NINTH EDITION Managerial Economics and Business Strategy The McGraw-Hill Series Economics ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel M: Economics: The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition PRINCIPLES OF ECONOMICS Asarta and Butters Connect Master: Principles of Economics First Edition Colander Economics, Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Sixth Edition Frank, Bernanke, Antonovics, and Heffetz A Streamlined Approach for: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition ADVANCED ECONOMICS ECONOMICS OF SOCIAL ISSUES MONEY AND BANKING Guell Issues in Economics Today Eighth Edition Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fifth Edition Register and Grimes Economics of Social Issues Twenty-First Edition ECONOMETRICS Gujarati and Porter Basic Econometrics Fifth Edition Hilmer and Hilmer Practical Econometrics First Edition MANAGERIAL ECONOMICS Romer Advanced Macroeconomics Fourth Edition URBAN ECONOMICS O’Sullivan Urban Economics Eighth Edition LABOR ECONOMICS Borjas Labor Economics Seventh Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Eleventh Edition Baye and Prince Managerial Economics and Business Strategy Ninth Edition PUBLIC FINANCE Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition Seidman Public Finance First Edition Thomas and Maurice Managerial Economics Twelfth Edition ENVIRONMENTAL ECONOMICS INTERMEDIATE ECONOMICS Bernheim and Whinston Microeconomics Second Edition Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition Frank Microeconomics and Behavior Ninth Edition Rosen and Gayer Public Finance Tenth Edition Field and Field Environmental Economics: An Introduction Seventh Edition INTERNATIONAL ECONOMICS Appleyard and Field International Economics Ninth Edition Pugel International Economics Sixteenth Edition NINTH EDITION Managerial Economics and Business Strategy Michael R Baye Bert Elwert Professor of Business Economics & Public Policy Kelley School of Business Indiana University Jeffrey T Prince Associate Professor of Business Economics & Public Policy Harold A Poling Chair in Strategic Management Kelley School of Business Indiana University MANAGERIAL ECONOMICS AND BUSINESS STRATEGY, NINTH EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2017 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2014, 2010, 2008 and 2006 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper LWI 21 20 19 18 17 16 ISBN 978-1-259-29061-9 MHID 1-259-29061-1 Chief Product Officer, SVP Products & Markets: G Scott Virkler Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Betsy Whalen Managing Director: James Heine Brand Manager: Katie Hoenicke Director, Product Development: Rose Koos Lead Product Developer: Michele Janicek Product Developer: Christina Kouvelis Marketing Manager: Virgil Lloyd Marketing Specialist: Dave O’Donnell Director of Digital Content Development: Douglas Ruby Digital Product Developer: Tobi Philips Director, Content Design & Delivery: Linda Avenarius Program Manager: Mark Christianson Content Project Managers: Kathryn D Wright, Kristin Bradley, and Karen Jozefowicz Buyer: Laura M Fuller Design: Matt Diamond Content Licensing Specialist: Beth Thole Cover Image: © Pasieka/Getty Images Compositor: SPi Global Typyface: 10/12 STIX MathJax Main Printer: LSC Communications All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Control Number: 2016042214 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites mheducation.com/highered DEDICATION To my former students To Annie, Kate, and Elise —Michael R Baye —Jeffrey T Prince About the Authors Michael R Baye is the Bert Elwert Professor of Business Economics & Public Policy at Indiana University’s Kelley School of Business, and served as the Director of the Bureau of Economics at the Federal Trade Commission from July 2007 to December 2008 He received his BS in economics from Texas A&M University in 1980 and earned a PhD in economics from Purdue University in 1983 Prior to joining Indiana University, he taught graduate and undergraduate courses at The Pennsylvania State University, Texas A&M University, and the University of Kentucky He has held a variety of editorial posts in economics, marketing, and business, and currently serves as a co-editor for the Journal of Economics and Management Strategy Professor Baye has won numerous awards for his outstanding teaching and research, and teaches courses in managerial economics and industrial organization at the undergraduate, MBA, and PhD levels His research has been published in the American Economic Review, Journal of Political Economy, Econometrica, Review of Economic Studies, Economic Journal, and Management Science It has also been featured in The Wall Street Journal, Forbes, the New York Times, and numerous other outlets When he is not teaching or engaged in research, Mike enjoys activities ranging from camping to shopping for electronic gadgets Jeffrey T Prince is Associate Professor of Business Economics & Public Policy at Indiana University’s Kelley School of Business He is also the Harold A Poling Chair in Strategic Management He received his BA in economics and BS in mathematics and statistics from Miami University in 1998 and earned a PhD in economics from Northwestern University in 2004 Prior to joining Indiana University, he taught graduate and undergraduate courses at Cornell University Professor Prince has won top teaching honors as a faculty member at both Indiana University and Cornell, and as a graduate student at Northwestern He has a broad research agenda within applied economics, having written and published on topics that include demand in technology markets, Internet diffusion, regulation in health care, risk aversion in insurance markets, and quality competition among airlines He is one of a small number of economists to have published in both the top journal in economics (American Economic Review) and the top journal in management (Academy of Management Journal) He currently serves as a co-editor for the Journal of Economics and Management Strategy and on the editorial board for Information Economics and Policy In his free time, Jeff enjoys activities ranging from poker and bridge to running and racquetball vi Preface Thanks to feedback from users around the world, Managerial Economics and Business Strategy remains the best-selling managerial text in the market We are grateful to all of you for allowing us to provide this updated and improved edition Before highlighting some of the new features of the ninth edition, we would like to stress that the fundamental goal of the book—providing students with the tools from intermediate microeconomics, game theory, and industrial organization that they need to make sound managerial decisions—has not changed What has changed are the examples used to make managerial economics come to life for this generation of students and the utilization of new technologies (such as Connect) for enhancing the teaching and learning experiences of instructors and their students This book begins by teaching managers the practical utility of basic economic tools such as present value analysis, supply and demand, regression, indifference curves, isoquants, production, costs, and the basic models of perfect competition, monopoly, and monopolistic competition Adopters and reviewers also praise the book for its real-world examples and because it includes modern topics not contained in any other single managerial economics textbook: oligopoly, penetration pricing, multistage and repeated games, foreclosure, contracting, vertical and horizontal integration, networks, bargaining, predatory pricing, principal–agent problems, raising rivals’ costs, adverse selection, auctions, screening and signaling, search, limit pricing, and a host of other pricing strategies for firms enjoying market power This balanced coverage of traditional and modern microeconomic tools makes it appropriate for a wide variety of managerial economics classrooms An increasing number of business schools are adopting this book to replace (or use alongside) managerial strategy texts laden with anecdotes but lacking the microeconomic tools needed to identify and implement the business strategies that are optimal in a given situation This ninth edition of Managerial Economics and Business Strategy has been revised to include updated examples and problems, but it retains all of the basic content that made previous editions a success The basic structure of the textbook is unchanged to ensure a smooth transition to this edition KEY PEDAGOGICAL FEATURES The ninth edition retains all of the class-tested features of previous editions that enhance students’ learning experiences and make it easy to teach from this book But this edition includes a number of new features available to those using McGraw-Hill’s wonderful interactive learning products, Connect and SmartBook McGraw-Hill Connect® offers hundreds of variations of end-of-chapter problems that may be electronically graded and provide students with immediate, detailed, feedback SmartBook® provides an adaptive reading experience Students and instructors can access these and other powerful resources directly from their laptops, tablets, and phones We know how important quality and accuracy is for both instructors and students when utilizing these enhanced features For this reason, and unlike many vii viii Preface competing books, we are directly involved in the generation and editing of material offered through both Connect and SmartBook Headlines As in previous editions, each chapter begins with a Headline that is based on a real-world economic problem—a problem that students should be able to address after completing the chapter These Headlines are essentially hand-picked “mini-cases” designed to motivate students to learn the material in the chapter Each Headline is answered at the end of the relevant chapter—when the student is better prepared to deal with the complications of real-world problems Reviewers as well as users of previous editions praise the Headlines not only because they motivate students to learn the material in the chapter, but also because the answers at the end of each chapter help students learn how to use economics to make business decisions Learning Objectives Each chapter includes learning objectives designed to enhance the learning experience Endof-chapter problems are denoted with the learning objective(s) to which they relate Demonstration Problems The best way to learn economics is to practice solving economic problems So, in addition to the Headlines, each chapter contains many Demonstration Problems sprinkled throughout the text, along with detailed answers This provides students with a mechanism to verify that they have mastered the material, and reduces the cost to students and instructors of having to meet during office hours to discuss answers to problems Some of the more challenging demonstration problems have an accompanying video tutorial that walks through the solution step-by-step These videos are available via Connect and at www.mhhe.com/baye9e Inside Business Applications Most chapters contain boxed material (called Inside Business applications) to illustrate how theories explained in the text relate to a host of different business situations As in previous editions, we have tried to strike a balance between applications drawn from the current economic literature and the popular press Calculus and Non-Calculus Alternatives Users can easily include or exclude calculus-based material without losing content or continuity That’s because the basic principles and formulae needed to solve a particular class of economic problems (e.g., MR = MC) are first stated without appealing to the notation of calculus Immediately following each stated principle or formula is a clearly marked Calculus Alternative Each of these calculus alternatives states the preceding principle or formula in calculus notation, and explains the relation between the calculus-based and non-calculusbased formula More detailed calculus derivations are relegated to chapter Appendices Thus, the book is designed for use by instructors who want to integrate calculus into managerial economics and by those who not require students to use calculus Variety of End-of-Chapter Problems Three types of problems are offered Highly structured but nonetheless challenging Conceptual and Computational Questions stress fundamentals These are followed by Problems and Preface ix Applications, which are far less structured and, like real-world decision environments, may contain more information than is actually needed to solve the problem Many of these applied problems are based on actual business events Additionally, the Time Warner Cable case that follows Chapter 14 includes 13 problems called Memos that have a “real-world feel” and complement the text All of these case-based problems may be assigned on a chapter-by-chapter basis as specific skills are introduced, or as part of a capstone experience. Detailed answers to all problems can be found among the instructor resource material available via Connect Case Study A case study in business strategy—Time Warner Cable—follows Chapter 14 and was prepared especially for this text It can be used either as a capstone case for the course or to supplement individual chapters The case allows students to apply core elements from managerial economics to a remarkably rich business environment Instructors can use the case as the basis for an “open-ended” discussion of business strategy, or they can assign specific “memos” (contained at the end of the case) that require students to apply specific tools from managerial economics to the case Teaching notes, as well as solutions to all of the memos, are provided among the instructor resource material available via Connect Flexibility Instructors of managerial economics have genuinely heterogeneous textbook needs Reviewers and users continue to praise the book for its flexibility, and they assure us that sections or even entire chapters can be excluded without losing continuity For instance, an instructor wishing to stress microeconomic fundamentals might choose to cover Chapters 2, 3, 4, 5, 8, 9, 10, 11, and 12 An instructor teaching a more applied course that stresses business strategy might choose to cover Chapters 1, 2, 3, 5, 6, 7, 8, 10, 11, and 13 Each may choose to include additional chapters (for example, Chapter 14 or the Time Warner Cable case) as time permits More generally, instructors can easily omit topics such as present value analysis, regression, indifference curves, isoquants, or reaction functions without losing continuity CHANGES IN THE NINTH EDITION We have made every effort to update and improve Managerial Economics and Business Strategy while assuring a smooth transition to the ninth edition Following is a summary of the pedagogical improvements, enhanced supplements, and content changes that make the ninth edition an even more powerful tool for teaching and learning managerial economics and business strategy ∙ A brand new Case Study—Time Warner Cable—which introduces a whole new set of managerial challenges beyond those posed in our previous case, Challenges at Time Warner ∙ New and updated end-of-chapter problems ∙ Learning objective labels for each end-of-chapter problem, to help foster targeted learning ∙ New and updated Headlines ∙ New and updated Inside Business applications www.downloadslide.net General Index Page numbers followed by n refer to footnotes AC; see Average costs Accounting costs, 162–163 Accounting profits, 4, Addyston Pipe & Steel Company v United States, 438 Adjusted R-square, 88–89 Adobe, 359–360 Ad valorem taxes, 41–42 Adverse selection, 385–387 Advertising brand loyalty induced by, 364 comparative, 260 deceptive, 454 demand shifts and, 35 elasticity of demand, 79 game theory view, 309 incremental costs, 261 industry differences, 217–218 optimal decisions, 260–262 persuasive, 35 AFC; see Average fixed costs Affiliated (or correlated) value estimates, 394, 396–397, 398 Affordable Care Act, employer mandate, 154 Airline industry antitrust cases, 416 frequent-flyer programs, 364 multimarket contact, 320 networks, 425 randomized pricing, 365 Southwest effect, 415 Amazon.com, 204, 479, 483 America Online (AOL), 410, 423, 469 American Airlines, 416 American Recovery and Reinvestment Act of 2009, 484 American Television and Communications (ATC), 469 American Tobacco, 438 Ampex, 423 Antitrust Division, Department of Justice, 216, 416, 440 Antitrust policy; see also Mergers aims, 437 Canadian, 455 Celler-Kefauver Act, 439 Clayton Act, 435, 438–439, 454 enforcement, 407, 440 judicial interpretation, 438 merger reviews, 216–217, 435, 439–440, 461, 475 534 Microsoft case, 410, 418 predatory pricing cases, 416 rationale, 437 Robinson-Patman Act, 438–439 Sherman Antitrust Act, 410, 416, 437–438 AOL; see America Online AP; see Average product Apple, 8, Applebee’s, 412 Arc elasticity of demand, 70 Asahi Breweries Ltd., 34 Asymmetric information adverse selection, 385–387 government regulation and, 452–454 in markets, 384–385 moral hazard, 387–388 signaling and screening, 388–390 AT&T, 203, 204, 224, 372, 474, 476, 477–478 ATC; see American Television and Communications; Average total costs Auctions bidding strategies, 394–397 Dutch, 392–393 on eBay, 357, 392, 427 English, 391, 393 expected revenues, 397–398 first-price, sealed-bid, 391, 393 importance for managers, 390–391 information structures, 393–394 of radio spectrum licenses, 372, 399 with risk-averse bidders, 399 second-price, sealed-bid, 392 Yahoo!, 427 Automobile industry Chinese, 54 Chinese market, 235 concentration ratio, 207 gas prices and, 77 input decisions, 187 profits, AVC; see Average variable costs Average costs (AC), 174 Average fixed costs (AFC), 156, 158 Average product (AP), 138, 139, 144 Average total costs (ATC), 157, 158, 160–161 Average variable costs (AVC), 156, 158 www.downloadslide.net Barriers to entry, 212–213, 242, 253; see also Free entry A Beautiful Mind, 307 Behavior; see Consumer behavior; Preferences Bell South, 372 Benefits marginal, 18–19 maximizing net, 17–20, 18n, 29 Bertrand duopoly game, 303–304 Bertrand oligopoly differentiated-product, 300–301 equilibrium, 291, 292 homogenous-product, 362–363, 364 pricing strategies, 362–365 profit maximization, 288–290 Best Buy, Best-response (or reaction) functions, Cournot oligopoly, 275–276, 277 Block pricing, 354–356 Boeing, 135–136, 166 Bottlenecks, 426 BP America, 438 Brand equity, 260 Brand loyalty, 364 Brand myopic companies, 260 Bright House Networks, 476 Bristol-Myers Squibb, 217 Budget constraint, 106–108, 109 Budget lines, 106–108 Budget sets, 106 Burger King, 255, 262 Business cycles, 115 “Buy one, get one free” deals, 117–118 Cable television; see also Time Warner Cable case study bundled pricing, 472–473 carriage disputes, 481–482 content providers, 472, 480–482 history, 469–470 market trends, 482–483 providers, 470, 471, 472, 474–476 regulation, 470, 480–481, 483–484 sports programming, 481, 482, 483 Cablevision, 475 Canada, Competition Bureau, 455 Capital, as input to production, 136 Cartels; see Oligopoly; Organization of Petroleum Exporting Countries General Index 535 Cash flows, present value, 12–16 Causal view of industry, 220 Celler-Kefauver Act, 439 Census Bureau, 208, 209 CEOs; see Chief executive officers Certification, 452–453 Chain stores, 377 Change in demand, 33 Change in quantity demanded, 33 Change in quantity supplied, 40 Change in supply, 40 Charter Communications, 468, 475–476 Cheating in collusion, 284, 308–309, 315–317 gain to, 319 in OPEC, 285 punishments, 315, 317, 318 Chery Automobile Co., 54 Chevron, 438 Chief executive officers (CEOs), 191; see also Managers Chili’s, 412 China, auto industry, 54, 235 Clayton Act, 435, 438–439, 454; see also Antitrust policy Clean Air Act, 446–447 Cobb-Douglas production function, 144, 145–146, 148 Coca-Cola, 209, 309 Coefficient of determination, 88 Colgate-Palmolive Company, 255, 260 Collusion cheating in, 284, 308–309, 315–317 Cournot oligopoly, 283–284 examples, 318, 319 factors affecting, 317–318 game theory view, 315–316, 317 laws against, 438 obstacles, 308 punishment mechanisms, 318 tacit, 318 trigger strategies, 315–317, 318 Comcast, 474–475, 479 Commitment, 287, 411–412 Commodity bundling, 356–357 Common-value auctions, 394 Compaq, 9, 423 Comparative advertising, 260 Comparative static analysis, 53–56, 112–117 www.downloadslide.net 536 General Index Compensation; see also Wages of chief executive officers, 191 fringe benefits, 154 of managers, 189–192, 200–202 of workers, 192–194 Competition; see also Perfect competition within industries, of Time-Warner, 474–480, 496 Competition Act (Canada), 455 Competition Bureau, Canada, 455 Competition policy; see Antitrust policy Competitive market equilibrium, 45–46 Complements, 35, 113, 425–426 Complete preferences, 103 Computer industry; see also Internet direct sales, 423 market structure evolution, 223 Microsoft antitrust case, 410, 418 profits, Concentration ratios, 206, 207–209 Conduct; see Industry conduct Confidence intervals, 87–88 Conglomerate mergers, 217 Connect America Fund, 484 Constant returns to scale, 162 Constraints, 4, 106; see also Budget constraint Consumer behavior; see also Indifference curves budget constraints, 106–108, 109 equilibrium, 111–112 gifts, 118–122 income changes and, 108–110, 114–115 income effect, 117 opportunities, 102, 108 price changes and, 110–111, 112–114 responses to marketing deals, 117–118 risk aversion, 375–378 substitution effect, 116–117 Consumer–consumer rivalry, 11 Consumer equilibrium, 111–112 Consumer opportunities, 102, 108 Consumer preferences; see also Indifference curves completeness, 103 constraints, 106–111 diminishing marginal rate of substitution, 104 properties, 102–106 transitivity, 104–105 utility maximization, 133 Consumer–producer rivalry, 11 Consumers definition, 102 expectations, 36 risk-neutral, 378 tastes, 35 Consumer search, 378–380 Consumer surplus definition, 39 demand and, 38–39 extracting, 347, 353 measuring, 218–219 Contestable markets, 292–293 Contracts enforcement, 454 franchising, 186 input acquisition, 177–178, 183–185 optimal lengths, 184–186 Coordination games, 310–311 Copyrights, 246 Correlated value estimates, 394, 396–397, 398 Cost complementarities, 164, 244 Cost function algebraic forms, 160 cubic, 160 estimating, 162 long-run, 160–161 multiproduct, 163–166 operating on, 176 short-run, 153–155 use of, 152–153 Cost minimization, 149–151 Costs average, 174 average fixed, 156, 158 average total, 157, 158, 160–161 average variable, 156, 158 economic versus accounting, 162–163 explicit and implicit, fixed, 153, 155, 159, 419 incremental, 20–21, 261 isocost lines, 148–149 marginal definition, 18 derivation, 157 prices and, 240–241 raising rivals’, 418–419 relationship to average costs, 158, 174 minimizing, 149–151, 176, 182–188 opportunity, 5, 12–13, 113 raising rivals’, 417–420 www.downloadslide.net relations among, 158, 174 sunk, 159, 293 total, 153, 155 transaction, 179–182 variable, 153, 155 Cournot equilibrium, 276, 290–291 Cournot oligopoly collusive outcomes, 292 OPEC as, 285 output decisions, 274–284 pricing rule, 345–346 reaction functions, 290–291 Cox Communications, 475 Credit, Truth in Lending Act, 453 Credit cards, budget constraint and, 109 Cross-advertising elasticity, 79 Cross-price elasticity of demand, 75–77 Cross-subsidies, 359–360, 364 Cubic cost function, 160 Customer loyalty programs, 364 Customers, power of, 8; see also Consumers Dansby-Willig (DW) performance index, 218–219 Deadweight loss of monopoly, 254, 436–437 Decision nodes, 325 Decrease in demand, 33 Decrease in supply, 40–41, 56 Decreasing (diminishing) marginal returns, 139–140, 142–143 Dedicated assets, 180 Dell Computer Corporation, 9, 69, 223, 423 Delta Airlines, 425 Demand; see also Elasticities of demand changes in, 33–36, 53–54, 55–56 consumer surplus and, 38–39 law of, 31–32 residual, 408–409 Demand curve, 32, 33, 37–38, 124–126 Demand function, 36–38; see also Regression analysis elasticity of demand, 79–83 estimating, 84–86, 93 log-linear, 81–83 Demand shifters, 33–36 Department of Justice (DOJ) Antitrust Division, 216, 416, 440, 476 Horizontal Merger Guidelines, 440 merger reviews, 203, 216–217, 440, 475 Microsoft case, 410, 418 Department of Transportation, 415 General Index 537 Deregulation; see also Government regulation cable industry, 470 electricity, 443 Differentiated-product Bertrand oligopoly, 300–301 Differentiated products; see Product differentiation Digital video recorders (DVRs), 470, 471, 477, 482–483 Diminishing marginal rate of substitution, 104 Direct network externalities, 425 Diseconomies of scale, 161, 242 Dish Network, 473, 477 Disney, 472, 479 Disney World Theme Parks, 340, 366 Diversification, 382 Dodd-Frank Wall Street Reform and Consumer Protection Act, 453–454 DOJ; see Department of Justice Dominant strategies, 305 Double marginalization, 361 Downstream divisions, 360–361 Duopoly; see also Oligopoly collusive, 292 definition, 271 Durable goods, 34 Dutch auctions, 392–393 DVRs; see Digital video recorders DW index; see Dansby-Willig performance index eBay, 357, 392, 427 Econometrics, 84, 93–94 Economic profits, Economics, 3, 21–22; see also Managerial economics Economies of scale, 161–162, 163, 213, 216, 242–243 Economies of scope, 164, 166, 216, 243–244 Elastic demand, 67 Elasticities of demand arc, 70 cross-price, 75–77 at firm and market levels, 211–212, 213 income, 77–78 obtaining from demand functions, 79–83 own advertising, 79 own price, 66–71 factors affecting, 71–73 marginal revenues and, 73–74 total revenues and, 67–69 Rothschild index, 211–212 Elasticity, 65–66 Electricity deregulation, 443 Eli Lilly, 244 www.downloadslide.net 538 General Index Employees; see Workers End-of-period problem, 323–324 Energy Policy Act, 443 English auctions, 391, 393 Entry barriers; see Barriers to entry; Free entry Entry games, 327–329 Environmental regulation, 444–447 Equilibrium choice, 111; see also Consumer equilibrium Equilibrium prices, 45–46; see also Market equilibrium Equilibrium quantity, 46 European Commission, Small Business Act for Europe, 439 European Union, antitrust laws, 410 Excise tariffs, 459, 460 Excise taxes, 41 Exclusive networks, 426, 427 Ex-dividend dates, 15 Expected value (mean), 373–374 Extensive-form games, 325–326 Externalities negative, 426, 444–447 network, 425–427 Exxon, 438 FC; see Fixed costs Federal Communications Commission (FCC), 372, 399, 471, 472, 475, 480, 483–484 Federal Energy Regulatory Commission (FERC), 443 Federal Reserve Board, 453 Federal Trade Commission (FTC) advertising regulation, 454 merger reviews, 216–217, 435, 440 Feedback critique, 220 FERC; see Federal Energy Regulatory Commission Financial regulation, 50, 453–454; see also Insider trading Finitely repeated games, 320–325 Firm demand curve, in perfect competition, 231, 232–233 Firms; see also Mergers number of, 40–41, 317 risk aversion, 380–382 selling, 376 separation of ownership and management, 189 uncertainty and, 380–384 Firm sizes, 204–205, 317 Firm supply curve, 238 First-degree price discrimination, 347–348 First-mover advantages, 421–423, 426–427 First-price, sealed-bid auctions, 391, 393 Fisher Body, 187 Five forces framework, 7–10, 220–221 Fixed costs (FC), 153, 155, 159 average, 156, 158 raising rivals’, 419 Fixed factors of production, 137 Fixed-proportion production function, 143–144 Followers, 285–286, 287 Ford, 218 Foreign trade; see Trade Four-firm concentration ratio, 206, 207–209 Franchising, contract lengths, 186 Free entry, 230, 239, 257; see also Barriers to entry; Contestable markets Free exit, 230, 239, 257 Free recall, 378 Free riding, 448, 449–450 Frequent-customer programs, 364 F-statistic, 89 FTC; see Federal Trade Commission Full economic price, 49 Future value (FV), 12–13 Games Bertrand duopoly, 303–304 coordination, 310–311 end-of-period problem, 323–324 extensive-form, 325–326 finitely repeated, 320–325 infinitely repeated, 314–319 multistage, 325–331 Nash bargaining, 312–313 normal-form, 304–306 one-shot, 303, 304–313 repeated, 303 sequential-move, 303, 325–327 sequential-move bargaining, 330–331 simultaneous-move, 303, 304–306 Game theory applications, 303, 307–313, 319–320, 324–325, 327–331 Nash equilibrium, 306, 307 strategies, 304–306 subgame perfect equilibrium, 327 Gateway Computer, 223 General Electric, 475 General Mills, 290 General Motors, 187 Gift certificates, 119–120, 122 www.downloadslide.net Gifts in-kind or cash, 118–119, 122 returning to stores, 118, 119 Globalization; see also Trade of auto industry, 54 global markets, 208–209 profit maximization and, Goods complements, 35, 113, 425 consumer preferences, 102–106 durable, 34 expenditure shares, 72–73 inferior, 34, 114–115 nonexclusionary, 448–450 nonrival, 448–450 normal, 33, 77–78, 114–115 public, 448–451 substitutes, 34, 71–72, 113–114 Goodyear, 218 Google, 175, 195, 204, 471, 478, 479–480 Government regulation; see also Antitrust policy; Market failures; Taxes advertising, 454 cable television, 470, 480–481, 483–484 certification, 452–453 contract enforcement, 454 deregulation, 443 environmental, 444–447 financial, 50, 453–454 health and safety, 452 international trade, 457–460 of markets, 12, 385, 436–437 minimum wages, 50, 52 net neutrality, 484 price ceilings, 47–51 price floors, 51–52 price regulation, 440–444 rent seeking and, 455–456 supply curve and, 41 usury laws, 50 Green marketing, 260 Guarantees, 319–320 Hart-Scott-Rodino Antitrust Improvement Act, 440 Health and safety regulations, 452 Health care prescription drugs, 74 public health centers, 126 Health insurance, employer mandate, 154 General Index 539 HealthNet International, 126 Herfindahl-Hirschman index (HHI), 206–208, 440 Hewlett-Packard, HHI; see Herfindahl-Hirschman index Hidden actions, 386, 387 Hidden characteristics, 386, 388 Hiring decisions, 385, 388–389 Hold-up problem, 181 Horizontal integration, 216 Horizontal Merger Guidelines, 440 Horizontal mergers, 216, 440 Housing market, arc elasticity of demand, 70 Hulu, 479, 483 Human capital, 180 Hynix Semiconductor, 30 IAM; see International Association of Machinists and Aerospace Workers Union IBM, 9, 423 iid normal assumption, 86 Import quotas, 457–458; see also Trade Incentive contracts, 190–191 Incentives; see also Compensation external, 192 of managers, 10–11, 190–192 output-based, 126 of workers, 140, 192–194 Income effect, 117 Income elasticity of demand, 77–78 Income-leisure choice model, 121 Incomes; see also Budget constraint business cycles and, 115 changes in, 108–110, 114–115, 116–117 demand and, 33–34 Incomplete information, 412–413, 451–452 Increase in demand, 33, 56 Increase in supply, 40 Increasing marginal returns, 139–140 Incremental costs; see also Marginal costs of advertising, 261 decision making using, 20–21 Incremental revenues, 20–21; see also Marginal revenue Independent private values, 393, 394–396, 398 India, cola wars, 309 Indifference curves, 104–106 consumer choices and, 117–118 demand curves and, 124–126 income-leisure choice, 121–122 management compensation, 200–202 www.downloadslide.net 540 General Index Indifference curves—Cont of managers, 123–124 marginal rate of substitution, 104 risk preferences and, 105 Indirect network externalities, 425–426 Industry classification systems, 210 Industry concentration limitations of measures, 208–209 measures, 205–208 in United States, 207–209 Industry conduct advertising spending, 217–218 merger activity, 215–217 pricing behavior, 214–215 relationship to structure and performance, 219–221 research and development, 217 Industry performance profits, 218 relationship to structure and conduct, 219–221 social welfare, 218–219 Industry structure, 204; see also Market structure demand and market conditions, 210–212 entry potential, 212–213 relationship to conduct and performance, 219–221 technology and, 209–210 Inelastic demand, 67; see also Elasticities of demand Inferior goods, 34, 114–115 Infinitely repeated games, 314–319 Information; see also Uncertainty asymmetric, 384–390, 452–454 imperfect, 373 incomplete, 412–413, 451–452 perfect, 373 Information advertising, 35 Information structures of auctions, 393–394 In-kind or cash gifts, 118–119, 122 Innovation, 329; see also Technology Input procurement methods contracts, 177–178, 183–186 cost minimization, 182–188 inefficient, 182 spot exchange, 177, 182–183 transaction costs, 179–182 vertical integration, 178, 186 Inputs; see also Production function; Suppliers capital, 136 cost minimization, 149–151, 176, 182–188 labor, 136 levels used, 140–143 marginal rate of technical substitution, 147–148 optimal mix, 174 optimal substitution, 151–152 prices, 40, 420 producer search, 383 production function, 136–138 productivity measures, 138–140 profit-maximizing usage, 141–143, 146, 173 Insider trading, 385, 452 Insurance adverse selection and, 386–387 health, 154 moral hazard problem, 387–388 risk aversion and, 378 Integration, 215; see also Mergers conglomerates, 217 horizontal, 216 vertical, 178, 186, 216, 419–420 Interest rates, usury laws, 50 International Association of Machinists and Aerospace Workers Union (IAM), 135–136, 166 International markets; see Trade International Paper, 204 Internet auction sites, 357, 392, 427 broadband access, 470–471, 473, 484 browsers, 410 complementary products and services, 425 net neutrality, 484 price comparison sites, 379 price searches, 378–380 pricing strategies, 357 reviews, 377–378 search costs, 379 telephone service, 473 travel services, 363 video distribution, 477, 478–480, 482 Inventory management, price changes and, 113 Inverse demand function, 37–38, 247 Inverse supply function, 44 Investments, risk preferences and indifference curves, 105 Isocost lines, 148–149 Isoprofit curves, 279–281 Isoquants, 146–148 slope, 173–174 Justice Department; see Department of Justice JVC, 423 www.downloadslide.net Kelkoo.com, 93, 289 Kellogg, 217, 290 KFC, Kirin Brewery Company, Ltd., 34 Kroger, 364 Labor; see also Wages; Workers as input to production, 136 value marginal product, 140–143 Lanham Act, 454 Law of demand, 31–32 Law of diminishing marginal rate of technical substitution, 148 Law of diminishing marginal returns, 142–143 Leaders, 285, 287 Learning curve effects, 412, 422 Least squares regression, 85 Legal issues; see Antitrust policy; Department of Justice Lenovo, Leontief production function, 143–144, 147 Lerner index, 214–215 Licensing certification, 452–453 technology, 142 Limit pricing definition, 408 dynamic considerations, 413–414 effects, 409–413 Southwest effect, 415 theoretical basis, 408–409 Linear demand function, 36, 79–81 Linear inverse demand function, 247–248 Linear production function, 143, 145, 147 Linear supply function, 43 Lobbyists; see Rent seeking Lock-in, 427 Log-linear demand function, 81–83 estimating, 89–91 Long run, 138 Long-run average cost curve (LRAC), 161 Low-price guarantee (LPG), 363 Lump-sum tariffs, 459–460 Management, effective; see also Profit maximization five forces framework, 7–10, 220–221 goals and constraints, incentives, 10–11 marginal analysis, 16–21 markets, 11–12 time value of money, 12–16 General Index 541 Managerial economics definition, headlines involving, studying, 2, 21–22 Managers compensation, 189–192, 200–202 decision making, 3, 20–21 definition, incentives, 10–11, 190–192 preferences, 121, 122–124 principal–agent problem, 189–191, 192–195, 311–312 responsibilities, risk-neutral, 381, 382, 383 Marginal analysis calculus, 20, 29 continuous decisions, 19–20 definition, 16–17 discrete decisions, 17–19 incremental decisions, 20–21 Marginal benefits, 18–19 Marginal costs (MC) Cournot oligopoly, 281–283 definition, 18 derivation, 157 prices and, 240–241 raising rivals’, 418–419 relationship to average costs, 158, 174 Marginal net benefits, 17–20 Marginal product (MP), 138–140, 144–146 value, 140–143, 146 Marginal rate of substitution (MRS), 104, 112, 133–134 diminishing, 104 Marginal rate of technical substitution (MRTS), 147–148 Marginal returns decreasing (diminishing), 139–140, 142–143 increasing, 139–140 negative, 139–140 Marginal revenue for Cournot duopoly, 276–277 definition, 232 elasticity of demand and, 73–74 of monopolist, 245–248 Market demand curve, 32, 33, 125–126; see also Demand Market entry games, 327–328; see also Free entry Market equilibrium, 45–46 comparative static analysis, 53–56 spreadsheet, 55 www.downloadslide.net 542 General Index Market failures asymmetric information, 384–390, 452–454 externalities, 444–447 incomplete information, 412–413, 451–452 market power, 436–444 public goods, 448–451 Market power, 436; see also Antitrust policy; Monopoly Market rate of substitution, 108 Markets contestable, 292–293 global, 208–209 government regulation, 12, 385, 436–437 regional and local, 209 understanding, 11–12 Market structure; see also Monopolistic competition; Monopoly; Oligopoly; Perfect competition barriers to entry, 212–213 definition, 204 effects on firm behavior, 220 evolution over time, 223 firm sizes, 204–205 industry concentration, 205–209 Market supply curve, 39–42; see also Supply Markups, 214–215, 343–344 Maruti Udyog Ltd., 163 Matsushita Plasma Display Panel Company, Ltd., 163 MC; see Marginal costs McCaw, 372 McDonald’s, 186, 229, 255, 262 Mean, 373–374 Mergers; see also Antitrust policy AOL Time-Warner, 469 conglomerate, 217 cost reductions, 166 horizontal, 216, 440 industry differences, 215–217 motives, 216 reviews, 203, 216–217, 440, 475 vertical, 216 Microsoft, 9, 410, 418 Minimum wages, 50, 52 Mitsui & Co Ltd., Mixed (randomized) strategies, 312 Mobil, 438 Mobile technology, 473, 483 Monopolistic competition advertising spending, 260 conditions, 255 definition, 222 demand curves, 255–256 long-run equilibrium, 257–259 pricing strategies, 342–344 profit maximization, 255–257 Monopolistic competitive markets, 255 Monopoly barriers to entry, 253 deadweight loss of, 254, 436–437 definition, 222, 241 demand curves, 241–242 limit pricing strategy, 408–414 multiplant decisions, 251–252 output decisions, 248–252 price regulation, 440–444 pricing strategies, 250, 342–344, 408–414 profit maximization, 244–252 social welfare losses, 253–254 sources, 242–244 supply curve absence, 251 Moral hazard, 387–388 More is better, 103–104 Morton’s, 406–407, 429 Motorola Mobility, 175, 195 MP; see Marginal product MRS; see Marginal rate of substitution MRTS; see Marginal rate of technical substitution Multichannel video programming distributors (MVPDs), 474, 476, 483, 496 Multimarket contact, 320 Multiplant monopoly, 251–252 Multiple regressions, 91–93 Multiproduct cost function, 163–166 Multistage games, 325–331 MVPDs; see Multichannel video programming distributors NAFTA; see North American Free Trade Agreement NAICS; see North American Industry Classification System Nash bargaining, 312–313 Nash equilibrium, 306, 307 National Association of Realtors, 70 National Football League (NFL), 481, 482 Negative externalities, 426, 444–447 Negative marginal returns, 139–140 Nestlé, 435, 461 Netflix, 471, 478–479, 483 Net neutrality, 484 Net present value (NPV), 13 www.downloadslide.net Netscape, 410, 418 Network complementarities, 425–426 Network effects, 422, 424–427 Networks bottlenecks, 426 definition, 424 exclusive, 426, 427 externalities, 425–427 one-way, 424 penetration pricing strategy, 427–428 star, 424–425 two-way, 424, 425 NexTag.com, 289 NFL; see National Football League Niche marketing, 260 Nodes, 424 Nonexclusionary goods, 448–450 Nongovernmental organizations, incentives, 126 Nonlinear demand function, 81–83 estimating, 89–91 Nonpecuniary prices, 49 Nonrival goods, 448–450 Normal-form games, 304–306 Normal goods, 33, 77–78, 114–115 North American Free Trade Agreement (NAFTA), 42, 210 North American Industry Classification System (NAICS), 210 NPV; see Net present value Occupational Safety and Health Administration (OSHA), 452 Oil; see Organization of Petroleum Exporting Countries Oligopoly; see also Games beliefs and strategic interaction, 271–273 collusion, 283–284, 291, 292, 315–319 definition, 222, 271 profit maximization Bertrand oligopoly, 288–290 Cournot oligopoly, 274–284 Stackelberg oligopoly, 285–288 Sweezy oligopoly, 273–274 Oligopoly models Bertrand differentiated-product, 300–301 equilibrium, 291, 292 homogenous-product, 362–363, 364 pricing strategies, 362–365 profit maximization, 288–290 General Index comparing, 290–292 Cournot collusive outcomes, 292 OPEC as, 285 pricing rule, 345–346 profit maximization, 274–284 reaction functions, 290–291 Stackelberg, 284–288, 291, 292, 421 Sweezy, 273–274 One-shot games, 303, 304–313 One-way networks, 424 OPEC; see Organization of Petroleum Exporting Countries Operating losses, short-run, 236 Opportunism, 181 Opportunity costs definition, of inventory, 113 of waiting, 12–13 Optimal input substitution, 151–152 Orbitz, 363 Organization of Petroleum Exporting Countries (OPEC), 285, 438 OSHA; see Occupational Safety and Health Administration Output decisions Cournot oligopoly, 274–284 Stackelberg oligopoly, 285–288 Sweezy oligopoly, 273–274 Own advertising elasticity of demand, 79 Owners principal–agent problem, 189–191 shareholders, 382 Own price elasticity of demand, 66–71 factors affecting, 71–73 marginal revenues and, 73–74 total revenues and, 67–69 Panasonic, 163 Parameter estimates, 85 Patents, 142, 244, 246 Pay-for-performance contracts, 194 Peak-load pricing, 358–359 Penetration pricing, 427–428 PepsiCo, 209, 309 Perfect competition assumptions, 230 definition, 221 543 www.downloadslide.net 544 General Index Perfectly competitive markets definition, 230 demand curves, 231, 232–233 examples, 230–231 long-run output decisions, 239–241 pricing decisions, 341 short-run output decisions firm supply curve, 238–239 loss minimization, 236 profit maximization, 232–234 shutting down, 236–237 supply curves, 238–239 supply function, 269 Perfectly elastic demand, 69–70 Perfectly inelastic demand, 69–70 Performance; see Industry performance; Profit maximization; Social welfare Perpetuities, 14 Persuasive advertising, 35 Per-unit (or excise) tariffs, 459, 460 Peugeot-Citroën, 235 Pfizer, 244 Physical-asset specificity, 180 Piece-rate system, 193, 194 Plants, multiplant monopoly, 251–252 Pollution, 444–447 Population, demand and, 35–36 Predatory pricing, 415–416 Preferences complete, 103 consumer, 102–105, 133 income-leisure choice model, 121–122 risk, 105 Prescription drugs, elasticity of demand, 74 Present value (PV), 12–16, 314 Price ceilings, 47–51 Price competition, intense inducing brand loyalty, 364 price matching, 362–363 randomized pricing, 364–365 Price–cost squeeze, 420 Price discrimination benefits to consumers, 352 consumer surplus and, 38 definition, 347 first-degree, 347–348 legality, 438–439 second-degree, 348–349 as strategic tool, 420–421 third-degree, 349–350 Price floors, 50, 51–52 Price frames, 357 Price matching, 362–363 Price regulation of cable industry, 484 of monopolists, 440–444 Prices changes in, 110–111, 112–114, 116–117 consumer surplus and, 38–39 equilibrium, 45–46 full economic, 49 of inputs, 40, 420 markups, 214–215, 343–344 nonpecuniary, 49 in oligopoly, 271–273 online comparisons, 289 producer surplus and, 44–45 transfer, 360–362 Price supports, 52 Pricewatch.com, 379 Pricing decisions game theory view, 307–309 in perfect competition, 341 Pricing strategies basic, 341–346 block pricing, 354–356 brand loyalty induced by, 364 cable television, 472–473 combining, 364 commodity bundling, 356–357 in Cournot oligopoly, 345–346 cross-subsidies, 359–360, 364 intense price competition, 362–365 limit pricing, 408–414, 415 in monopolistic competition, 342–344 in monopoly, 250, 342–344, 408–414 peak-load pricing, 358–359 predatory pricing, 415–416 price discrimination, 38, 347–350, 352, 420–421 price matching, 362–363 randomized pricing, 364–365 rule-of-thumb markup, 343 transfer pricing, 360–362 two-part pricing, 351–354 value pricing, 38 www.downloadslide.net Principal–agent problem game theory view, 311–312 hidden actions, 387 for managers and workers, 192–195, 311–312 for owners and managers, 189–191 Private value, 393 Probabilities, 373–375 Procter & Gamble, 255, 423 Prodigy Services, 423 Producer expectations, 42 Producer–producer rivalry, 11 Producer search, 383 Producer surplus, 44–45, 218–219 Product differentiation examples, 255 in monopolistic competition, 259–260 in oligopoly, 271–273, 300–301 Production learning curve effects, 412, 422 managerial decisions, 136, 137 managerial roles, 140–143 substitutes, 41 Production costs; see Costs Production function; see also Inputs algebraic forms, 143–144 Cobb-Douglas, 144, 145–146, 148 definition, 136 estimating, 162 fixed-proportion, 143–144 inputs, 136–138 isocosts, 148–149 isoquants, 146–148 Leontief, 143–144, 147 linear, 143, 145, 147 long-run, 138 producing on, 140 short-run, 137 Productivity, 388–389 Productivity measures algebraic forms, 144–146 average product, 138, 139, 144 marginal product, 138–140, 144–146 total product, 138, 139 Product quality game theory view, 309, 319–320 risk-averse consumers and, 376–377 Products; see also Goods complementary, substitutes, 8–9 General Index Profit maximization; see also Pricing strategies advertising decisions, 260–262 basic rule, 341 Bertrand oligopoly, 288–290 calculus, 269 Cournot oligopoly, 274–284 globalization and, as goal, 4–6 long-term, 15 in monopolistic competition, 255–257 in monopoly, 244–252 in perfectly competitive markets, 232–234 present value analysis, 14–15 pricing decisions, 341 risk and, 382, 383–384 short-term, 15 Stackelberg oligopoly, 285–288 Sweezy oligopoly, 273–274 Profit-maximizing advertising-to-sales ratio, 261–262 Profit-maximizing usage, 141–142, 146, 173 Profits accounting, 4, economic, five forces framework, 7–10, 220–221 industry differences, 218 isoprofit curves, 279–281 postentry, 410–414 as signal, 6, Profit sharing, 192–193 Property rights, 445 Public goods, 448–451 Public health centers, 126 Public utilities; see Utilities Public Utility Regulatory Policies Act (PURPA), 443 PV; see Present value P-values, 87 Quality; see Product quality Quotas, 457–458 Raising rivals’ costs, 417–420 Ralston Purina, 435, 461 Randomized pricing, 364–365 Reaction functions, Cournot oligopoly, 275–276, 277 Recessions, 34, 115 Regression analysis estimating demand, 84–86, 93 fit of regression line, 88–89 least squares, 85 545 www.downloadslide.net 546 General Index Regression analysis—Cont multiple, 91–93 nonlinear, 89–91 spreadsheets, 85, 86 statistical significance of estimated coefficients, 86–89 Regression line, 84, 85, 88–89 Regulation; see Government regulation Regulation Z, 453 Relationship-specific exchanges, 179 Rent seeking, 455–456 Repeated games definition, 303 finitely, 320–325 infinitely, 314–319 Replacement, 378 Reputation effects, 413 Reputations, 192 Research and development (R&D) expenditures, 217, 218 as source of innovation, 142 Reservation price, 380, 392 Residual degrees of freedom, 89 Residual demand, 408–409 Resignations, 324–325 Resources, Retail stores chains, 377 gift certificates, 119–120, 122 returning purchases, 118, 119 Returns to scale, 161–162 Revenue equivalence, 398 Revenues, incremental, 20–21; see also Marginal revenue; Total revenues Revenue sharing, 193 Reverse engineering, 142 Risk; see also Uncertainty diversification, 382 indifference curves and, 105 probabilities, 373–375 Risk aversion of auction bidders, 399 of consumers, 375–378 of firms, 381–382 Risk-loving individuals, 376 Risk-neutral individuals auction bidding strategies, 391, 394–397 consumers, 378 definition, 376 managers, 381, 382, 383 Robinson-Patman Act, 438–439 Rothschild index, 211–212 R-square, 88 adjusted, 88–89 Rule of reason, 438 Rwanda, public health centers, 126 Safelite Glass Corporation, 194 Sales taxes, 41–42 Samsung Electronic Company, 30 Sapporo Breweries Ltd., 34 Sarbanes-Oxley Act, 452 Screening, 389 SEC; see Securities and Exchange Commission Second-degree price discrimination, 348–349 Second-mover advantages, 423 Second-price, sealed-bid auctions, 392 Secure strategies, 305–306 Securities and Exchange Act, 452 Securities and Exchange Commission (SEC), 453–454 Self-selection devices, 389–390 Senior discounts, 349, 352 Sequential bargaining, 330–331 Sequential-move games, 303, 325–327 Shareholders, 382 Sherman Antitrust Act, 410, 416, 437–438; see also Antitrust policy Shopper.com, 289 Shortages, 45 Short run, 137 Short-run cost function, 153–155 Shut-down decisions, 236–237 Signaling, 388–389 Simultaneous-move games, 303, 304–306 Site specificity, 179 Small Business Act for Europe, 439 “Snake-oil” salesmen, 325 Socially inefficient outcomes, 307 Social welfare Dansby-Willig performance index, 218–219 effects of market power, 436–437 Sony, 423 Southwest Airlines, 415 Southwest effect, 415 Specialized investments implications, 180–181 types, 179–180 Spot checks, 194–195 Spot exchange, 177, 182–183 www.downloadslide.net Sprint, 203 Stackelberg oligopoly, 284–288, 291, 292, 421 Standard deviation, 374 Standard error, 87 Standard Oil of New Jersey, 438 Staples, Starbucks, 186, 262 Star networks, 424–425 Statistics, 373–375 Stockpiling, 36 St Petersburg paradox, 376 Strategic interaction, in oligopoly, 271–273; see also Games Strategies dominant, 305 in game theory, 304–306 mixed (randomized), 312 secure, 305–306 trigger, 315–317, 318 Structure; see Industry structure Structure–conduct–performance paradigm, 219–221 Student discounts, 349 Subgame perfect equilibrium, 327 Subsidiaries, selling, 166 Substitutes goods, 34, 71–72, 113–114 in production, 41 Substitution effect, 116–117 Subway, 260 Sum of squared errors, 85 Sunk costs, 159, 293 Suppliers, power, Supply changes in, 40–42, 54–56 producer surplus and, 44–45 Supply curve, 39–42, 43–44 Supply function, 43–44 Supply shifters, 40–42 Supreme Court, 438 Surplus; see Consumer surplus; Producer surplus Sweezy oligopoly, 273–274 Tacit collusion, 318 Takeovers; see also Mergers motives, 216 threats, 192 Tariffs lump-sum, 459–460 per-unit (or excise), 459, 460 General Index Taxes ad valorem, 41–42 excise, 41 public goods funded with, 450 sales, 41–42 supply curve and, 41–42 Technology; see also Research and development; Television acquiring, 142 industry structure and, 209–210 licensing, 142 patents, 142, 244, 246 production, 136 reverse engineering, 142 supply curve and, 41 Telecommunications Act of 1996, 470 Telephone service on Internet, 473 mobile, 473, 483 providers, 470, 473, 477–478 Television; see also Cable television broadcast, 480–481, 484 digital video recorders, 470, 471, 477, 482–483 satellite, 470, 473, 474, 476–477 Television Consumer Freedom Act of 2013, 472 Telkom, 287 Third-degree price discrimination, 349–350 Time, Inc., 469 Time clocks, 194 Time value of money, 12–16 Time Warner, 410, 469 Time Warner Cable case study acquisition by Charter, 475 businesses, 471–473 carriage disputes, 481–482 challenges, 484–485 Comcast merger proposal, 475 company history, 469 competition, 474–480, 496 financial statements, 493–494 markets, 471–473 market trends, 468, 471–473, 482–483 regulatory considerations, 470, 480–481, 483–484 revenues, 471, 472, 473, 495 stock price, 469, 470 subscribers, 471, 473, 495 suppliers, 480–482 TLSA; see Truth in Lending Simplification Act T-Mobile USA, 203 547 www.downloadslide.net 548 General Index Toray Industries, 163 Total costs (TC), 153, 155 average, 157, 158, 160–161 Total product (TP), 138, 139 Total revenues cross-price elasticity of demand and, 76–77 elasticity of demand and, 67–69 Total revenue test, 68–69 Toyota, 7–8, 360 TP; see Total product Trade quotas, 457–458 tariffs, 459–460 Trade Act of 2002, 42 Trade agreements, 42 Trademarks, 246 Transaction costs, 179–182 Transfer pricing, 360–362 Transitivity, 104–105 Trigger strategies, 315–317, 318 Truth in advertising, 454 Truth in Lending Act, 453 Truth in Lending Simplification Act (TLSA), 453 t-statistics, 87–88 Turner Broadcasting Systems, 469 Two-part pricing, 351–354 Two-way networks, 424, 425 Uncertainty; see also Risk consumer search, 378–381 in markets, 384–390 random variables, 373–375 Unitary elastic demand, 67 U.S Copyright Office, 246 U.S Patent and Trademark Office, 246 United States v Joint Traffic Association, 438 United States v Standard Oil of New Jersey, 438 United States v Trans-Missouri Freight Association, 438 Upstream divisions, 360–361 US Airways, 16, 302, 331–332 Usury laws, 50 Utilities deregulation, 443 monopolies, 241 price regulation, 440–444 Utility function, 133 Utility maximization, 133 Value marginal product (VMP), 140–143, 146 Value of firm, 14–15 Value pricing, 38 Variable costs (VC), 153, 155 average, 156, 158 Variable factors of production, 137 Variance, 374–375 VC; see Variable costs Verizon Communications, 203, 204, 473, 474, 477 Vertical foreclosure, 420 Vertical integration input production, 178, 186, 216 raising rivals’ costs, 419–420 Vertical mergers, 216 VMP; see Value marginal product Wages minimum, 50, 52 piece-rate system, 193, 194 Walmart, 64, 204 Warner Communications, 469 Warranties, 319–320 Web; see Internet Wendy’s, 7, 255, 262 Winner’s curse, 396–397 Workers; see also Labor; Wages compensation, 192–194 fringe benefits, 154 human capital, 180 incentives, 140, 192–194 income-leisure choice model, 121–122 job applicants, 385, 388–389 monitoring, 194–195, 311–312 principal–agent problem, 192–195, 311–312 productivity, 388–389 resignations, 324–325 Yahoo!, 93, 482 Yahoo! Auctions, 427 Yelp, 377–378 YouTube, 479–480 ... EDITION Managerial Economics and Business Strategy The McGraw-Hill Series Economics ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel M: Economics: ... and Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics... Schiller and Gebhardt Essentials of Economics Tenth Edition PRINCIPLES OF ECONOMICS Asarta and Butters Connect Master: Principles of Economics First Edition Colander Economics, Microeconomics, and