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									                       BUS 552 MANAGERIAL ECONOMICS

                          PROFESSOR DANIEL SHAPIRO

                                      FALL 2006


                                  Tel: 604.291.5155
                                  Fax: 604.291.5122
                                email: dshapiro@sfu.ca



PURPOSE

The purpose of this course is to introduce students to basic concepts in microeconomics
and to explore the relevance of economic reasoning to managerial decision-making, both
tactical and strategic. The importance of economic concepts, economic models and
quantitative applications will be emphasized and applied to problems regularly
encountered by managers. The goal is to make you a better manager, not an economist.
Although some material may refer to elementary calculus or statistics, the course material
will be presented in a simple and accessible way.

FORMAT

This course will follow a standard lecture format with discussion. Lectures are designed
to survey and complement the assigned readings. Participation and discussion are highly
encouraged.

GRADING

       1 group assignments (take-home)       25% (distributed Sept 26, due Oct 10)
       1 group assignments (take-home)       25% (distributed Oct 31, due Nov 14)
       1 individual assignment               20% (distributed Sept 19, due Nov 21)
       1 final examination                   30% (Nov 21)
                                             100%

Details regarding the assignments will be provided in class. Generally speaking no more
than 50% of students in total should expect a grade of A+, A, or A-.

TEXT & OTHER READINGS

Required Text: M. Baye, Managerial Economics and Business Strategy, Irwin, 2005,
      Fifth Edition. This is a fairly standard textbook that covers most of the topics we
      will consider. It links managerial economics to strategy.
Required Reading: The BUS 552 custom courseware package contains supplementary
      readings for each lecture (will be available at the SFU Harbour Centre
      Bookstore). Additional readings may be assigned. The supplemental readings
      have been chosen to augment material in the context, to introduce new material,
      or to provide applications of specific ideas. The most essential of these are
      indicated by a *.

Suggested Reading: From time to time I will provide or suggest other articles or books
      that you may find interesting and useful. Some of you will already have read
      Freakonomics, and we will use some of the examples from that book at various
      points in the course.


Lecture 1:     Introduction

This class provides an introduction to the scope and method of Managerial Economics as
well as a brief survey of the course material. Economists approach most problems by
assuming that resources are scarce, and that individual agents (people and firms) always
act in a rational way to maximize their net benefits. Accordingly, we will review
fundamental economic concepts such as scarcity, rationality, maximization and
incentives. These will be illustrated through the examples of consumer behaviour,
production analysis, and the theory of the firm. In each case, we will derive and
understand the idea that marginal something equals marginal something else. This will be
done when outcomes are certain, and when they are uncertain. We will also consider
recent challenges to the strict economic approach to rationality, referred to as behavioural
economics.

Readings:      Baye, Chapters 1, 5 (pages 157-165), 12 (pages 435-448)
               Economist: "An Economist Takes Tea with a Management Guru"
                           "Quacks and Coaches"
                           "Art or Science".
               Kotlikoff, “Are Economists Smarter?”, Economists’ Voice, 2006
               *Schrage, Interview with Daniel Kahneman, Strategy + Business, 2003
               *Quarls et al, “Love Your Dogs”, Strategy + Business, 2006


Lecture 2:     Markets and Market Failures

Markets are fundamental to the operation of most economies, and understanding markets
is critical for managers. In this class, we will examine the basic theory of supply and
demand, and its application when markets work well, and when they work less well
(market failures). We will examine in particular the operation of foreign exchange and
commodity markets, and the ways in which supply and demand analysis can be used to
understand public policy. Various market failures will be introduced and the appropriate
role of government will be discussed. We will focus in particular on the arguments in
favour of free trade, and the policy issues surrounding negative externalities, such as
carbon emissions.

Readings:      Baye, Chapters 2, 14 (pages 518-537)
               *Pindyck and Rubinfeld, “The Analysis of Competitive Markets”
               *Wheelan, “Government and the Economy”
               Seabright, The Company of Strangers, Chapters 1 (Who’s In Charge) and
               2 (Man and the Risks of Nature)
               Surowiecki, The Wisdom of Crowds, Chapter 1


Lecture 3:     Firms and Markets

Although it may not be intuitive, there is a connection between the way in which markets
work, and the size and scope of firms. When market transactions are costly, firms may
internalize transactions (for example through vertical integration). This session will focus
on transaction costs, a kind of market failure, and how they are related to the organization
of firms and markets. Transaction cost economics will be applied to questions relating to
the existence, vertical boundaries, and efficiency of firms. Specific topics to be discussed
include vertical integration, contracting out, outsourcing, and collaborative supply
relationships. In addition, we will explore the relationship between market failures and
firm strategies in emerging markets.

Readings:      Baye, Chapter 6 (pages 204-219)
               *Besanko, Dranove , Shanley Schaefer, “The Vertical Boundaries of the
               Firm”
               Gottfredson et al, “Strategic Sourcing” (HBR, 8878)
               *Anand, “Market Failures” (HBS #9-700-127, April 2000)
               Khanna and Palepu, “Whey Focused Strategies May be Wrong for
               Emerging Markets” (HBR, 97404)



Lecture 4:     Demand Analysis

We survey the basic concepts required for a systematic analysis of demand. Topics will
include analysis of the position and shifts in the demand curve, elasticities and the
relationship between demand and revenues. We will discuss the implications for pricing
decisions and other applications. Demand estimation and forecasting using regression
analysis will be reviewed, using beer as an example. Finally, we will examine the
consequences for demand and strategy when consumption decisions are interdependent
(network externalities), and when physical limitations on the number of goods sold are
removed (the Long Tail).

Readings:      Baye, Chapter 3
               *Kritzman , “What Practioners Need to Know About Regression”
               *Lee and Tremblay, "Advertising and the U.S. Market Demand for Beer"
               (skim for class, read more thoroughly later)
               Leibowitz and Marglolis, “Network Externalities”
               *Wikipedia, “Network Effects”
               Economist, “Wag the Dog”


Lecture 5:     Cost Analysis

We will discuss the basic concepts required for a systematic analysis of costs. The
importance of variable, fixed, and sunk costs will be discussed. Particular emphasis will
be placed on the concepts of economies of scale and economies of scope (synergies) and
their relation to the choice of plant size and firm size. The question of sub-optimal scale
will be addressed, as well as the relationship between scale of plant and market structure,
and the role of the learning curve. These topics will be discussed in the context of
diversification strategies and the means to achieve them (merger).

Readings:      Baye, Chapter 5 (177-191).
               *Samuelson and Marks, “Cost Analysis”
               Wallstein, “The Economic Costs of the Iraq War”, Economists’ Voice,
               2006
               *Laseter et al, The Big, the Bad and the Beautiful”, Strategy + Business,
               Amel et. al. “Consolidation and Efficiency in the Financial Sector” (you
               need only browse this article, noting in particular the discussion of
               economies of scale and scope)
               *Piskorski, “Notes on Corporate Strategy” (HBS 9-705-449)


Lecture 6:     Market Structure and Strategy 1: Perfect (and Almost Perfect)
               Competition and Monopoly (or Near Monopoly)

We begin a comprehensive analysis of firm behaviour and strategic choices in different
market settings by defining what is meant by market structure, and how market structures
are related to business strategy. We first examine and contrast two extreme (and mostly
non-existent) market structures: perfect competition and monopoly. We then use these as
benchmarks to examine the consequences of market structures where there are many
firms, or a single dominant firm. We will examine the rationale for anti-trust policy, the
rationale for socially sanctioned monopoly power in the form of intellectual property
protection, and the debate over whether competitive market structures are more likely to
foster innovative activity. Finally, we will examine how industry structure changes over
time.

Readings:      Baye, Chapters 7, 8
               *McGahan, “How Industries Change”, HBR, R0410E,
               *Huyett and Viguerie, “Extreme Competition”, McKinsey Quarterly, 2005
               Boldrin and Levine, “Why Napster is Right”
               Economist, “A Market for Ideas”, Oct. 2005


Lecture 7:     Market Structure and Strategy 2: Oligopoly

When competing firms are few in number (oligopoly), the recognition of mutual
interdependence drives competition. The classic theories of oligopoly will be examined,
as well as newer game-theoretic models. This class is devoted to problems where firms
make simultaneous choices, with specific emphasis on price and non-price competition,
as well as strategic issues such as standards competition.

Readings:      Baye, Chapter 9 (browse sections on Stackelberg models and those using
               isoprofit curves; read the Appendix)
                       Chapter 10 (pages 352-378).
                       Chapter 11 (pages 397-410).
               *Brandenburger and Nalebuff, “The Right Game: Use Game Theory to
                       Shape Strategy” (HBR reprint #95402)
               *Ho and Weigelt, “Game Theory and Competitive Strategy”


Lecture 8:     Market Structure and Strategy 3: Oligopoly, Part 2

We continue the analysis of oligopoly markets begun in the previous session, and extend
it to include games in which one firm moves first. We discuss strategic issues arising
from sequential actions, with particular emphasis on the issues of entry, entry-deterrence,
and first-mover advantages. The importance of credibility and commitment will be
discussed in both national and international contexts.

Readings:      Baye, Chapter 9: Re-read the sections on Stackelburg models (pages 332-
                        336)
                      Chapter 10 (pages 378-387)
                      Chapter 13
               Markides and Geroski, “Teaching Elephants How to Dance”, Business
               Strategy Review, 2003
               De Vries and Hendrikse, “The Dutch Banking Chipcard Game” (2001)
               *Finkelstein, “First Mover Advantage for Internet Start-Ups”


Lecture 9:     Topics in Pricing

Firms adopt a broad range of pricing strategies, ranging from one fixed price charged to
all customers, to dynamic prices set through auctions. We consider the rationale for
pricing strategies such as the various forms price discrimination, including bundling, and
versioning. We also examine the particular problems of internet pricing, and the
characteristics of various types of auctions.
Readings:     Baye, Chapter 11: 404-427
                      Chapter 12: 455-466
              *Shapiro and Varian “Versioning: The Smart Way to Sell Information”
              *Ellison and Ellison, “Lessons About Markets from the Internet” (I
              recommend all of it, but if you find it too long, focus on the section on
              Frictionless Commerce)
              McAfee, “Auctions” (Chapter 12 of Competitive Solutions)
              *Evans, “Managing the Maze of Multisided Markets” Strategy + Business
              32


Lecture 10:   Asymmetric Information and Incentives

Problems of asymmetric information arise when one party to a transaction possesses
relatively more information about themselves, their product, or their actions. Information
asymmetry creates particular problems known as moral hazard and adverse selection.
These can affect market outcomes in negative ways. We discuss the strategic issues
arising out of markets with information asymmetry. As a particular application we shall
examine the principal-agent relationship and its importance for the firm. Topics will
include corporate governance and incentives, and the problem of CEO pay.

Readings:     Baye, Chapter 6 (pages 220-229)
                    *Besanko et al, “Agency and Performance Measurement”
                    *Brickley et al, “Incentive Conflicts and Contracts” and “Incentive
                    Compensation” (these readings are similar to Besanko, so you
                    might find it sufficient to browse them)
                    Bebchuk and Fried, “Pay Without Performance”, Academy of
                    Management Perspectives, 2006

Lecture 11 (bonus): Country Analysis and Competitiveness

We conclude the course by examining the economic nature of country competitiveness.
Although countries do not compete, some are more successful. We will examine the
measures and determinants of that success, with a particular focus on productivity growth
and it relation to the growth of income per capita. We will also examine the importance
of international trade and the balance of payments. Finally, we will explore the
importance of locational clusters as a determinant of country-specific industry
advantages.

Readings:
              *OECD, Economic Survey of Canada, 2006
              *Martin and Porter, “Canadian Competitiveness”
              *Kaci, Understanding Productivity: A Primer”
              Pilat, “Canada’s Productivity Performance in International Perspective”
              *Snowdon and Stonehouse, Interview with Michael Porter on
              Competitiveness, Journal of International Business Studies, 2006

								
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