econ311

Markets, Prices and Firms

Economics 311

Instructor: R. Morris Coats

Office: 102B White Hall

Office Phone: (504)448-4237

Office Hours: or by appointment.

Virtual Office: course website is at www.geocities.com/WallStreet/Floor/5316

e-mail at coatsm@cajunnet.com or ecfi-rmc@mail.nich.edu

Virtual Office Hours: 24 hours a day, 7 days a week.

Course Description:

Economic analysis of prices and market institutions and how they coordinate the actions of diverse individuals in society in the use of resources in production and the exchange of goods and services for consumption. Emphasis on consumer choice and firm choice, cost analysis, pricing and output decisions under various competitive scenarios, as well as non-price competition. Attention is paid to economic theory, theory application and empirical analysis.

Possible Texts:

Robert S. Pindyck and Daniel L. Rubinfeld (1998). Microeconomics, 4^th ed. Prentice-Hall.

Edgar K. Browning and Mark A. Zupan (1999). Microeconomic Theory and Applications, 6^thed. Addison-Wesley.

Arthur A. Thompson, Jr. and John P. Formby (1993). Economics of the Firm: Theory and Practice, 6h ed. Prentice-Hall.

David D. Friedman (1990). Price Theory: An Intermediate Text, 2^nd ed. SouthWesern Publishing Co. Now, Friedman's Price Theory text is available completely webbed, just click on the title.

Course Objectives:

Provide the student with current economic theory of markets, prices, and firms as well as relevant applications of the theory in today’s business world.

Provide an in-depth theoretical foundations of market analysis.

Enable the student to use basic statistical tools to estimate demand, supply, production and cost functions.

Enable the student to predict firm and market responses to various stimuli under various competitive market environments.

Enable the student to analyze strategic decisions of firms in various competitive and informational environments, particularly business policies regarding pricing, quality, advertising and bundling.

Provide a framework for understanding consumer and business decisions and how such decisions are coordinated through market processes and the social consequences of those decisions.

Course Requirements:

Reading Assignments: Read material from the text for each day's class BEFOREclass, as assigned. Periodically you will be given additional reading assignments as a class. You will also be responsible for reading, summarizing and presenting an article from the list at the end of the syllabus.

Summaries: Summaries will be marked and returned before your presentation so that you can make corrections. You will make copies of your summary for the class.

Presentations: You will have one oral presentation, as stated above.

Homework: You will have several homework assignments throughout the term. Homework assignments will be made with the idea of giving you practice and an idea of what to expect on exams. I will try to keep in mind that each of you has other obligations for your time. In other words, these assignments are not to keep you busy, but to enable you to be successful in class.

Examinations: There will be a total of three exams during the term, with one of which is being your final exam. Makeup exams will be given only in the event of officially excused absences.

Class Discussions: Class discussions will not be graded but you will find that engaging in these discussions will be intellectually rewarding and aid to your mental development.

Estimation: As part of your homework, you will be required to estimate several functions using statistical techniques discussed in class.

Method of Evaluation:

There will be three exams, including a potentially comprehensive final. The first two exams count for one twenty percent of your final grade, while the final counts for thirty percent of your grade. Twenty percent of your grade will be determined by your homework. The remaining ten percent will be determined by your combined grade of your article summary and oral presentation. Graphical analysis will be used on exams.

The grading scale is the usual 60-70-80-90 scale. Exams will have problems, essays and definitional questions. Exams will not have any multiple-choice or true-false type questions.

Make-up Exam Policy: Makeup exams will be given only in the event of officially excused absences.

Attendance: Attendance is required by University policy, but will not enter directly into the grade formula.

Class rules:

No smoking or eating will be tolerated in the classroom-- before, during or after class.

Leaving early is disruptive of classroom activities and will not be permitted unless you have permission from me or become ill.

Talking in class while I am speaking or while someone else has permission to speak is both distracting and rude and will not be tolerated.

Any instance of cheating will be reported and full action will be pursued (see the handout on cheating and plagiarism).

Warning:

The theory and methods presented in this course will help you to understand many social phenomena, not just business activity. This is worthy of diligent study and requires it from even the more intelligent student. You will probably need to read the assigned material more than once in order to have an adequate understanding of the concepts. You must read the assignments before coming to class on that material. Procrastination leads to cramming, which can only result in confusion and failure.

Course Outline:

I. Introduction
	A. Supply and Demand
		1. elasticities
		2. comparative statics
		3. price controls
	B. Regression Analysis
		1. estimation
		2. statistical tests
		3. goodness of fit
		4. forecasting
II. Demand and Consumer Choice
	A. Preferences and Constraints
	B. Consumer Choice
	C. Revealed Preferences
	D. Individual Denand
	E. Income and Substitution Effects
	F. Market Demand
	G. Consumer Surplus
	H. Network Externalities
	I. Empirical Estimation of Demand
	J. Probability and Expected Value
	K. Risk Preferences
	L. Risk Reduction
	M. Risk/Return Tradeoff
III. Production, Costs, Supply and Firm Choice in Competitive Markets
	A. Production Technology
		1. isoquant/isocost analysis
		2. production with one variable input
		3. production with two variable inputs
	B. Production Costs
		1. measuring costs
		2. short-run costs
		3. long-run costs
		4. economies of scope and multiple outputs
		5. the learning curve
		6. cost estimation and prediction
	C. Profit Maximization Under Competitive Conditions
		1. marginal cost and marginal revenue analysis
		2. output and supply in the short and long run
		3. competitive and contestable markets
IV. Competitive Markets and Economic Efficiency
	A. Market Power: Monopoly and Monopsony
	B. Pricing and Output Under Monopoly
	C. Monopoly Power
		1. measurement
		2. sources
		3. social costs
		4. pricing
	D. Monopsony Power
	E. Antitrust
V. Pricing with Market Power
	A. Capturing Consumer Surplus
	B. Price Discrimination
	C. Peak-Load Pricing
	D. Two-Part Pricing
	E. Bundling as a Pricing Strategy
	F. Advertising
VI. Non-Price Competition and Oligopoly
	A. Non-Price Competition (Monopolistic Competition)
	B. Oligopoly
	C. First-Mover Advantage
	D. Price Competition
	E. Competition vs. Collusion and the Prisoner's Dilemma
	F. Cartels
VII. Game Theory and Competitive Strategy
	A. Strategic Decisions
	B. Dominant Strategies
	C. Nash Equilibrium and Mixed Strategies
	D. Repeated Games
	E. Sequential Games
	F. Threats, Commitments and Credibility
	G. Entry Deterrence
	H. Bargaining Strategy
VIII. Markets for Production Inputs and the Input Purchasing Decision
	A. Competitive Input Markets
	B. Input Markets with Monopsony Power
	C. Input Markets with Monopoly Power
	D. Bilateral Monopoly Markets
IX. Markets with Asymmetric Information
	A. Quality Uncertainty and Lemons Markets
	B. Market Signaling
	C. Moral Hazard
	D. The Principal-Agent Problem
	E. Managerial Incentives in and Integrated Firm

Papers (or books) to summarize and present:

James M. Buchanan (1969). Cost and Choice. Chicago: Markham Publishing Company.

George Stigler (1958). The Economies of Scale, Journal of Law and Economics 1:54-71.

Arthur Denzau (1992). The Size of the Firm: Vertical Integration and Scope, ch. 23 in Microeconomic Analysis: Markets and Dynamics, Homewood, IL: Irwin.

William Baumol (1982). Theory of Industry Structure. American Economic Review 72:1-15.

Armen Alchian and Harold Demsetz (1972). Production, Information Costs and Economic Organization, American Economic Review 62:777-795.

Ronald Coase (1937). The Nature of the Firm, Economica 4:386-405.

O.E. Williamson (1981). The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm, Englewood Cliffs, NJ: Prentice-Hall.

_______________ (1981). The Modern Corporation: Origins, Evolution, Attributes, Journal of Economic Literature 19:1537-68.

Arthur Denzau (1992). Firms: Entrepreneurial and Public Corporations, ch. 20 in Microeconomic Analysis: Markets and Dynamics, Homewood, IL: Irwin.

Terry Moe (1984). The New Economics of Organization, American Journal of Political Science 28:739.

M.C. Jensen and W.H Meckling (1976). The Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics 3:305-60.

Henry Manne (1965). Mergers and the Market for Corporate Control, Journal of Political Economy 73:110-120.

Robin Marris (1964). The Economics of Managerial Capitalism, Macmillan.

Charles Knoeber (1986). Golden Parachutes, Shark Repellents, and Hostile Tender Offers, American Economic Review 76:155-61.

Paul L. Joskow and Richard Schmalensee (1983). Markets for Power, Cambridge, MA: MIT Press.

Michael C. Jensen and Richard S. Ruback (1983). The Market for Corporate Control: The Scientific Evidence, Journal of Financial Economics 11:5-50.

Gregg A. Jarrell, James A. Brickley and Jeffery M. Netter (1988). The Market for Corporate Control: The Empirical Evidence Since 1980, Journal of Economic Perspectives 2:49-68.

Stanley J. Grossman and O.D. Hart (1979). A Theory of Competitive Equilibrium in Stock Market Economies, Journal of Financial Economics.

____________________________ (1988). One Share/One Vote and the Market for Corporate Control, Journal of Financial Economics 20.

M. Harris and A. Raviv (1988). Corporate Governance: Voting Rights and Majority Rules, Journal of Financial Economics 20:203-35.

R.A. Winter (1981). Majority Choice and the Objective Function of the Firm under Uncertainty: Note, Bell Journal of Economics 12: 335-37.

Peter M. DeMarzo (1993). Majority Voting and Corporate Control: The Rule of the Dominant Shareholder, Review of Economic Studies 60:713-734.

H. DeAngelo and L. DeAngelo (1985). Managerial Ownership of Voting Rights: A Study of Public Corporations with Dual Classes of Stock, Journal of Financial Economics 14:33-70.

F. Easterbrook and D. Fischel (1983). Voting in Corporate Law, Journal of Law and Economics 26:395-428.

Kenneth Clarkson and Roger LeRoy Miller (1982). Price Discrimination, ch. 10 in Industrial Organization: Theory, Evidence and Public Policy, New York: McGraw- Hill.

_______________________________________ (1982). Price Discrimination: Methods and Applications, ch. 11 in Industrial Organization: Theory, Evidence and Public Policy, New York: McGraw-Hill.

Basil Yamey (1974). Monopolistic Price Discrimination and Economic Welfare, Journal of Law and Economics 17(2):377-80.

Walter Oi (1971). A Disneyland Dilemma: Two-Part Tariffs in a Mickey Mouse Monopoly, Quarterly Journal of Economics 85:77-96.

David Hemenway (1984). The Cover Charge, ch. 7 in Prices and Choices, revised ed. Cambridge, MA: Ballinger Publishing Co., pp.75-82.

M.L. Burstein (1960). The Economics of Tie-in Sales, Review of Economics and Statistics 42:68-73.

William James Adams and Janet L. Yellen (1976). Commodity Bundling and the Burden of Monopoly, Quarterly Journal of Economics 475-498.

R. Morris Coats (1995). Peak-load Pricing and Facility Utilization in Higher Education, Marketing for Higher Education, (forthcoming).

Israel Kirzner (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press. Particularly Ch. 4.

Phillip Nelson (1970). Information and Consumer Choice, Journal of Political Economy 78:311-329.

_______________ (1974). Advertising as Information, Journal of Political Economy 82:729-754.

_______________ (1975). The Economic Consequences of Advertising, Journal of Business, 48: 213-41.

Michael Darby and Edi Karni (1973). Free Competition and the Optimal Amount of Fraud, Journal of Law and Economics 16:67-88.

George A. Akerlof (1970). The Market for 'Lemons': Qualitative Uncertainty and the Market Mechanism, Quarterly Journal of Economics 84: 488-500.

Jules Backman (1967). Advertising & Competition, New York, New York: New York University Press.

Yale Brozen ed. (1974). Advertising and Society, New York, New York: New York University Press.

Lee Benham (1972). The Effect of Advertising on the Price of Eyeglasses, Journal of Law and Economics 15:337-52.

__________ and Alexander Benham (1975). Regulating through the Professions: A Perspective on Information Control, Journal of Law and Economics 18:421-47.

Robert Steiner (1973). Does Advertising Lower Consumer Prices? Journal of Marketing 37:19-26.

Alex Maurizi (1972). The Effect of Laws Against Advertising: The Case of Retail Gasoline, Western Economic Journal 10:321-29.

Timothy Muris and Fred McChesney (1979). Advertising and the Price and Quality of Legal Services: The Case for Legal Clinics, American Bar Foundation Research Journal 1979:179-207.

Lester Telser (1964). Advertising and Competition, Journal of Political Economy, 72:537-62.

Kenneth Clarkson and Roger LeRoy Miller (1982). Advertising, Product Differentiation, and Trademarks, ch. 9 in Industrial Organization: Theory, Evidence and Public Policy, New York: McGraw-Hill.

Arthur Denzau (1992). The Markets for a Commodity, ch. 21 in Microeconomic Analysis: Markets and Dynamics, Homewood, IL: Irwin.

_____________ (1992). Horizontal Product Differentiation and Monopolistic Competition, ch. 29 in Microeconomic Analysis: Markets and Dynamics, Homewood, IL: Irwin.

_____________ (1992). Product Quality, ch. 30 in Microeconomic Analysis: Markets and Dynamics, Homewood, IL: Irwin.

David Hemenway (1984). Product Differentiation, ch. 13 in Prices and Choices, revised ed. Cambridge, MA: Ballinger Publishing Co., pp. 145-154.

David Hemenway (1984). Quality Assessment, ch. 14 in Prices and Choices, revised ed. Cambridge, MA: Ballinger Publishing Co., pp. 155-70.

Israel Kirzner (1973). Competition and Entrepreneurship. Chicago: University of Chicago Press.

Michael Mussa and Sherwin Rosen (1978). Monopoly and Product Quality, Journal of Economic Theory 18:301-17.

A. Michael Spence (1975). Monopoly, Quality and Regulation. Bell Journal of Economics 6:417-429.

John F. Kain (1962). The Journey-to-Work as a Determinant of Residential Location, Papers and Proceedings of the Regional Science Association 9:137-160.

David Hemenway (1984). Optimal Location, ch. 7 in Prices and Choices, revised ed. Cambridge, MA: Ballinger Publishing Co., pp. 215-27.

Harland William Whitmore, Jr. (1981). Plant Location and the Demand for Investment: A Theoretical Analysis, Journal of Regional Science 21:89-101.

Michael J. de Smith (1981). Optimum Location Theory--Generalizations of Some Network Problems and Some Heuristic Solutions, Journal of Regional Science 21:491-505.

Mukesh Eswaran, Yoshitsugu Kanemoto and David Ryan (1981). A Dual Approach to the Locational Decision of the Firm, Journal of Regional Science 21:491-505.

Brian J.L. Berry, Gardiner Barnum and Robert J. Tennant (1962). Retail Location and Consumer Behavior, Papers and Proceedings of the Regional Science Association 9:65-106.

Edwin S. Mills and Bruce W. Hamilton (1994). The Nature of Urban Areas, ch. 1 in Urban Economics, 5th ed. New York, New York: HarperCollins CollegePublishers, pp. 2-32.

________________________________ (1994). Comparative Advantage and Regions, ch. 2 in Urban Economics, 5th ed. New York, New York: HarperCollins College Publishers, pp. 33-53.

________________________________ (1994). Introducing Land and Land Rents Into Price Theory, ch. 5 in Urban Economics, 5th ed. New York, New York: HarperCollins College Publishers, pp. 89-99.

_________________________________(1994). Local Government, ch. 14 in Urban Economics, 5th ed. New York, New York: HarperCollins College Publishers, pp. 315-69.

Calabresi, Guido and A. Douglas Melamed (1972). Property Rules, Liability Rules and Inalienability, Harvard Law Review 85:1089-1128.

Ronald Coase (1960). The Problem of Social Cost, Journal of Law and Economics 3:1-44.

Benjamin Klein and Keith Leffler (1981). The Role of Market Forces in Assuring Contractual Performance, Journal of Political Economy 89:615-641.

References:

Adams, William James and Janet L. Yellen (1976). Commodity Bundling and the Burden of Monopoly, Quarterly Journal of Economics 90:475-498.

Akerlof, George A. (1970). The Market for 'Lemons': Qualitative Uncertainty and the Market Mechanism, Quarterly Journal of Economics 84:488-500.

Alchian, Armen and Harold Demsetz (1972). Production, Information Costs and Economic Organization, American Economic Review 62:777-95.

Baumol, William John Panzar and Robert Willig (1988). Contestabel Markets and the Theory of Industry Structure, rev. ed. (New York: Harcourt, Brace and Jovanovich).

Besanko, David, David Dranove and Mark Shanley (1996). Economics of Strategy (New York: John Wiley).

Buchanan, James (1969). Cost and Choice, (Chicago: Markham Publishing Company).

Burstein, M.L. (1960). The Economics of Tie-in Sales, Review of Economics and Statistics 42:68-73.

Coase, Ronald (1937). The Nature of the Firm, Economica 4:386-405.

Coats, R. Morris (1995). Peakload Pricing and Facility Utilization in Higher Education, Journal of Marketing for Higher Education 6:15-25.

Henderson, James M. and Richard E. Quandt (1971). Microeconomic Theory, 2^nd ed. (New York: McGraw Hill).

Jensen, M.C. and W.H. Meckling (1976). The Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, Journal of Financial Economics 3:305-60.

Milgrom, Paul and John Roberts (1992). Economics, Organization and Management, (Englewood Cliffs, New Jersey: Prentice Hall).

Mussa, Michael and Sherwin Rosen (1978). Monopoly and Product Quality, Journal of Economic Theory 18:301-17.

Nelson, Phillip (1970). Information and Consumer Choice, Journal of Political Economy 78:311-29.

____________ (1974). Advertising as Information, Journal of Political Economy 82:729-54.

Oi, Walter (1971). A Disneyland Dilemma: Two-Part Tariffs in a Mickey Mouse Monopoly, Quarterly Journal of Economics 85:77-96.

Porter, Michael E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors, (New York: The Free Press).

Spence, A. Michael (1975). Monopoly, Quality and Regulation, Bell Journal of Economics 6:417-29).

Williamson, O.E. (1981). The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm, (Englewood Cliffs, New Jersey: Prentice Hall).

_______________ (1967). Hierarchical Control and Optimum Firm Size, Journal of Political Economy 75:123-38.

_______________ (1981). The Modern Corporation: Origins, Evolution, Attributes, Journal of Economic Literature.

Yamey, Basil (1974). Monopolistic Price Discrimination and Economic Welfare, Journal of Law and Economics 17:377-80.