1. Costs. Total, average and marginal costs. Costs functions as boundaries. Fixed vs. variable costs. Average-marginal relationship. Economic vs. accounting costs.

Economic Value Added = operating profit - (cost of capital * amount of capital)

Short-run vs. Long-run costs. Sunk vs. avoidable costs

2. Demand and Revenues. The law of demand and the demand relationship. Price elasticity of demand. Inelastic vs. elastic demand. Factors that make demand more price elastic (few unique features, buyers' expenditures a large fraction of their budgets, with demand for an input, if product market demand is elastic, lots of time for buyers to adjust their behavior). Factors that make demand less price elastic (product complexity makes comparisons costly, buyers pay only fraction of full price, switching costs, complement for good buyers are committed to). Brand vs. industry elasticities. Total revenue, marginal revenue and elasticity.

3. Price and Output Decisions of Firms. Equality of Marginal Costs and Marginal Revenues

change in total revenue = MR x Q

change in total costs = MC x Q

change in profits = (MR-MC) x Q.

if MR>MC, raise profit by selling more so cut price

if MR

if MR=MC

4. Game Theory. Neither perfect comp. or monopoly. Matrix form and Nash equilibrium (Expand or not, p. 31) prisoners' dilemma, repeated games, sequential vs. simultaneous games. Subgame perfect Nash equilibrium. Fold-back on p. 34.

1. Coase and his 2 questions.

2. Vertical boundaries. Upstream and downstream production along the value chain. Make or buy decision defines vertical boundaries. Fallacies about make-or-buy (p. 75).

3. Benefits of using the market. Division of labour is limited by the extent of the market. Market firms can achieve economies of scale. Market firms subject to market discipline. Agency costs. Agency costs and innovation. Influence costs.

4. Costs of using the market. Coordination of production (quality, timing, advertising). Control over private information (OS-2, Windows). Transactions costs of market exchange.

1. Incomplete Contracts. Once deal is struck, strong mutual reliance. Complete contracting is prevented by bounded rationality, difficulties measuring or even specifying performance (wear and tear?). Asymmetric information (hidden information--adverse selection; and hidden action-moral hazard).

2. Contract Law. Westinghouse uranium deal. Russia.

3. Relationship-specific Assets. Sunk cost involved and Williamson's fundamental transformation (large numbers

game to small numbers game--bilateral monopoly).

4. Creation of pie (quasi-rents) to fight over. How this leads to transactions costs.

1. Note the contrast between chs. 2 & 3.

2. Explain the balance or tradeoff between achieving technical efficiency and agency efficiency.

3. How do production and transactions costs vary with asset specificity? Total costs?

4. What can be concluded from this? see conclusions on pp. 138-39.

5. Explain Grossman and Hart's theory concerning asset ownership and how does this help address issues of governance in newly merged firms. Tell us about the importance of path dependency.

6. What are other reasons for vertical integration? Include a discussion of gross-receipts taxes and their effects on vertical integration.

7. Tapered integration is a make-and-buy instead of make-or-buy strategy. Under what conditions would this strategy make sense? What are its downsides?

8. Discuss the joint venture and strategic alliance strategies as well as Keiretsu and Japanese subcontracting networks.

9. Discuss with the class the nature of production on offshore oil platforms and suggest reasons for the lack of vertical integration.

1. Define economies of scale and scope and explain the sources of scale and scope economies.

2. What is a learning curve and how does this differ from the idea of scale and scope economies?

3. Explain the sources of diseconomies of scale.

5. What is the idea behind Stigler's survivor method? Explain this using my incomplete paper with Dr. Lajaunie on bank survivorship.

4. Economies of scope provide a rationale for efficient diversification. Why do so few instances of diversification seem to be for achieving scope economies? Explain Nathanson and Cassono's findings as seen in Table 6.2.

5. Explain the Dominant General Management Logic. What is the problem with this "logic?"

7. How do transactions costs and holdup problems provide a rationale for horizontal mergers and acquisitions?

9. How have unrelated conglomerates performed relative to related conglomerates and dominant and single business firms? Be sure to discuss all three types of studies.

1. Why do we analyze on an industry-by-industry basis?

2. What are the five forces and briefly explain each?

3. Differentiate between importance of inputs and supplier power.

4. Differentiate between buyer sensitivity (price elasticity of demand) and buyer power (monopsony power).

5. Apply the five forces in the tobacco industry. What factors lead to high entry barriers here? What are the shortcomings of this approach? (demand trends and risk of government regulations)

1. How can market boundaries be identified? Both qualitatively and quantitatively? What are the two factors influencing substitution that are measured by own-price elasticity and cross-price elasticity? How does measuring residual demand lead to defining a market? How do price correlations and trade flow analyses lead to market definitions? Definition by SIC code? What are the weaknesses of each approach?

2. How do we measure market structure? N-firm concentration ratio and Herfindahl index. Besides market concentration, what other factors are involved in determining market structure (see Greer)? Why might capacity concentration instead of sales concentration be a good indicator of level of competition for some industries?

3. Go over basics of the four basic market structures: perfect competition, monopolistic competition, monopoly, and oligopoly. What is the role of excess capacity in perfect competition? Why is Cournot competition different from Bertrad competition.

4. Go over some of the evidence on the connection between market structure and performance. What else determines profitability? How strong is the connection between economies of scale and profit?

1. Distinguish between strategic commitments and tactical decisions.

2. Distinguish between strategic substitutes and strategic complements. Give examples, p. 324.

3. Distinguish between aggressive and soft strategies.

4. What is a preemptive move and how does it change a game from a simultaneous to a sequential play game?

5. Why does inflexibility have value?

6. Why must commitments be visible, understandable and credible? What makes a commitment credible and why?

7. Explain strategic substitutability and complementarity in terms of reaction functions.

8. Differentiate between direct and strategic effects.

9. Explain the decision to make a commitment that makes a firm tough under Cournot competition (top dog).

10. Explain the decision to make a commitment that makes a firm soft under Cournot competition (lean and hungry

look).

11. Explain the decision to make a commitment that makes a firm tough under Bertrand competition (puppy dog

ploy).

12. Explain the decision to make a commitment that makes a firm soft under Bertrand competition (fat cat effect).

13. How is the choice of financial structure a strategic choice (Ex. 9.4, pp. 341-43).

14. In question #5, you discussed the value of inflexibility. Explain the value of flexibility in terms of analyzing

the option value of delay (for instance).

15. Briefly discuss Ghemwat's framework for analyzing commitments. Briefly explain positioning analysis, sustainability analysis, flexiblity analysis and judgement analysis.

Price Discrimination, Peak-load Pricing, Two-part Pricing, and Commodity Bundling Ch. 11 P&R*

1. Why does a firm have an incentive to price discriminate?

2. What are the factors that limit a firm's ability to price discriminate?

3. Distinguish between the three types or degrees of price discrimination.

4. How does two-part pricing accomplish the same thing as price discrimination? How is the flat charge related to the variable charge (what happens when to the variable charge one may get when the flat charge goes up)?

5. How does tie-in sales accomplish the same thing as price discrimination?

6. What is commodity bundling and how does it increase profits? What is mixed bundling?

7. Under what condition does commodity bundling make sense? When is it better to charge separate prices? When is it better to have mixed bundling?

1. Why are Cournot and Bertrand models not dynamic pricing models? equilibrium, foresight

2. Why are prices above what is implied by Cournot and Bertrand sustainable? pp. 355-357, tit-for-tat

3. Make sure that you show the computations at the top of p. 357 in italics and give the reasoning.

4. What is the importance of statements such as "we will not be undersold?"

5. What happens to firms that deviate from cooperative strategies when others are playing tit-for-tat strategies?

6. Explain the logic behind 10.1 on p. 360.

7. How can any price between MC and the monopolist's price be an equilibrium in a dynamic Bertrand world?

8. What is the coordination problem in oligopolies? How is this solved with focal points? Explain focal points.

9. Show why market concentration, reaction and detection speeds, asymmetries among firms, and multimarket contact affects the sustainability of cooperative pricing. Why does the market concentration, lumpiness of orders, information about sales transactions, the number and size of buyers and the volatility of demand and cost affect response speed of firms?

10. Explain why shorter reaction time is so important to sustaining prices above marginal cost? see 10.2 on p. 366.

11. What is a price umbrella? What does the little formula on p. 371, ( < ß/PCM) have to say about the price umbrella strategy?

12. Discuss examples 10.2 and 10.3.

13. Why is multimarket contact important in sustaining cooperative pricing?

14. Discuss each of the facilitating practices mentioned pp. 375-382, especially go over FOB versus uniform deliverd pricing and also basing point pricing (Greer).

15. Differentiate between vertical and horizontal product differentiation.

16. Discuss the lemons market phenomena. See my Health Economics text on this.

17. What affects the marginal cost of increasing quality? the marginal benefits?

18. What is the importance of objective information, such as J.D. Power ratings and Consumer Reports?

19. Differentiate among search goods, experience goods and credence goods. What factors work to get actual quality up to advertised, implied or promised quality?

20. Why do manufacturers employ exclusive franchises and resale price maintainance?

21. How is quality related to price-cost margins? to market structure.

22. Tell us about the medical arms race.

1. Simply define entry and exit to and from markets, by both existing (and diversifying) firms and new firms.

2. What are the basic results of the DRS study and why are they important for strategy?

3. Define Blockaded, Accomadated and Deterred Entry.

4. What are barriers to entry? Discuss the three main types of structural entry barriers. How are these related to strategic commitment?

5. What are barriers to exit? Can you think of any legal barriers to exit, besides the one mentioned on p. 407?

6. Explain the conditions for the success of entry-deterring strategies and their importance.

7. What is contestability theory all about? Discuss Borenstein's evidence against the contestability of airline markets.

8. How does limit pricing deter entry (or supposed to)? How does it differ from predatory pricing? Explain the flaw in the logic. How might limit pricing make sense?

9. How does predatory pricing chase challengers away and then deter entrants? How does a war of attrition work? What is the chain-store paradox? What are the flaws with the logic here? How does uncertainty also rescue predatory pricing? Why is a reputation for toughness important?

10. How does excess capacity deter entry? Why is a sunk cost (a strategic commitment) important to deter entry?

11. Go over the Numerical Example of Entry-Deterring Excess Capacity.

12. Explain the "stay small," Judo economics, puppy dog ploy for the entrant.

13. How do you drive your competitors out of business? Why is this very risky? (see Heyne.)

14. What difference does diversification make in terms of entry and exit strategies? Go over the Pizza/hamburger example on pages 428-29. Why are the two questions on page 428, (1. Can the incumbent benefit...? and 2. Wil the incumbent...?) so important? Explain.

15. What evidence is there that firms practice predatory or entry-deterring behavior?

1. What is competitive advantage (define it)?

2. Explain the concepts of value creation, perceived benefits and consumer surplus (of course, I have already explained the basics of consumer surplus). Figure 12.2 is helpful in this.

3. How does this lead to the idea of a value map (indifference curves in price/quality space)? Try to explain why the indifference curves are sloped and shaped the way they are--see footnote 8. I can help you on this.

4. Briefly define consumer suplus parity.

5. What is value creation (see Fig. 12.5) and how does it relate to the value chain and competitive advantage?

6. How does value creation relate to resources and capabilities (the way the text defines them)? You may want to go through some of the examples, especially time-based competition.

7. Why is value creation a better approach to competitive advantage than value redistribution? What is the social significance of this? How is price discrimination and other pricing approaches value redistribution?

8. Why is industry structure important in looking at value creation? Why is this look at things somewhat incomplete because of the focus on value created by a single unit of the good produced instead of the total consumer surplus?

9. By taking a look at the quality/price tradeoff (indifference curve) we can see how there are two approaches to creating more consumer surplus, more value than competitors, creating a competitive advantage: developing a cost advantage or a differentiation advantage. Explain both, including the ideas of benefit and cost parity and proximity. 10. So far the discussion of quality differences has been unidimensional, looking at vertical differentiation instead of the multidimensional horizontal differentiation. What is the importance of looking at horizontal differentiation and why does price elasticity of demand become important? (beginning with the 2nd full paragraph p. 470 on over to 1st paragraph p. 471)

11. Compare cost and differentiation strategies; when is each the preferred strategy?

12. Why is it extremely important that the firm's cost or advantage strategy is effectively communicated to the functional areas?

13. Why does Porter advise against simultaneously pursuing cost and differentiation (stuck in the middle) strategies? Why might one go ahead with such a strategy, in spite of Porter's admonitions? (see bullets pp. 476-78)

14. Go over broad coverage and focus strategies for targeting. Look at product specialization, geographic specialization, customer specialization and niche types of focus strategies. What conditions indicate which stragy? Define economies of density.

15. How are targeting and pricing related? How is targeting related to tough and soft commitments?

16. How will the potential for competition within a market segment affect a firm's targeting strategy?

17. What are strategic groups? What are mobility barriers? How can these groups be identified? Why is it important to identify these strategic groups and which firms are in each? What is a strategic map? What is the importance of resources and mobility barriers?

1. Why do we disaggregate costs? Briefly describe the ways costs can be disaggregated and the advantages of disaggregating costs in each way. Describe activity-cost analysis.

2. What are cost drivers. Briefly describe the four categories of cost drivers and their sub-categories.

Be sure to prepare definitions/examples for the class on economies of density, complexity of production environment, process and discretionary factors affecting costs.

3. Viewing firms as collections of activities, what two routes are there to achieving a cost advantage?

4. How can we use accounting data to estimate costs?

5. How is regression analysis used to estimate costs? Explain the importance of the ß 's and the noise or error term in a regression equation. Why is Q² included along with Q as variables in the regression cost equation on page 512? Where are costs minimized?

6. Briefly explain the idea behind frontier analysis and explain how this is used to estimate costs? What is an efficiency frontier? Compare and contrast frontier analysis with regression analysis.

7. How can accounting data, regression analysis and frontier analysis used used to identify the area of scale economies?

8. How can we estimate learning curves? Why might various cost drivers other than learning (as measured by cumulative production) be included in the regression equation to measure learning curves? Why are logarithmic transformations of variables sometimes used in estimation? Explain the importance of measuring slopes.

9. What are beneifit drivers. Briefly go over the five major classes of benefit drivers, giving examples of each.

10. What is a perceptual map?

11. Briefly describe the methods for estimating perceived benefits (reservation price, attribute rating, conjoint analysis, and hedonic pricing analysis).

12. What are network externalities?

13. Go over the analysis in example 13.5.

1. Describe why competitive forces make it so difficult to sustain profits and competitive advantage in

a) competitive markets, b) monopolistically competitive markets, and c) oligopolistic and monopolistic markets.

2. Describe Mueller's findings on the persistence of profits.

3. How are barriers to entry, barriers to mobility and barriers to imitation similar?

4. What is a sustainable competitive advantage?

5. Briefly describe the resource-based theory of the firm. Why does sustainable competitive advantage depend both on the scarcity and lack (or cost) of mobility of resources and capabilities? What makes resources immobile?

6. What are isolating mechanisms?

7. If some legal restriction such as a patent can be bought and sold, who is likely to end up with that isolating mechanism? What happens when the legal restriction cannot be traded (as in the case of some licenses)?

8. Why is it hard to rely on legal restrictions and on superior access to inputs or customers as a basis for sustaining competitive advantage?

9. Scale-based entry and imitation barriers are very strong, but only for static, no-growth markets. Why?

10. What is casual ambiguity and how is it a barrier to imitation? How is it also a source of diseconomies of scale? What other ways does casual ambiguity pose a threat to firms?

11. Describe or explain both how historical circumstances and social complexity are barriers to imitation.

12. What are early-mover advantages? Very, very quickly discuss the learning curve and network externalities again in the context of early-mover advantages. Remember, earlier chapters and Jimmy Cazes' presentation have already introduced these concepts and so you need only discuss these as they relate to early-mover advantages.

13. We have also talked about experience goods in class. Explain why early movers can better establish reputation in cases of experience goods. Why might an entrant's advertising campaign not be enough to successfully challenge a pioneer.

14. How can buyer-switching costs work to sustain a competitive advantage? Use the examples of frequent-flyer miles, volume discounts (Greer, pp. 185-186 & 193-94) and United Shoe machine's penalties for premature termination of leases (see Greer, p. 146). How does this analysis change if we consider cases where demand is growing and there are no more economies of scale to exploit or if there are network externalities? Explain stabilizing inertia.

15. Does the possibility of early-mover advantage increase or decrease overall competition? Discuss the ideas of Katz and Shapiro (1986) and Klemperer (1987) on this.

16. Why are complementary assets so important in taking advantage of pioneering work? How can firms still take advantage of their pioneering work by working through the market?

17. Explain Rumelt and Lippman's result that when there is imperfect imitability in an otherwise competitive market, some firms will be able to sustain positive economic profits, but average firms will earn below-average profits and may be making negative economic profits.

1. Schumpeter recognized the importance of entrepreneurship in a dynamic economy and stressed that competition among real entrepreneurs is much more than the simple price and quantity rivalry we have looked at with Cournot and Bertrand. Explain Schumpeter's creative destruction and with it hypercompetition in this light.

2. How do incumbents and potential entrants compare in terms of the incentive to innovate? To explain this, explain the sunk cost effect, the replacement effect, and the efficiency effect.

3. What is a patent race? Discuss the incentives involved in the deterministic patent race. Why is it so important to anticipate competitors' innovation behavior? How is a patent race like Cournot competition? What does Nash equilibrium look like for a deterministic patent race? Why does only one firm invest in R&D in this model?

4. Do your best to tell us about probabilistic patent races. Why is an exponential probability distribution used in this model (see a basic QBA 285 text). Are R&D investments strategic complements or strategic substitutes? What is the importance of the number of R&D competitors?

5. Why are risky R&D strategies attractive (p. 593-4)? Why are uncorrelated research approaches more beneficial to society? Do firms have an incentive to pursue correlated or uncorrelated research strategies? Why?

6. Tell us about the approach that evolutionary economics takes to looking at innovation and the importance of dynamic capabilities.

7. Porter argues that the local business environment is very important to a firm's global competitive advantage. Explain why this is so. Explain each of the four factors in Porter's "diamond" and their importance to our look in this chapter at innovation.

8. Schumpeter argued that monopoly was "good" because monopoly profits would be used to support R&D activities that would add more to the dynamic efficiency in the economy that detract from static efficiency. How is innovation measured? What is the evidence about market structure and firm size and innovation?

9. How are basic and applied research related? Why have corporations and universities and government taken on different roles in research (basic vs. applied)? What is the importance of location for firms in innovative markets?

10. The section on managing innovation (p. 606) is as much about innovative management as it is about managing innovation. Discuss.