Managerial economics and strategy jeffey perloft

Managerial Economics and Strategy www.downloadslide.com THE P E ARS O N S ER IES IN EC ON OM IC S Abel/Bernanke/Croushore Macroeconomics* Froyen Macroeconomics Bade/Parkin Foundations of Economics* Fusfeld The Age of the Economist Berck/Helfand The Economics of the Environment Gerber International Economics* Laidler The Demand for Money Leeds/von Allmen The Economics of Sports Leeds/von Allmen/Schiming Economics* Lipsey/Ragan/Storer Economics* Lynn Economic Development: Theory and Practice for a Divided World Miller Economics Today* Understanding Modern Economics Miller/Benjamin The Economics of Macro Issues Miller/Benjamin/North The Economics of Public Issues Mills/Hamilton Urban Economics González-Rivera Forecasting for Economics and Business Bierman/Fernandez Game Theory with Economic Applications Gordon Macroeconomics* Blanchard Macroeconomics* Greene Econometric Analysis Blau/Ferber/Winkler The Economics of Women, Men, and Work Gregory Essentials of Economics Boardman/Greenberg/ 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Williamson Macroeconomics Visit www.myeconlab.com to learn more www.downloadslide.com Managerial Economics and Strategy Jeffrey M Perloff University of California, Berkeley James A Brander Sauder School of Business, University of British Columbia Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo www.downloadslide.com For Jackie, Lisa, Barbara, and Cathy Editor-in-Chief: Donna Battista Executive Acquisitions Editor: Adrienne D’Ambrosio Editorial Project Manager: Sarah Dumouchelle Editorial Assistant: Elissa Senra-Sargent Executive Marketing Manager: Lori DeShazo Managing Editor: Jeff Holcomb Senior Production Project Manager: Meredith Gertz Senior Procurement Specialist: Carol Melville Art Director: Jonathan Boylan Cover Designer: John Christiana Cover Image: Artisilense/Shutterstock Image Manager: Rachel Youdelman Photo Research: Integra Software Services, Ltd Associate Project Manager—Text Permissions: Samantha Blair Graham Text Permissions Research: Electronic Publishing Services Director of Media: Susan Schoenberg Content Leads, MyEconLab: Noel Lotz and Courtney Kamauf Executive Media Producer: Melissa Honig Project Management and Text Design: Gillian Hall, The Aardvark Group Composition and Illustrations: Laserwords Maine Copyeditor: Rebecca Greenberg Proofreader: Holly McLean-Aldis Indexer: John Lewis Printer/Binder: RR Donnelley Cover Printer: Lehigh Phoenix Text Font: Palatino Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text or on page E-51 Copyright © 2014 by Pearson Education, Inc All rights reserved Manufactured in the United States of America This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458, or you may fax your request to 201-236-3290 Many of the designations by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Perloff, Jeffrey M Managerial economics and strategy/Jeffrey Perloff, James Brander — First edition pages cm Includes bibliographical references and index ISBN 978-0-321-56644-7 Managerial economics I Brander, James A II Title HD30.22.P436 2014 338.5024’658 — dc23 2013022387 10 www.pearsonhighered.com ISBN 10: 0-321-56644-0 ISBN 13: 978-0-321-56644-7 www.downloadslide.com Brief Contents Preface xiii Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Introduction Supply and Demand Empirical Methods for Demand Analysis 42 Consumer Choice 85 Production 124 Costs 154 Firm Organization and Market Structure 193 Competitive Firms and Markets 232 Monopoly 273 Pricing with Market Power 311 Oligopoly and Monopolistic Competition 354 Game Theory and Business Strategy 389 Strategies over Time 428 Managerial Decision Making Under Uncertainty 464 Asymmetric Information 500 Government and Business 533 Global Business 573 Answers to Selected Questions E-1 Definitions E-13 References E-18 Sources for Managerial Problems, Mini-Cases, and Managerial Implications E-24 Index E-32 Credits E-51 v www.downloadslide.com Contents Preface Chapter 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 Summary Chapter 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 MINI-CASE Aggregating the Demand for Broadband Service 2.2 Supply The Supply Curve The Supply Function Summing Supply Curves 2.3 Market Equilibrium Using a Graph to Determine the Equilibrium Using Algebra to Determine the Equilibrium Forces That Drive the Market to Equilibrium 2.4 Shocks to the Equilibrium Effects of a Shift in the Demand Curve Effects of a Shift in the Supply Curve Q&A 2.1 MANAGERIAL IMPLICATION Taking Advantage of Future Shocks Effects of Shifts in Both Supply and Demand Curves MINI-CASE Genetically Modified Foods Q&A 2.2 vi xiii 1 2 3 4 5 7 10 13 14 14 15 15 16 17 18 18 18 19 20 21 21 21 22 23 24 24 25 2.5 Effects of Government Interventions Policies That Shift Curves MINI-CASE Occupational Licensing Price Controls MINI-CASE Disastrous Price Controls Sales Taxes Q&A 2.3 MANAGERIAL IMPLICATION Cost Pass- 26 26 26 27 29 31 33 Through 34 2.6 When to Use the Supply-and-Demand Model 34 MANAGERIAL SOLUTION Carbon Taxes 36 Summary 37 ■ Questions 38 Chapter Empirical Methods for Demand Analysis 42 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 USING CALCULUS The Point Elasticity of Demand Q&A 3.2 Elasticity Along the Demand Curve Other Demand Elasticities MINI-CASE Substitution May Save Endangered Species Demand Elasticities over Time Other Elasticities Estimating Demand Elasticities MINI-CASE Turning Off the Faucet 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 R2 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 42 43 44 45 45 47 47 47 50 51 52 52 52 53 53 54 55 60 61 61 62 63 63 63 64 65 www.downloadslide.com Contents 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 80 ■ Questions 81 Appendix The Excel Regression Tool Chapter Consumer Choice MINI-CASE How You Ask the Question Matters 66 67 67 67 69 71 73 74 74 76 77 84 85 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 85 87 87 88 89 95 95 96 96 97 98 98 100 101 Consumer Choices to Relocate Summary 118 ■ Questions 119 Appendix 4A The Marginal Rate of Substitution Appendix 4B The Consumer Optimum Chapter Production 116 122 122 124 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 A Semiconductor Isoquant Substituting Inputs Q&A 5.2 USING CALCULUS Cobb-Douglas Marginal Products 5.4 Returns to Scale Constant, Increasing, and Decreasing Returns to Scale 102 102 102 102 103 103 105 Manufacturing Varying Returns to Scale 110 110 113 113 113 116 MANAGERIAL SOLUTION Paying Employees Q&A 5.3 MINI-CASE Returns to Scale in U.S 106 107 108 114 115 MANAGERIAL IMPLICATION Simplifying 101 MANAGERIAL IMPLICATION Designing Promotions 4.5 Deriving Demand Curves 4.6 Behavioral Economics Tests of Transitivity Endowment Effects Salience vii MANAGERIAL IMPLICATION Small Is Beautiful 5.5 Productivity and Technological Change Relative Productivity MINI-CASE U.S Electric Generation Efficiency Innovation MINI-CASE Tata Nano’s Technical and Organizational Innovations MANAGERIAL SOLUTION Labor Productivity During Recessions Summary 150 ■ Questions 151 Chapter Costs 124 125 127 127 128 128 129 129 129 132 133 134 134 137 138 139 141 141 141 143 143 145 146 146 146 147 147 148 149 154 MANAGERIAL PROBLEM Technology Choice at Home Versus Abroad 154 www.downloadslide.com viii Contents 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 155 155 156 157 157 158 MANAGERIAL IMPLICATION Ignoring Sunk Costs 6.2 Short-Run Costs Common Measures of Cost USING CALCULUS Calculating Marginal Cost Cost Curves Production Functions and the Shapes of Cost Curves USING CALCULUS Calculating Cost Curves Short-Run Cost Summary 6.3 Long-Run Costs Input Choice MANAGERIAL IMPLICATION Cost Minimization by Trial and Error MINI-CASE The Internet and Outsourcing Q&A 6.2 The Shapes of Long-Run Cost Curves MINI-CASE Economies of Scale in Nuclear Power Plants Q&A 6.3 Long-Run Average Cost as the Envelope of Short-Run Average Cost Curves MINI-CASE Long-Run Cost Curves in Beer Manufacturing and Oil Pipelines 6.4 The Learning Curve MINI-CASE Learning by Drilling 6.5 The Costs of Producing Multiple Goods MINI-CASE Scope MANAGERIAL SOLUTION Technology Choice at Home Versus Abroad Summary 187 ■ Questions 187 Appendix Long-Run Cost Minimization 159 159 159 161 161 163 166 167 168 168 173 174 175 176 178 179 180 181 182 183 184 185 185 192 Chapter Firm Organization and Market Structure 193 MANAGERIAL PROBLEM Clawing Back Bonuses 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 193 195 195 197 197 199 199 199 200 201 202 202 Profit over Time 204 MANAGERIAL IMPLICATION Stock Prices Versus Profit 7.3 Owners’ Versus Managers’ Objectives Consistent Objectives Q&A 7.2 Conflicting Objectives Q&A 7.3 MINI-CASE Company Jets Monitoring and Controlling a Manager’s Actions Takeovers and the Market for Corporate Control MINI-CASE The Yahoo! Poison Pill 7.4 The Make or Buy Decision Stages of Production Vertical Integration Profitability and the Supply Chain Decision MINI-CASE Vertical Integration at American Apparel MINI-CASE Aluminum Market Size and the Life Cycle of a Firm 7.5 Market Structure The Four Main Market Structures Comparison of Market Structures Road Map to the Rest of the Book MANAGERIAL SOLUTION Clawing Back Bonuses Summary 226 ■ Questions 227 Appendix Interest Rates, Present Value, and Future Value 204 205 205 207 208 209 210 211 212 214 214 215 215 217 218 219 221 222 222 224 224 225 230 Chapter Competitive Firms and Markets 232 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 Oil, Oil Sands, and Oil Shale Shutdowns 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 232 233 234 235 236 236 239 240 240 242 243 244 246 247 247 248 248 www.downloadslide.com Contents The Long-Run Market Supply Curve MINI-CASE Fast-Food Firms’ Entry in Russia MINI-CASE Upward-Sloping Long-Run Supply Curve for Cotton Long-Run Competitive Equilibrium Zero Long-Run Profit with Free Entry 8.4 Competition Maximizes Economic Well-Being Consumer Surplus MANAGERIAL IMPLICATION Willingness to Pay on eBay Producer Surplus Q&A 8.2 Q&A 8.3 Competition Maximizes Total Surplus MINI-CASE The Deadweight Loss of Christmas Presents Effects of Government Intervention Q&A 8.4 MANAGERIAL SOLUTION The Rising Cost of Keeping On Truckin’ Summary 268 ■ Questions 248 249 251 252 254 254 255 257 258 260 261 262 264 265 266 267 269 Chapter Monopoly 273 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 ProfitMaximizing Output Effects of a Shift of the Demand Curve 9.2 Market Power Market Power and the Shape of the Demand Curve MANAGERIAL IMPLICATION Checking Whether the Firm Is Maximizing Profit MINI-CASE Cable Cars and Profit Maximization The Lerner Index MINI-CASE Apple’s iPad Q&A 9.2 Sources of Market Power 9.3 Market Failure Due to Monopoly Pricing Q&A 9.3 9.4 Causes of Monopoly Cost-Based Monopoly Q&A 9.4 Government Creation of Monopoly MINI-CASE Botox 273 275 275 278 279 280 281 283 283 285 285 286 286 287 288 289 289 9.5 Advertising Deciding Whether to Advertise How Much to Advertise USING CALCULUS Optimal Advertising Q&A 9.5 MINI-CASE Super Bowl Commercials 9.6 Networks, Dynamics, and Behavioral Economics Network Externalities Network Externalities and Behavioral Economics Network Externalities as an Explanation for Monopolies MINI-CASE Critical Mass and eBay MANAGERIAL IMPLICATION Introductory Prices MANAGERIAL SOLUTION Brand-Name and Generic Drugs Summary 307 ■ Questions 307 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 Dynamic Pricing at Amazon 10.3 Group Price Discrimination Group Price Discrimination with Two Groups USING CALCULUS Maximizing Profit for a Group Discriminating Monopoly MINI-CASE Reselling Textbooks Q&A 10.2 Identifying Groups MANAGERIAL IMPLICATION Discounts 290 292 293 294 295 296 297 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 ix 298 299 299 300 301 301 302 302 303 304 304 305 305 311 311 313 313 315 315 316 317 317 318 318 318 319 321 322 323 324 324 325 326 328 328 330 331 332 333 335 335 337 338 www.downloadslide.com E-42 Index Market structures comparing properties of, 224–225 government intervention and, 536 overview of, 222 types of, 222–224 Market supply curves, for long-run firm cotton example, 251–252 entry and exit and, 248–250 for firms that differ, 251 for identical firms and free entry, 250–251 for limited entry, 251 overview of, 248 Market supply curves, for short-run firm competitive equilibrium and, 246–247 for firms that differ, 245–246 for identical firms, 244–245 overview of, 244 Markets competitive see Competitive firms/ markets for corporate control (takeovers and), 212–214 decision making and, market size and life cycle of firms, 221–222 monopolies see Monopolies Monopolistic competition see Monopolistic competition oligopolies see Oligopolies Materials (M), as production input, 125 Maximin strategies, bounded rationality and, 410–411 MBA program, opportunity cost of, 156–157 MC (marginal cost) see Marginal cost (MC) Mergers acquisition compared with, 374 hospital example, 546 reasons for, 372–373 reducing free riding, 562 regulation of, 545 Microsoft acquisitions by, 374 applying to regression analysis using Excel, 56–59, 84 comparative advantage in analyzing Paul Allen’s value to, 578 Office as example of mixed bundling, 341 Works as example of pure bundling, 340 Minimum efficient scale, economies of scale, 380 Minimum wage laws (price floors), 29–30 Mixed bundles, 341–343 Mixed enterprises, 196 Mixed-strategy equilibria applying to competing e-book formats, 407–408 combining pure-strategy and mixedstrategy equilibria, 405–406 determining mixed strategy, 427 mixed-strategy only, 404–405 overview of, 403 MNEs (multinational enterprises) see Multinational enterprises (MNEs) Modeling agency, cartel example, 358–359 Models, see also Economic models Monitoring after-the-fact monitoring, 526 techniques for reducing moral hazard, 524 Monopolies advertising as means of shifting demand curve, 298–299 calculating optimal advertising, 300–301 causes of, 293 comparing market structures, 223–224 cost-based, 294–295 deadweight loss of, 291 deciding how much to advertise, 299–300 deciding whether to advertise, 299 drug prices related to patent protection, 273–274 government regulation of, 536 government-created, 296–298 group price discrimination vs singleprice monopoly, 332–333 iPad example, 288–289 Lerner Index and, 287–288 marginal revenue and price elasticity of demand, 279–280 marginal revenue in, 275–279 market failure and, 290–293 market power and shape of demand curve, 285–287 network externalities and, 302–306 noisy monopolies, 506–507 overview of, 274–275 price discrimination by, 315 as price setters, 35 profit maximization in, 275, 281–283 setting price or quantity, 280–281 shifts in demand curve impacting, 283–285 shutdown decisions, 282 sources of market power, 289–290 summary and review questions, 307–310 Monopolistic competition comparing market structures, 223–224 competitive equilibrium and, 379–380 gourmet food truck example, 378–379 overview of, 355, 378 price discrimination by, 315 profitability of, 380 subsidies to aircraft industry, 381–382 summary and review questions, 383–385 zoning laws as barrier to entry, 381 Monopsonies, 274 Moral hazard after-the-fact monitoring, 526 bonding, 524–525 contingent contracts, 519–523 contracts and productivity in agriculture, 522 contracts for reducing, 518 deferred payment, 525 doctor example, 517 efficiency wages, 526 fixed-fee contracts, 518–519 hostages for good behavior, 524–525 in insurance markets, 513 leased car example, 526–527 managerial incentives, 527–528 monitoring for reducing, 524 overview of, 501–502, 512–513 in principal-agent relations, 513–516 subprime loan example, 517–518 More-is-better property, consumer preferences, 88, 90 Mortgages CDOs and, 193–194, 225–226 limiting managerial incentives to reduce moral hazard, 527–528 moral hazard related to subprime loans, 517–518 Motorola, coordination problem example, 409–410 Movement along demand curves, 13, 21 Movement along supply curves, 16–17, 21 MPK (marginal product of capital) combining cost and production information, 172 substitutability of inputs and, 140 MPL (marginal product of labor) see Marginal product of labor (MPL) MR (marginal revenue) see Marginal revenue (MR) MRS (marginal rate of substitution) see Marginal rate of substitution (MRS) MRT (marginal rate of transformation), 100–101 MRTS (marginal rate of technical substitution) see Marginal rate of technical substitution (MRTS) Multinational enterprises (MNEs) becoming, 596–597 international transfer pricing, 597 overview of, 595–596 profit-maximizing transfer pricing, 597–599 tax avoidance, 599–601 Multivariate regression, 60–61 Mutual funds, as diversification strategy, 481–482 Mutually exclusive outcomes, probability and, 466 N NAFTA (North American Free Trade Agreement), 594–595 Names, changing firm name to deal with bad reputation issue, 510–511 Nano (from Tata Motors), example of innovation, 148–149 Nash, John, 361, 394–395, 403, 412 Nash bargaining solution applying to car purchase, 413 applying to coffee market, 414 overview of, 412–413 Nash equilibrium backward induction and, 438 best response as basis for, 394–396 combining pure-strategy and mixedstrategy, 405–406 Cournot oligopolies and, 361–362 investment strategy applied to worker safety, 420–421 levels of reasoning and, 456–457 maximization of joint profits in game theory, 396–400 mixed-strategy equilibria, 403–405 www.downloadslide.com Index multiple Nash equilibria, 401–402 prisoners’ dilemma game with two actions, 431–433 subgame-perfect Nash equilibrium, 437–438 types of, 400 Nash-Bertrand equilibrium applying to cola market, 387–388 with differentiated products, 376–377 with identical products, 375–376 Nash-Cournot equilibrium compared with, 376 overview of, 374–375 Nash-Cournot equilibrium algebraic approach to, 364–365 AMD (Advanced Micro Devices) example, 371 applying to airline duopoly, 362 differentiated products and, 370 effect of drop in marginal cost of one firm, 369–370 subsidies to aircraft industry and, 381–382 unequal costs in Cournot model, 368 Nationalization, holdup problem and, 450–452 Natural disasters, 485–486 Natural gas, regulation of, 540–542 Natural monopolies, 294–295 Negative externalities see also Externalities assigning property rights as means of controlling, 555–556 government intervention for social gain, 552 overview of, 548 related to driving, 555 social costs and, 550–551 spam as, 548 Network effect, consumer buying decision and, 10 Network externalities behavioral economics and, 303–304 direct and indirect effects, 303 examples, 304–306 monopolies and, 304 overview of, 302–303 Network scheduling game overview of, 401–402 Pareto criterion in, 402 Noisy monopolies, 506–507 Nonlinear price discrimination block pricing, 333–335 overview of, 333 types of price discrimination, 318 Nonprofit firms, 195–196 Nonuniform pricing bundling see Bundling peak-load prices see Peak-load prices price discrimination see Price discrimination profit maximization in monopolies and, 311–312 two-part pricing see Two-part pricing Normal goods, 51 Normative statements, in economic models, 5–6 North American Free Trade Agreement (NAFTA), 594–595 Nuclear power plants, economies of scale in, 178–179 Null hypothesis, 66–67 O Observable characteristics, in identifying consumer groups, 330–331 Occupational licensing, government policies impacting supply curve, 26 Oil see Fossil fuels Oligopolies advertising and, 398–400 airline duopoly, 361–362 airline ticket prices and, 366–367 algebraic approach to profitmaximizing output in airline duopoly, 364–365 Bertrand oligopoly, 374–375 calculus approach to marginal revenue in Cournot oligopoly, 365 cartels, 356 comparing market structures, 223–224 Cournot oligopolies, 360–361 Cournot oligopolies with many firms, 386 differentiated products in Bertrand model, 376–378 differentiated products in Cournot model, 368–372 graphing profit-maximizing output in airline duopoly, 362–364 identical products in Bertrand model, 375–376 maintaining cartels, 359–360 mergers and, 372–374 modeling agency example of a cartel, 358–359 monopolies and, 35 Nash-Bertrand equilibrium, 387–388 number of firms in Cournot oligopoly, 366 overview of, 354–355 price discrimination by, 315 Stackelberg oligopoly, 436–439 summary and review questions, 383–385 unequal costs in Cournot model, 368 why cartels fail, 358 why cartels form, 356–357 Oligopoly games best responses, 394–396 dominant strategies, 393–394 failure to maximize joint profits, 396–400 overview of, 392–393 OLS (ordinary least squares) see Ordinary least squares (OLS) Omitted variables, 70–71 OPEC (Organization of Petroleum Exporting Countries), 356, 543 Open source, alternatives to patents, 565 Open-access common property assigning property rights, 559 bridge toll example, 559 government regulation of, 559 overview of, 558–559 Opportunistic behavior adverse selection see Adverse selection E-43 moral hazard see Moral hazard restricting, 507–508 types of, 501 Opportunity costs costs of durable inputs, 157–158 MBA program example, 155–156 measuring, 200 overview of, 155–156 Opportunity set defined, 99 impact of income change on, 102–103 impact of price change on, 101 Optimal bundle consumer choice and, 103–104 indifference curves and, 106 Options (stock), moral hazard and, 520–521 Ordinal utility, 96 Ordinary least squares (OLS) LINEST (line estimate) function using, 64–65 regression analysis technique, 59–60 unbiased under mild conditions, 63 Organization of firms see Firm organization Organization of Petroleum Exporting Countries (OPEC), 356, 543 Organizational change, 148–150 Outputs converting inputs into, 125–126 determining how much to produce, 236–239 profit maximization in monopolies and, 280–283 profit maximization rules and, 200–202 quantity varying with price in profit maximization, 243 total surplus lowered when output reduced below competitive level, 263–265 Outsourcing global business and, 601–603 Internet and, 174–175 make/buy decisions and, 216 Overconfidence, biases in probability assessment, 490 Overhead, fixed costs, 159 Ownership conflicting objectives with managers, 208 consistent objectives with managers, 205 contingent rewards for aligning managerial objectives, 205–206 governance and, 199 liability and, 198 private, public, and nonprofit firms, 195–197 profit sharing for aligning managerial objectives, 206–207 structures of for-profit firms, 197–199 P Parallel (black) markets, price controls resulting in, 29 Pareto, Vilfredo, 535 Pareto criterion, in network scheduling game, 402 www.downloadslide.com E-44 Index Pareto efficient, 535 Pareto improvement, 535, 540 Pareto principle, 535 Partnerships, ownership structures of forprofit firms, 197 Pass-through, specific taxes and, 32–34 Patents advantages/disadvantages of, 564 alternatives to, 565 drug prices related to patent protection, 273–274 government-created monopolies resulting from, 296–298 licensing and, 533, 566–567 overview of, 563–564 prices and, 274 strategies for raising rivals costs, 448 Pattern contracts, 449 Pay-for-delay agreements, 442–443 Payoffs, in games, 391, 393 Peak-load prices hotels and, 344–345 types of nonuniform pricing, 312 Whistler Blackcomb ski resort example, 346 Perfect competition see also Competitive firms/markets characteristics of perfectly competitive markets, 234–235 comparing market structures, 222, 224 deviations from, 235–236 equilibrium and, 20 overview of, 233–234 price takers and, 34 Perfect price discrimination Botox example, 321–322 how firms perfectly price discriminate, 318–319 impact on consumers, 319–321 movie ticket example, 322–323 overview of, 318 Perfect substitutes, 136–137 Perfectly elastic demand curves, 49–50 Perfectly inelastic demand curves, 48, 50 Performance bonds, 525 Perquisites (perks), 210–211 Per-unit price, in two-part pricing, 335 Petroleum see Fossil fuels Pfizer, example of limit pricing to deter entry, 444 Piece-rate contracts productivity in agriculture and, 522 reducing moral hazard, 521 Piracy, example of rival good without exclusion, 560 Point elasticity of demand, 45–47 Point of view, game theory in decision making, 411 Poison pill, takeovers and, 213–214 Poison put, takeovers and, 213 Policies antitrust law and competition policies see Antitrust laws clawback policy, 193–194, 225–226 cost-benefit analysis of policies that benefit some but harm others, 536 international trade see International trade policies market failure and, 534–535 price ceilings (price cap), 537 that impact supply or demand curves, 26 Pollution Coase Theorem and, 556–557 developing nations as pollution havens, 594 emissions fees, 554–555 emissions standards, 553–554 government intervention for social gain, 552 pulp and paper mill example, 553 social cost of, 549 welfare effects of, 550–552 Population growth, Malthus theory of, 133 Portland Fish Exchange example, of regression analysis, 55–57, 60 Positive externalities, 548 see also Externalities Positive statements, in economic models, 5–6 Predatory actions, antitrust laws preventing, 546 Predictions, 5–6 see also Forecasting Preference maps indifference curves and, 90–91 overview of, 89–90 Preferences, consumer see also Consumer choice overview of, 87 preference maps, 89–90 properties of consumer preferences, 87–88 Preferential trading arrangements, between WTO countries, 594 Pre-play communication (cheap talk), in games, 402 Present value (PV ) in firm decision making, 230–231 profits over time and, 204 Price ceilings (price cap) effects of government intervention, 265–267 government policy and, 537 market equilibrium and, 27–28 Price controls overview of, 27 price ceilings, 27–28, 265–267, 537 price floors, 29–30 supply and demand and, 31 vertical integration avoiding, 220 Zimbabwe example, 29 Price discrimination benefits of, 313–315 Botox example, 321–322 discounts in, 331–332 Disneyland example, 315 dynamic pricing at Amazon, 324 elasticity and, 327–328 example of reselling textbooks, 328–330 group price discrimination, 324–325 group price discrimination impacting total surplus, 332–333 group price discrimination with two groups, 325–326 how firms perfectly price discriminate, 318–319 identifying groups, 330–331 impact of perfect price discrimination on consumers, 319–321 individual price discrimination, 323 nonlinear, 333–335 nonuniform pricing and, 312 not all price differences are price discrimination, 317 perfect price discrimination, 318 profit maximization in group discriminating monopoly, 326–327 regulation of vertical relationships, 548 types of, 318 which firms can price discriminate, 315–317 Whistler Blackcomb ski resort example, 346 Price elasticity of demand see Demand elasticity Price floors (minimum wage laws), 29–30 Price regulation eliminating market failure, 536 nonoptimal due to inability to subsidize, 540–542 nonoptimal due to poor information, 537–540 optimal, 537 Price setters Apple as example of, 43 calculating arc elasticity of demand, 45 monopolies as, 35, 223, 275 monopolistic competition, 223 oligopolies as, 35 profit maximization and, 280–281 Price takers in competitive markets, 42 in perfect competition, 34, 222, 233 Price-fixing antitrust laws preventing, 546 as illegal activity, 544 Priceline.com, reverse auction, 332 Prices changes impacting consumer surplus (CS), 258 changes impacting demand, 11–12 changes impacting opportunity set, 101 changes impacting supply, 16–17 consumer buying decision and, demand function and, 13–14 equilibrium price, 18 introductory prices, 305 limit pricing as deterrent to market entry, 443–445 marginal revenue and, 275–276 market failure due to monopoly pricing, 290–293 not all price differences are price discrimination, 317 output quantity varying with, 243 rising following mergers, 546 trade-offs in determining what to charge, Pricing, with market power benefits of price discrimination, 313–315 Botox example, 321–322 bundling, 339–340 discounts, 331–332 www.downloadslide.com Index dynamic pricing at Amazon.com, 324 elasticity and, 327–328 group price discrimination, 324–325 group price discrimination impact on total surplus, 332–333 group price discrimination with two groups, 325–326 how firms perfectly price discriminate, 318–319 identifying groups, 330–331 impact of perfect price discrimination on consumers, 319–321 individual price discrimination, 323 mixed bundles, 341–343 nonlinear price discrimination, 333–335 not all price differences are price discrimination, 317 overview of, 311–312 peak-load prices, 344–346 perfect price discrimination, 318 profit maximization in group discriminating monopoly, 326–327 pure bundles, 340–341 requirement tie-ins, 344 sales prices, 311, 347–348 summary and review questions, 348–353 textbook resale example, 328–330 two-part pricing, 335 two-part pricing with differing consumers, 337–339 two-part pricing with identical consumers, 335–337 types of price discrimination, 318 which firms can price discriminate, 315–317 Whistler Blackcomb ski resort example, 346 Principal-agent relations asymmetric information and, 515–516 doctor example, 517 efficient contracts for reducing moral hazard in, 514–515 moral hazard in, 513–516 overview of, 513–514 subprime loan example, 517–518 symmetric information for reducing moral hazard in, 515 Prisoners’ dilemma game airlines example with three actions, 436–439 best responses, 395–396 cooperation in repeated game, 431–433 failure to maximize joint profits in game theory, 397–398 overview of, 394 World War I trench warfare example, 433–434 Private cost, vs social cost, 549 Private equity stock, 197 Private sector firms, 195–197 Private value of auctioned goods, 416 bidding strategies in private-value auctions, 416–419 Privatization reducing free riding, 562 of state-owned monopolies, 296 Probability biases in probability assessment, 490 expected value and, 468–469 in risk assessment, 466–467 Probability distributions, 467–468 Producer surplus (PS) as component of total surplus (TS), 262 effects of government intervention, 266–267 market failure and, 293 measuring supply curve for roses, 261–262 measuring with supply curve, 259 overview of, 258–259 perfect price discrimination and, 319–320 studying effects of shocks, 260–261 two-part pricing and, 339 Product curves, 131–132 Production advantages of bundling, 339 average product of labor (APL), 129 Cobb-Douglas production functions, 140–141 combining cost and production information, 170–173 constant, increasing, and decreasing returns to scale, 141–144 costs of producing multiple goods, 184–186 costs of production impacting supply, 15 deciding how much to produce, 236–239 deciding whether to produce, 240–242 diminishing marginal returns and, 132–133 effect of adding extra labor, 131 graphing product curves, 129–131 innovation and, 147 isoquant properties, 135–136 isoquant shapes, 136–137 isoquants, 134–135 long-run, 134 marginal product of labor, 128–129 organizational change and, 148–150 overview of, 124–125 production functions, 125–127 relationships between product curves, 131–132 relative productivity, 146–147 returns to scale, 141 short-run, 127 staging, 214–215 substituting inputs, 138–140 summary and review questions, 150–153 technological changes and, 147–148 total product function in short-run, 127–128 trade-offs in determining how to produce, varying returns to scale, 145–146 Production function overview of, 125–127 shapes of cost curves and, 163–164 Products adverse selection and products of unknown quality, 503–506 E-45 differentiated products in Bertrand oligopolies, 376–378 differentiated products in Cournot oligopolies, 368–372 identical or homogeneous in perfectly competitive markets, 234–235 identical products in Bertrand oligopolies, 375–376 product differentiation, 370, 372 types of production outputs, 125 variety from international trade, 579–580 Profit matrix, for summarizing static game, 393 Profit maximization deciding how much to advertise, 299–300 deciding how much to produce, 236–239 deciding whether to advertise, 299 deciding whether to produce, 240–242 decision making and, in duopoly example, 362–365 failure to maximize joint profits in game theory, 396–400 in firms, 199 long-run competition and, 247–248 output quantity varying with price, 243 output rules, 200–202 profits over time, 204–205 shutdown rules, 203–204 with specific tax, 240 steps in, 200 zero long-run profit with free entry, 254 Profit maximization, in monopolies marginal revenue, 275–277 marginal revenue and price elasticity of demand, 279–280 marginal revenue curve, 277–279 output quantities, 281–283 overview of, 275 setting price or quantity, 280–281 shifts in demand curve impacting, 283–285 shutdown decisions, 282 For-profit sector see Private sector firms Profit sharing for aligning managers with owner objectives, 206–207 productivity in agriculture and, 522 reducing moral hazard, 520 Profits reducing short-run profits to maximize long-run, 204 revenue and cost as variables in, 199–200 stock prices vs profits, 204–205 supply chain decisions and, 217 Promotions buy one, get one free promotion, 108–110 half-price promotions, 109–110 overview of, 108 Property rights assigning as means of controlling negative externalities, 555–556 Coase Theorem and, 556–557 converting open-access common property to private property, 559 example of buying a town, 557 www.downloadslide.com E-46 Index Prospect theory, 492–493 PS (producer surplus) see Producer surplus (PS) Public goods free riding and, 561–562 overview of, 560–561 reducing free riding, 562 Public sector firms, 195–197 Public utilities barriers to entry creating monopolies, 296 government-created monopolies, 274 as natural monopoly, 295 Publicly traded corporations, 197–198 Public-private partnerships, 196 Pulp and paper mills, regulation of, 553 Pure bundles, 340–341 Pure strategy applying game strategy to competing ebook formats, 407–408 combining pure-strategy and mixedstrategy equilibria, 405–406 in games, 403 PV (present value) in firm decision making, 230–231 profits over time and, 204 Q Quadratic specification, functional form in regression analysis, 72–73 Quality of products, varies under condition of asymmetric information, 506 Quantity demand curve and, 10 demand function and, 13–14 inverse demand function and, 54 profit maximization in monopolies, 280–281 supply curve and, 16 supply function and, 17–18 Quasi-vertical integration, 216–217, 452 Quotas in competitive markets, 583–584 effects of, 586 vs free trade, 587–589 international trade policies, 584 rent seeking activities resulting in, 589–590 R R2 statistic, 61–62 Radio, timing radio ads, 403 Random error terms, in regression analysis, 55 Randomization, game theory in decision making, 411 Randomized tests, applying empirical analysis, 73 Rationality bounded, 392, 410 levels of reasoning and, 456–457 maximin strategies, 410–411 overview of, 410 strikes due to limited information or irrational behavior, 415 Rebates, price discrimination and, 332 Recessions, labor productivity during, 124, 149–150 Reflection effect, violations of expected utility theory, 491 Refusal to deal, regulation of vertical relationships, 547 Regression analysis applying to focus group example, 64–65 bias and standard error of estimated coefficients, 63–64 confidence intervals, 65–66 correlation and causation, 69–70 estimated coefficients, 63 estimating demand, 43 estimating demand function, 54–56 functional form selection in, 71–73 goodness of fit and R2 statistic, 61–62 hypothesis testing and statistical significance, 66–67 Microsoft Excel used for, 56–59 multivariate regression, 60–61 omitted variables, 70–71 ordinary least squares (OLS), 59–60 overview of, 53–54 random error terms in, 55 regression specification, 67 repeated samples for assessing reliability of, 63 selecting explanatory variables for, 67–69 Regression specification correlation and causation and, 69–70 functional form selection, 71–73 omitted variables and, 70–71 overview of, 67 selecting explanatory variables, 67–69 Regression tool, in Windows version of Excel, 84 Regulation applying cost-benefit principle to, 542 of natural gas, 540–542 nonoptimal price regulation due to inability to subsidize, 540–542 nonoptimal price regulation due to poor information, 537–540 of open-access common property, 559 optimal price regulation, 537 overview of, 536 of pollution, 553–555 pulp and paper mill example, 553 regulatory capture, 542 rising costs of trucking related to, 232–233 Regulatory capture, 542 Relative productivity, technological changes and, 146–147 Rent seeking international trade policies and, 589–590 regulatory capture and, 542 Repeated games cooperation in prisoners’ dilemma game, 431–433 deterring entry in, 441, 445–446 finitely repeated, 434–435 implicit vs explicit collusion, 434 overview of, 429–430 strategies and actions in, 430–431 World War I trench warfare example, 433–434 Repeated samples, for assessing reliability of regression analysis, 63 Reciprocity, behavioral game theory and, 455 Reputation changing firm name to deal with bad reputation issue, 510–511 screening by, 509 requirement tie-ins, 344 Resale, price discrimination and, 316–317 Resale price maintenance (RPM), regulation of vertical relationships, 546–547 Reservation prices firm capacity to estimate, 323 grouping consumers for price discrimination, 324 lemon owners and, 503 mixed bundling and, 342 perfect price discrimination and, 318 pure bundling and, 340–341 Resources opportunity costs, 155–156 overexploitation of open-access common property, 558 Retirement funds, 482–483 Returns to scale constant, increasing, and decreasing, 141–144 long-run costs and, 177 overview of, 141 in U.S manufacturing, 143 varying, 145–146 Returns to specialization, 145 Revenues maximization as managerial objective, 208–209 shutdown rules and, 203 as variables in profit, 199–200 Revenue-sharing contracts productivity in agriculture and, 522 reducing moral hazard, 521 Reverse auctions, 332 Risk see also Uncertainty/risk diversification in reducing, 480–483 information in reducing, 479–480 insurance for reducing, 483–486 limiting, 464–465 managerial incentives and excessive risk taking, 500–501 managing exchange rate risk, 582–583 pooling see Diversification reduction, 478 Risk assessment biases, 489–490 expected value and, 467–469 overview of, 466 probability in, 466–467 variance and standard deviation, 469–470 Risk attitudes expected utility, 471–472 of managers, 478 overview of, 471 risk aversion, 472–475 risk neutrality, 475–476 risk preference, 476–477 Risk aversion investing and, 488–489 overview of, 472 www.downloadslide.com Index risk premium and, 474–475 risk reduction and, 478 unwilling to take a fair bet, 472–474 Risk neutrality investing and, 487–488 overview of, 475–476 risk reduction and, 478 Risk preference, 476–477 Rivalry club goods and, 560 open-access common property and, 558–559 properties of private goods, 557–558 public goods and, 560–562 Rivals, raising costs of, 448–449 Robber barons, 543 Robinson-Patman Act, 313 RPM (resale price maintenance), regulation of vertical relationships, 546–547 Rule of reason, 547 Rule of thumb, 410 Rules of the game, 391–392 S Sales prices, 311, 347–348 Sales taxes equilibrium effects, 32 impact on avocado market, 33 overview of, 31 pass-through and, 32 Salience, behavioral economics and, 115–116 Samsung, example of complementary investment game, 408–409 Say on pay (SOP), shareholder control of management compensation, 212 SC (economies of scope) cost of producing multiple goods, 184–186 examples, 185–186 Scale, returns to see Returns to scale Screening techniques, for reducing adverse selection, 508–509 Sealed-bid auctions, 416 Seasonal dummy variables, seasonal forecasting and, 75 Seasonal variations, extrapolation techniques in forecasting, 75–76 Second-price auction eBay, 257–258 sealed-bids, 416 strategies in, 417–418 Security, integration securing supply, 219 Sellers, large numbers in perfectly competitive markets, 234–235 Semiconductors cost of moving production abroad, 154, 185–186 isoquant for, 137–138 Sequential games competing e-book formats and, 440 credible threats in, 439 deterring entry in, 441 overview of, 429, 435 Stackelberg oligopoly, 436–439 Services, types of production outputs, 125 Sharecropping, 522 Shareholder rights plan, defenses against takeovers, 213 Shareholders in corporations, 197 role in governance, 199 role in monitoring and controlling managers, 211–212 Shares (stock), ownership of corporations and, 197 Sherman Antitrust Act (1890), 543 Shift of demand curves advertising and, 298–299 vs movement along, 13 policies that impact, 26 profit maximization in monopolies and, 283–285 shocks to market equilibrium, 21–23 Shift of supply curves impact of variables on supply, 17 policies that impact supply or demand curves, 26 shocks to market equilibrium, 21–23 Shirking after-the-fact monitoring, 526 deferred payments as means for reducing, 525 efficiency wages reducing, 526 hidden actions of employees, 514 hostages for good behavior reducing, 525 monitoring and, 524 in unsupervised agriculture, 522 Shocks to market equilibrium, 21 producer surplus applied to measuring effects of, 260–261 taking advantage of, 23 Short-run competition competitive equilibrium, 246–247 deciding how much to produce, 236–239 deciding whether to produce, 240–242 market supply curve, 244–246 overview of, 236 supply curve, 243–244 Short-run costs average cost curve, 165–166 common measures, 159–161 cost curves, 161–163 marginal cost curve, 165 overview of, 159 production functions and shapes of cost curves, 163–164 summary of, 167–168 variable cost curve, 164–165 Short-run production average product of labor (APL), 129 diminishing marginal returns, 132–133 effect of adding extra labor, 131 graphing product curves, 129–131 marginal product of labor, 128–129 overview of, 126–127 relationships between product curves, 131–132 total product function, 127–128 Shutdown decisions in monopolies, 282 decisions in short-run firms, 241–243 rules in profit maximization, 203–204 Signaling eBay Motors example, 512 E-47 techniques for reducing adverse selection, 508–510 Simplification, modeling based on, 4–5 Smith, Adam, 20, 221, 254–255 Snob effect, 303–304 Social cost, vs private cost, 549 Social marginal cost (MC s), 551 Social pressure, reducing free riding, 562 SOEs (state-owned enterprises), in China, 197 Software piracy, example of rival good without exclusion, 560 Sole proprietorships, 197 SOP (say on pay), shareholder control of management compensation, 212 Spam, as negative externality, 548 Specialization efficiency of, 221 life cycle of firms and, 221–222 returns to, 145 Specific taxes calculating profit maximization with, 240 equilibrium effects of, 32 impact on avocado market, 33 sales taxes as, 31 types of tariffs, 585 Stackelberg, Heinrich von, 436 Stackelberg oligopoly limit pricing and, 443 mathematical approach to, 463 overview of, 436–439 Standard & Poor’s Composite Index of 500 Stocks (S&P 500), 481 Standard deviation, risk assessment and, 469–470 Standard error confidence intervals and, 65–66 of estimated coefficients, 64 Standards environmental, 552 third-party information for reducing adverse selection, 511–512 State-contingent contracts, reducing moral hazard, 519–520 State-owned enterprises (SOEs), in China, 197 Static games, 392 see also Game theory Statistical significance, hypothesis testing and, 66–67 Stock exchanges, publicly traded corporations and, 197 Stock options, as contingent reward, 205–206 Stocks mutual funds as diversification strategy, 481–482 risk premium and, 475 stock prices vs profits, 204–205 Strategic decision making, game theory in, 390 Strategic trade policies, 590–592 Strategies advertising use example, 398–400 decision making and, dominant strategy, 393–394 in games, 391 in oligopoly games, 392 in repeated games, 430–431 taking advantage of limited strategic thinking, 457 www.downloadslide.com E-48 Index Strategies, over time behavioral game theory, 454 cooperation in repeated prisoners’ dilemma game, 431–433 cost strategies, 446 credible threats in, 439 deterring entry, 441 deterring entry in repeated game, 445–446 disadvantages of first moves, 450 in dynamic games, 430–431 e-book format example, 440 exclusion contracts, 441–442 finitely repeated games, 434–435 holdup problem, 450–453 implicit vs explicit collusion, 434 Intel and AMD advertising strategies, 428–429 investing to lower marginal cost, 446–448 learning by doing, 448 levels of reasoning, 456–458 limit pricing, 443–445 mathematical approach to Stackelberg oligopoly, 463 moving too quickly, 453–454 overview of, 429–430 pay-for-delay agreements, 442–443 raising rival costs, 448–449 repeated games, 429–430 sequential games, 435 Stackelberg oligopoly, 436–439 summary and review questions, 458–462 tit-for-tat strategy in trench warfare, 433–434 ultimatum games, 454–455 Strikes, inefficiency as bargaining approach, 415 Subgame-perfect Nash equilibrium deterring entry and, 442 investing to lower marginal cost, 447 prisoners’ dilemma with three actions, 437 Subgames, 437 Subjective probability, 467 Subprime loans, moral hazard example, 517–518, 527–528 Subsidiaries, multinational enterprises and, 595 Subsidies to aircraft industry, 354, 381–382 nonoptimal price regulation due to inability to subsidize, 540–542 Substitute goods consumer buying decision and, cross-price elasticity of demand, 51 endangered species example, 51–52 factors impacting demand, 12 market power and, 289 perfect and imperfect substitutes, 93–94 Substitute inputs, 136–137 Sunk costs ignoring in current decision making, 159 overview of, 158 Super Bowl ads, 301–302 Supply excess supply, 20 other factors impacting, 17 overview of, 15–16 price ceilings and price floors and, 31 price changes impacting, 16–17 summary and review questions, 37–39 summing supply curves, 18 supply curve, 16 supply function, 17–18 when to use supply and demand models, 34–37 Supply chain management defined, 215 flexibility and security from integration, 219 profitability and, 217 Supply curves deterring exchange rates, 581 effect of price on supply, 16–17 effects of shifts in both supply and demand curves, 24–25 effects of shifts in either supply or demand curves, 21–23 for long-run competitive firm, 248 market supply curve for long-run firms, 248–251 market supply curve for short-run firms, 244–246 measuring for roses, 261–262 measuring producer surplus, 259 other factors impacting supply, 17 overview of, 16 policies impacting, 26 for short-run competitive firm, 243–244 summing, 17–18 Supply function, 17–18 Supply-and-demand model carbon tax example, 7–8 demand, 9–10 demand curve, 10–11 demand function, 13–14 deterring exchange rates, 581 market equilibrium and see Market equilibrium other factors impacting demand, 12–13 other factors impacting supply, 17 price ceilings and price floors and, 31 price change impacting demand, 11–12 price change impacting supply, 16–17 summary and review questions, 37–41 summing demand curves, 14–15 summing supply curves, 18 supply, 15–16 supply curve, 16 supply function, 17–18 when to use, 34–37 Surveillance, for reducing moral hazard, 524 Survivor principle, in competitive markets, 212 Switchers, sales prices and, 311 Switching fees, strategies for raising rivals costs, 448 T Takeovers market for corporate control and, 212–214 winner’s curse and, 419–420 Tariffs antidumping policies and, 592 in competitive markets, 583–584 effects of, 586 vs free trade, 585–587 General Agreement on Tariffs and Trade (GATT), 593–594 international trade policies, 584 rent-seeking activities resulting in, 589–590 strategies for avoiding, 589 Taste advertising impacting, 298–299 consumer buying decision and, consumer choice and, 85 Tata Motors, example of innovation, 148–149 Taxes carbon taxes, 7–8, 36–37 cost-benefit principle applied to, 536 multinational enterprises strategies for avoiding, 599–601 pollution control and, 554 profit maximization with specific tax, 240 regulating negative externalities related to driving, 555 sales taxes as form of government intervention, 31–34 salience of, 115 vertical integration for lowering, 220 Technical efficiency input choices, 168 of production processes, 154 Technological changes benefitting small scale production, 146 cost advantages resulting in monopoly, 294 impacting costs of production, 16 innovation, 147 organizational change, 148–150 overview of, 147–148 relative productivity, 146–147 TEMA (Toyota Motor Engineering & Manufacturing North America), 597–600 Testing theories in economic models, positive statements and, Tests, of transitivity, 113 Textbook resale, example of price discrimination, 328–330 Theories, testing economic models, Theory-based forecasting, 76–78 Third-party information, for reducing adverse selection, 511–512 Threat point, in bargaining, 412 Time series observations, of trends, 74 Tit-for-tat strategies, in trench warfare, 433–434 TMMC (Toyota Motor Manufacturing Canada Inc.), 597–600 TMS (Toyota Motor Sales, USA), 597–600 Total cost see Cost (C) Total product function effect of adding extra labor, 131 graphing product curves, 129–130 www.downloadslide.com Index output of short-run production, 127–128 Total surplus (TS) competition maximizing, 233, 262–263 competitive markets and, 534 government intervention impacting, 265–267 group price discrimination impacting, 332–333 lowered when output reduced below competitive level, 263–265 market failure and, 290–293 perfect price discrimination and, 319–320 social costs as component of, 551 Toyota Motor Engineering & Manufacturing North America (TEMA), 597–600 Toyota Motor Manufacturing Canada Inc (TMMC), 597–600 Toyota Motor Sales, USA (TMS), 597–600 Trade, international see International trade Trade secrets, as intellectual property, 565–566 Trade-offs, in decision making, 2–3 Tranches, 193 Transaction costs agency costs, 194 bundling and, 339 perfect competition and, 35, 234–235 perfect price discrimination and, 323 reduced by vertical integration, 218–219 Transfer pricing see International transfer pricing Transitivity, tests of, 113 Transitivity property, consumer preferences, 88 Trends, forecasting, 74–76 Trial and error approach, to cost minimization, 173 Trucking, rising costs due to government intervention, 232–233, 267–268 Trusts, 543 TS (total surplus) see Total surplus (TS) t-statistic, 66–67 Two-part pricing with differing consumers, 337–339 with identical consumers, 335–337 overview of, 335 types of nonuniform pricing, 312 Whistler Blackcomb ski resort example, 346 U UAW (United Auto Workers), 449 Ultimatum games, behavioral game theory, 454–455 Unbiased estimation, regression analysis and, 63–64 Uncertainty/risk assessing risk, 466 attitudes toward risk, 471 behavioral economics and, 489 biased assessment of probabilities, 489–490 diversification for risk reduction, 480–483 expected utility and, 471–472 expected value and, 467–469 information in risk reduction, 479–480 insurance and, 483–486 investing and, 487, 489 limiting liability, 464–465, 494–495 managerial attitudes toward risk, 478 overview of, 465–466 probability in risk assessment, 466–467 prospect theory, 492–493 quantifiable and unquantifiable, 465 reducing risk, 478 risk aversion, 472–475, 488–489 risk neutrality, 475–476, 487–488 risk preference, 476–477 summary and review questions, 495–499 variance and standard deviation, 469–470 violations of expected utility theory, 491–492 UNCTAD (United Nations Conference on Trade and Development), 595 Unemployment, minimum wage laws and, 30 Unequal costs, in Cournot oligopolies, 368 Uniform pricing iTunes and, 338 profit maximization in monopolies and, 311–312 Unitary elasticity, 49 United Airlines Cournot model and, 361 prisoners’ dilemma game with two actions, 431–433 prisoners’ dilemma with three actions, 436–439 profit-maximizing output, 363–365 United Auto Workers (UAW), 449 United Nations Conference on Trade and Development (UNCTAD), 595 Universal coverage (insurance), reducing adverse selection, 508 U.S Patent and Trademark Office (USPTO), 564 U.S Postal Service, as monopoly, 290 U.S Robinson-Patman Act (1936), 548 Utilities, government ownership as means of eliminating market failure, 536 Utility exercise in utility maximization, 105 marginal, 96–97 MRS (marginal rate of substitution), 98 ordinal and cardinal, 96 overview of, 95 utility functions, 95–96 V Value, of auctioned goods, 416 Variable cost curves, 164–165 Variable costs (VC) calculating cost curves, 167 cost curves, 162 E-49 overview of, 160 production functions and shapes of cost curves, 163–164 shapes of cost curves and, 164–165 shutdown rules and, 203 Variable inputs, in short-run production, 126 Variables dependent and explanatory in regression analysis, 53 elasticity summarizing relationship between related, 52 multivariate regression, 60–61 omitted variables, 70–71 seasonal dummy variables, 75 selecting explanatory variables, 67–69 Variance, risk assessment and, 469–470 Varying returns to scale, 145–146 VC (variable costs) see Variable costs (VC) Vegetable oil example, market supply curve, 250 Venezuela, nationalization of oil, 450–452 Vertical integration American Apparel example, 218 avoiding holdups, 452 firm organization and, 214 government intervention avoided by, 220 life cycle of firms and, 221–222 overview of, 215–217 stages of production and, 215 supply flexibility and security from, 219 transaction costs reduced by, 218–219 Vertical mergers, 216 Vertical relationships, regulation of exclusive dealing, 547–548 overview of, 546 price discrimination, 548 refusal to deal, 547 resale price maintenance (RPM), 546–547 Viagra example, of substitute goods, 51–52 W Wage laws (price floors), 29–30 Wages bargaining regarding, 411 compensating wage differentials for risky occupations, 390 minimum wage laws (price floors), 29–30 productivity in agriculture and, 522 strategies for raising rivals costs, 449 Warner Brothers, example of group price discrimination, 325–328 Warranties requirement tie-ins and, 344 signaling techniques in reducing adverse selection, 510 Water demand elasticity of (Santa Cruz example), 53 examples of open-access common property, 558 www.downloadslide.com E-50 Index Wealth/money diminishing marginal utility of, 474 how much is enough, 88 Welfare effects, of pollution, 550 Well-being competition maximizing economic well-being, 254–255 government intervention and, 254–255 Warehouse stores, two-part pricing and, 335 What-if analysis, in economic models, Whistler Blackcomb ski resort, 346 Willingness to pay, 256 see also Consumer surplus (CS) Willingness to produce, 258 see also Producer surplus (PS) Willingness to substitute, 92–93 Wilshire 5000 Index Portfolio, 482 Winner’s curse, 419–421 Worker safety, 389–390, 420–421 World Trade Organization (WTO) contingent protection trade policies allowed by, 592 subsidies to aircraft industry, 354 trade liberalization policies of, 593–594 Y Yahoo! poison pill example, 214 Year-end bonus, contingent rewards, 205 Z Zoning laws, as barrier to entry, 381 www.downloadslide.com Credits Cover: Artisilense/Shutterstock p 4, excerpt “Everything should be made as simple. . .” (11 words): Albert Einstein Public Radio, January 4, 2005, www.npr.org/dmg/ dmg.php?prgCode=ATC&showDate=04-Jan-2005& segNum=10&NPRMediaPref=WM&getAd=1 p 7, photo: Tomas/Fotolia p 154, photo: Photodisc/Getty Images p 10, photo: Oriori/Shutterstock p 156, excerpt “When there’s a go-go economy. . .” (14 words): Stacey Kole p 24, photo: AGE Fotostock/SuperStock p 42, photo: Jeffrey M Perloff p 56, photo: Jeffrey M Perloff p 62, excerpt “A recent survey of North American. . .” (20 words): Banksy p 64, excerpt “Consumers are statistics. . .” (6 words): Stanley Marcus p 66, excerpt “There are two possible outcomes. . .” (29 words): Enrico Fermi p 67, excerpt “An approximate answer to the right. . .” (21 words): John Tukey; excerpt “It is unfortunate we can’t buy. . .” (24 words): Malcolm Forbes p 160, cartoon: Pearson Education, Inc p 166, photo: Tony McNicol/Alamy p 178, Table 6.4: Jeffrey M Perloff, Robidoux and Lester (1992) p 179, photo: Martin D Vonka/Shutterstock p 188, excerpt “There are certain fixed costs when. . .” (38 words): Scott Ostler, “Andre Even Flies like a Champ,” San Francisco Chronicle, February 8, 1993, C1 p 193, cartoon: Pearson Education, Inc.; excerpt “I won’t belong to any organization. . .” (13 words): Groucho Marx p 70, cartoon: Pearson Education, Inc p 195, excerpt “Atheism is a non-prophet organization.”: George Carlin p 73, excerpt “If your result needs a statistician. . .” (13 words): Ernest Rutherford p 205, excerpt: “The executive exists to make sensible. . .” (10 words): Elting E Morison p 75, Figure 3.7: Heinz’s Annual Reports p 210, photo: Shutterstock p 85, excerpt “If this is coffee, please bring. . .” (19 words): Abraham Lincoln; photo: Image Source/ Getty Images p 212, excerpt “rigorous goals to incentivize improvement in. . .” (8 words): Vikram S Pandit; excerpt “Competition is the keen cutting edge. . .” (13 words): Henry Ford p 87, excerpt “I have forced myself to contradict. . .” (16 words): Marcel Duchamp; excerpt “Do not unto others as you. . .” (21 words): George Bernard Shaw p 93, cartoon: Pearson Education, Inc p 103, excerpt “My problem lies in reconciling my. . .” (12 words): Errol Flynn p 108, photo: Four Seasons Resort Seychelles p 124, photo: Michael Macor/San Francisco Chronicle/ Corbis p 133, photo (top): Pearson Education, Inc.; photo (bottom) Jeffrey M Perloff p 142, cartoon: Pearson Education, Inc p 146, excerpt “Progress was all right Only it. . .” (10 words): James Thurber p 214, excerpt “huge incentive for a massive employee. . .” (33 words): Jerry Yang p 217, excerpt “If you want to make an. . .” (16 words): Carl Sagan p 218, excerpt “American Apparel’s greatest. . .innovation may come. . .” (36 words): Warren (2005) p 219, excerpt “We could unlock significant cost synergies. . .” (17 words): “PepsiCo bids to buy its bottlers,” Marketwatch, April 20, 2009, www marketwatch.com/story/pepsico-bids-buy-bottlersreports p 220, photo: Courtesy of Alcoa p 149, photo: Ajit Solanki/AP Images p 221, excerpt “[A] workman not educated to this. . .” (254 words): Adam Smith p 152, excerpt “produce twice as much [relief]”. . .“Maybe pretty close to twice as much.”: Vicky O’Hara, All Things Considered, National p 232, photo: Konstantin Sutyagin/Fotolia; excerpt “The love of money is the. . .” (10 words): George Bernard Shaw E-51 www.downloadslide.com E-52 Credits p 242, photo: Design Pics Inc./Alamy p 247, excerpt “I think there is a world. . .” (11 words): Thomas J Watson, IBM chairman, 1943 p 257, photo: Jeffrey M Perloff p 264, cartoon: Pearson Education, Inc p 265, photo: Jeffrey M Perloff; excerpt “I don’t make jokes I just. . .” (13 words): Will Rogers p 273, photo: Jeffrey M Perloff p 287, photo: Jeffrey M Perloff; excerpt “was my biggest fear when we. . .” (57 words): Mayor Gavin Newsom (1,008 words) p 290, cartoon: Pearson Education, Inc p 359, excerpt “made a point. . .that we are. . .” (37 words): Monique Pillard; excerpt “Wilhelmina objects to the outward discussion. . .” (30 words): Harold Baer, Jr.; excerpt “A thing worth having is a. . .” (10 words): W C Fields p 370, photo: Jeffrey M Perloff p 372, photo: Jeffrey M Perloff p 375, cartoon: Rhymes with Orange © 2013 by Hillary Price Distributed by King Features Reprinted with permission p 378, excerpt “the limited menu approach, high quality. . .” (17 words): William Bender p 297, photos: Jeffrey M Perloff p 379, excerpt “Lunch is our consistent bread-and. . .” (35 words): Matthew Cohen p 298, excerpt “You can fool all the people. . .” (20 words): Joseph E Levine p 389, photo: Davis Turner/EPA/Newscom p 299, excerpt “I have always believed that writing. . .” (22 words): Philip Dusenberry p 403, cartoon: Pearson Education, Inc p 304, excerpt “Nobody goes there anymore; it’s too. . .” (7 words): Yogi Berra p 309, excerpt “maintain a Canadian presence against the. . .” (11 words): Canada Magazine Fund p 311, photo: Jeffrey M Perloff; excerpt “Everything is worth what its purchaser. . .” (10 words): Publilius Syrus (first century BC) p 315, photo: Jeffrey M Perloff p 331, cartoon: Pearson Education, Inc p 332, excerpt “The manufacturers would rather not give. . .” (28 words): Jay Walker p 344, excerpt “. . .[I]f printer failure or damage is. . .” (68 words): Hewlett-Packard (HP), HP LaserJet Print Cartridges and Imaging Drums Limited Warranty Statement h10025.www1.hp.com/ewfrf/wc/document? lc=en&dlc=en&cc=us&docname=c01848047 {I would go with 68 words My assumption is that the entire document is 496 words but only 68 are used.} p 346, photo: Radius Images/Corbis p 349, excerpt “The industry’s margins just got too. . .” (13 words): David LaGesse, “A PC Choice: Dorm or Quad?” U.S News & World Report, May 5, 2003, 64 p 350, excerpt “U.S motorists are essentially subsidizing European. . .” (19 words): Tom Doggett, “US Drivers Subsidize European Pump Prices,” Reuters, August 31, 2006 p 354, photo: Db Airbus/Hcsgm/Picture-Alliance/ DPA/AP Images; excerpt “Anyone can win unless there happens. . .” (11 words): George Ade p 356, excerpt “People of the same trade seldom. . .” (29 words): Adam Smith p 398, photo: Trevor Smith/Alamy p 406, photo: Jeffrey M Perloff p 408, excerpt “All that I have to say. . .” (22 words): Sherlock Holmes (Sir Arthur Conan Doyle) p 428, photo: Bikeriderlondon/Shutterstock; excerpt “In solving a problem of this. . .” (17 words): Sherlock Holmes (Sir Arthur Conan Doyle) p 439, cartoon: Pearson Education, Inc p 448, excerpt “What we have to learn to. . .” (11 words): Aristotle p 451, photo: Aaron Sosa/Picture Alliance/DPA/ Newscom; excerpt “The owner will be PdVSA and. . .” (15 words): Hugo Chavez p 464, photo: U.S Coast Guard; excerpt “We must believe in luck For. . .” (18 words): Jean Cocteau p 466, excerpt “In America anyone can be president. . .” (13 words): Adlai Stevenson p 467, excerpt “One of the common denominators I. . .” (17 words): George W Bush p 471, photo: Jeffrey M Perloff p 476, excerpt “Horse sense is the thing a. . .” (15 words): W C Fields p 477, photo: Jeffrey M Perloff p 478, cartoon: Pearson Education, Inc p 486, photo: Michael Reynolds/EPA/Newscom p 490, photo: Boeri SRL p 500, photo: Pamela Moore/E+/Getty Images; excerpt “The buyer needs a hundred eyes. . .” (10 words): George Herbert; excerpt “Decisions on compensation and other actions. . .” (27 words): Lloyd Blankfein p 503, photo: Pearson Education, Inc p 509, cartoon: Pearson Education, Inc www.downloadslide.com Credits p 510, excerpt “Honesty is the best policy—when. . .” (10 words): Mark Twain p 518, excerpt “A verbal contract isn’t worth the. . .” (10 words): Samuel Goldwyn p 522, photo: Gautier Willaume/Fotolia p 523, photo: Damian Dovarganes/AP Images p 533, cartoon: Pearson Education, Inc.; excerpt “If it moves, tax it If. . .” (17 words): Ronald Reagan p 543, excerpt “to promote economic competition through. . . promoting. . .” (34 words): Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) p 544, cartoon: Pearson Education, Inc p 553, photo: TranceDrumer/Shutterstock p 557, photo: Doral Chenoweth III/The Columbus Dispatch/AP Images E-53 p 563, photo: Jeffrey Coolidge/Getty Images p 573, photo: iStockphoto/Thinkstock; excerpt “Traditionally, most of Australia’s imports come. . .” (10 words): Keppel Enderbery, former Australian cabinet minister (allegedly) p 575, excerpt “Number of chopsticks made every day. . .” (17 words): Harper’s Index 2012 p 593, excerpt “Our domestic industry is under siege. . .” (22 words): Gordon Brinser, president of the U.S SolarWorld branch; excerpt “Growth is a result of declining. . .” (93 words): Arno Harris, CEO of Recurrent Energy p 603, cartoon: Doonesbury © 2003 G B Trudeau Reprinted with permission of Universal Uclick All rights reserved www.downloadslide.com This page intentionally left blank www.downloadslide.com Featured Mini-Cases in This Book Using an Income Threshold Model in China Aggregating the Demand for Broadband Service 15 Genetically Modified Foods 24 Occupational Licensing 26 Disastrous Price Controls 29 Substitution May Save Endangered Species 51 Turning Off the Faucet 53 The Portland Fish Exchange 55 Determinants of CEO Compensation 67 You Can’t Have Too Much Money 88 Rationing 102 Why Americans Buy More E-Books Than Do Germans 106 How You Ask the Question Matters 114 Malthus and the Green Revolution 133 A Semiconductor Isoquant 137 Returns to Scale in U.S Manufacturing 143 U.S Electric Generation Efficiency 147 Tata Nano’s Technical and Organizational Innovations 148 The Opportunity Cost of an MBA 156 The Internet and Outsourcing 174 Economies of Scale in Nuclear Power Plants 178 Long-Run Cost Curves in Beer Manufacturing and Oil Pipelines 181 Learning by Drilling 183 Scope 185 Chinese State-Owned Enterprises 197 Company Jets 210 The Yahoo! Poison Pill 214 Vertical Integration at American Apparel 218 Aluminum 219 Oil, Oil Sands, and Oil Shale Shutdowns 242 The Size of Ethanol Processing Plants 248 Fast-Food Firms’ Entry in Russia 249 Upward-Sloping Long-Run Supply Curve for Cotton 251 The Deadweight Loss of Christmas Presents 264 Cable Cars and Profit Maximization 286 Apple’s iPad 288 Botox 297 Super Bowl Commercials 301 Critical Mass and eBay 304 Disneyland Pricing 315 Preventing Resale of Designer Bags 317 Botox Revisited 321 Dynamic Pricing at Amazon 324 Reselling Textbooks 328 Available for a Song 338 Downhill Pricing 346 A Catwalk Cartel 358 Air Ticket Prices and Rivalry 366 Acquiring Versus Merging 374 Zoning Laws as a Barrier to Entry by Hotel Chains 381 Strategic Advertising 398 Timing Radio Ads 403 Competing E-Book Formats 406 Nash Bargaining over Coffee 414 Experienced Bidders 417 Google Advertising 418 Tit-for-Tat Strategies in Trench Warfare 433 Pay-for-Delay Agreements 442 Pfizer Uses Limit Pricing to Slow Entry 444 Auto Union Negotiations 449 Venezuelan Nationalization 451 Advantages and Disadvantages of Moving First 453 GM’s Ultimatum 454 Stocks’ Risk Premium 475 Gambling 476 Bond Ratings 479 Limited Insurance for Natural Disasters 485 Biased Estimates 490 Reducing Consumers’ Information 506 Changing a Firm’s Name 510 Adverse Selection on eBay Motors 512 Selfless or Selfish Doctors? 517 Contracts and Productivity in Agriculture 522 Abusing Leased Cars 526 Natural Gas Regulation 540 Hospital Mergers: Market Power Versus Efficiency 546 An Exclusive Contract for a Key Ingredient 548 Negative Externalities from Spam 549 Pulp and Paper Mill Pollution and Regulation 553 Why Tax Drivers 555 For Whom the Bridge Tolls 559 Piracy 560 Barbie Doll Varieties 579 Managerial Responses to the Chicken Tax Trade War 589 Dumping and Countervailing Duties for Solar Panels 592 What’s an American Car? 596 Profit Repatriation 600 www.downloadslide.com Featured Managerial Implications in This Book Taking Advantage of Future Shocks Ties That Bind 23 Cost Pass-Through 34 344 Differentiating a Product Through Marketing Changing Prices to Calculate an Arc Elasticity 45 372 Focus Groups 62 Managing in the Monopolistically Competitive Food Truck Market 378 Experiments Solving Coordination Problems 73 Designing Promotions 110 Simplifying Consumer Choices Small Is Beautiful Auction Design 116 452 Taking Advantage of Limited Strategic Thinking 159 Cost Minimization by Trial and Error Summarizing Risk 173 Diversifying Retirement Funds Stock Prices Versus Profit 204 Using Brand Names and Warranties as Signals Willingness to Pay on eBay Efficiency Wages 257 Introductory Prices Preventing Resale Discounts 331 305 316 286 Buying a Town Trade Secrets 457 470 Marginal Decision Making 202 Checking Whether the Firm Is Maximizing Profit 411 420 Avoiding Holdups 146 Ignoring Sunk Costs 409 Using Game Theory to Make Business Decisions 482 526 557 565 Paul Allen's Comparative Advantage 578 Limiting Arbitrage and Gray Markets 582 510 ... Jeffrey M Managerial economics and strategy/ Jeffrey Perloff, James Brander — First edition pages cm Includes bibliographical references and index ISBN 978-0-321-56644-7 Managerial economics I Brander,... Perloff/Brander Managerial Economics and Strategy* Keat/Young/Erfle Managerial Economics Phelps Health Economics Klein Mathematical Methods for Economics Pindyck/Rubinfeld Microeconomics* Krugman/Obstfeld/Melitz... Mishkin The Economics of Money, Banking, and Financial Markets* The Economics of Money, Banking, and Financial Markets, Business School Edition* Macroeconomics: Policy and Practice* Parkin Economics*