: Why Have Restricted Stock Grants Replaced Executive Stock Options at Microsoft?......Page 585
Choosing the Efficient Organizational Form......Page 587
What Went Right / What Went Wrong: Cable Allies Refuse to Adopt Microsoft’s WebTV as an Industry Standard......Page 590
International Perspectives: Economies of Scale and International Joint Ventures in Chip Making......Page 591
Vertical Integration......Page 594
What Went Right / What Went Wrong: Dell Replaces Vertical Integration with Virtual Integration......Page 596
Summary......Page 598
Exercises......Page 599
Case Exercise: The Division of Investment Banking Fees in a Syndicate......Page 601
Optimal Mechanism Design......Page 603
First-Come, First-Served versus Last-Come, First-Served......Page 604
Auctions......Page 606
Incentive-Compatible Revelation Mechanisms......Page 621
International Perspectives: Joint Venture in Memory Chips: IBM, Siemens, and Toshiba......Page 626
Summary......Page 628
Exercises......Page 630
Case Exercise: Debugging Computer Software: Intel......Page 631
Managerial Challenge: Cap and Trade, Deregulation, and the Coase Theorem......Page 633
The Regulation of Market Structure and Conduct......Page 634
Antitrust Regulation Statutes and Their Enforcement......Page 637
Antitrust Prohibition of Selected Business Decisions......Page 640
Command and Control Regulatory Constraints: An Economic Analysis......Page 645
What Went Right / What Went Wrong: The Need for a Regulated Clearing house to Control Counterparty Risk at AIG......Page 648
Regulation of Externalities......Page 649
Governmental Protection of Business......Page 656
The Optimal Deployment Decision: To License or Not......Page 657
What Went Right / What Went Wrong: Delayed Release at Aventis......Page 658
What Went Right / What Went Wrong: Technology Licenses Cost Palm Its Leadin PDAs......Page 660
What Went Right / What Went Wrong: Motorola: What They Didn’t Know Hurt Them......Page 661
Summary......Page 663
Exercises......Page 664
Case Exercise: Music Recording Industry Blocked from Consolidating......Page 666
Managerial Challenge: Multigenerational Effects of Ozone Depletion and Greenhouse Gases......Page 667
The Capital Budgeting Process......Page 670
Estimating the Firm’s Cost of Capital......Page 676
Cost-Benefit Analysis......Page 681
Objectives and Constraints in Cost-Benefit Analysis......Page 683
Analysis and Valuation of Benefits and Costs......Page 685
The Appropriate Rate of Discount......Page 686
Cost-Effectiveness Analysis......Page 687
Summary......Page 689
Exercises......Page 690
Case Exercise: Cost-Benefit Analysis......Page 693
Case Exercise: Industrial Development Tax Relief and Incentives......Page 695
A The Time Value of Money......Page 696
B Tables......Page 702
C Differential Calculus Techniques in Management......Page 713
D Check Answers to Selected End-of-Chapter Exercises......Page 731
Glossary......Page 733
Index......Page 740
Notes......Page 753