Managerial Economics And Strategy, Third Edition
By Jeffrey M. Perloff And James A. Brander
Contents:
Preface Xiii
Chapter 1 Introduction 1
1.1 Managerial Decision Making 1
Profit 2
Trade-Offs 2
Other Decision Makers 2
Strategy 3
1.2 Economic Models 3
Mini-Case Using An Income Threshold
Model In China 4
Simplifying Assumptions 4
Testing Theories 5
Positive And Normative Statements 6
New Theories 7
1.3 Using Economic Skills In Your Career 7
Summary 8
Chapter 2 Supply And Demand 9
Managerial Problem Carbon Taxes 9
2.1 Demand 10
The Demand Curve 11
The Demand Function 14
Using Calculus Deriving The Slope
Of A Demand Curve 16
Summing Demand Curves 16
Mini-Case Summing Corn Demand Curves 16
2.2 Supply 17
The Supply Curve 18
The Supply Function 19
Summing Supply Curves 20
2.3 Market Equilibrium 20
Using A Graph To Determine The Equilibrium 20
Using Math To Determine The Equilibrium 20
Forces That Drive The Market To Equilibrium 22
Mini-Case Speed Of Adjustment
To New Information 23
2.4 Shocks To The Equilibrium 23
Effects Of A Shift In The Demand Curve 23
Q&A 2.1 24
Effects Of A Shift In The Supply Curve 25
Mini-Case The Opioid Epidemic
Reduces Labor Market Participation 26
Q&A 2.2 26
Managerial Implication Taking
Advantage Of Future Shocks 27
2.5 Effects Of Government Interventions 27
Policies That Shift Curves 27
Mini-Case Occupational Licensing 28
Price Controls 28
Mini-Case Venezuelan Price Ceilings
And Shortages 30
Sales Taxes 33
Q&A 2.3 35
Managerial Implication Cost Pass-Through 36
2.6 When To Use The Supply-And-
Demand Model 36
Managerial Solution Carbon Taxes 37
Summary 39
Questions 39
Chapter 3 Empirical Methods
For Demand Analysis 44
Managerial Problem Estimating The
Effect Of An Itunes Price Change 44
3.1 Elasticity 45
The Price Elasticity Of Demand 45
Managerial Implication Changing
Prices To Calculate An Arc Elasticity 47
Q&A 3.1 47
Mini-Case Demand Elasticities For
Google Play And Apple Apps 49
Using Calculus The Point Elasticity Of Demand 49
Elasticity Along The Demand Curve 49
Q&A 3.2 51
Other Types Of Demand Elasticities 53
Mini-Case Anti-Smoking Policies May
Reduce Drunk Driving 53
Demand Elasticities Over Time 54
Other Elasticities 54
Estimating Demand Elasticities 54
3.2 Regression Analysis 55
A Demand Function Example 55
Mini-Case The Portland Fish Exchange 57
Multivariate Regression 62
Q&A 3.3 62
Goodness Of Fit And The R2 Statistic 63
Managerial Implication Focus Groups 64
3.3 Properties And Statistical Significance
Of Estimated Coefficients 64
Repeated Samples 64
Desirable Properties For Estimated Coefficients 65
A Focus Group Example 65
Confidence Intervals 67
Hypothesis Testing And Statistical Significance 67
3.4 Regression Specification 68
Selecting Explanatory Variables 69
Mini-Case Determinants Of Ceo Compensation 69
Q&A 3.4 71
Functional Form 72
Managerial Implication Experiments 74
3.5 Forecasting 75
Extrapolation 75
Theory-Based Econometric Forecasting 78
Managerial Solution Estimating
The Effect Of An Itunes Price Change 79
Summary 81
Questions 82
Appendix 3a The Identification Problem 85
Chapter 4 Consumer Choice 87
Managerial Problem Paying Employees
To Relocate 87
4.1 Consumer Preferences 88
Properties Of Consumer Preferences 89
Mini-Case You Can’t Have Too Much Money 90
Preference Maps 90
4.2 Utility 97
Utility Functions 97
Ordinal And Cardinal Utility 98
Marginal Utility 98
Using Calculus Marginal Utility 99
Marginal Rates Of Substitution 100
4.3 The Budget Constraint 100
Slope Of The Budget Line 102
Using Calculus The Marginal Rate
Of Transformation 102
Effects Of A Change In Price On
The Opportunity Set 102
Effects Of A Change In Income On
The Opportunity Set 103
Q&A 4.1 104
Mini-Case Rationing 104
Q&A 4.2 105
4.4 Constrained Consumer Choice 105
The Consumer’s Optimal Bundle 105
Q&A 4.3 107
Mini-Case Why Americans Buy More
E-Books Than Do Germans 108
Q&A 4.4 109
Promotions 109
Managerial Implication Designing Promotions 111
4.5 Deriving Demand Curves 111
4.6 Behavioral Economics 113
Tests Of Transitivity 114
Endowment Effects 114
Mini-Case How You Ask The
Question Matters 115
Salience 115
Managerial Implication Simplifying
Consumer Choices 116
Managerial Solution Paying
Employees To Relocate 117
Summary 118
Questions 119
Appendix 4a The Marginal Rate Of Substitution 122
Appendix 4b The Consumer Optimum 123
Chapter 5 Production 124
Managerial Problem Labor Productivity
During Recessions 124
5.1 Production Functions 125
5.2 Short-Run Production 126
The Total Product Function 127
The Marginal Product Of Labor 128
Using Calculus Calculating The Marginal
Product Of Labor 128
Q&A 5.1 129
The Average Product Of Labor 129
Graphing The Product Curves 129
The Law Of Diminishing Marginal Returns 132
Mini-Case Malthus And The Green Revolution 133
5.3 Long-Run Production 134
Isoquants 134
Mini-Case Self-Driving Trucks 137
Substituting Inputs 138
Q&A 5.2 139
Using Calculus Cobb-Douglas
Marginal Products 141
5.4 Returns To Scale 141
Constant, Increasing, And Decreasing Returns To Scale 141
Q&A 5.3 143
Mini-Case Returns To Scale For Crocs 143
Varying Returns To Scale 144
Managerial Implication Small Is Beautiful 145
5.5 Innovation 146
Process Innovation 146
Mini-Case Robots And The Food You Eat 147
Organizational Innovation 147
Mini-Case A Good Boss Raises Productivity 148
Managerial Implication Technical
Progress And Competitive Advantage 148
Managerial Solution Labor
Productivity During Recessions 148
Summary 149
Questions 149
Chapter 6 Costs 153
Managerial Problem Technology
Choice At Home Versus Abroad 153
6.1 The Nature Of Costs 154
Opportunity Costs 154
Mini-Case The Opportunity Cost Of An Mba 155
Q&A 6.1 156
Costs Of Durable Inputs 156
Sunk Costs 157
Managerial Implication Ignoring Sunk Costs 158
6.2 Short-Run Costs 158
Mini-Case Costs Of Building A Guitar 158
Common Measures Of Cost 159
Using Calculus Calculating Marginal Cost 161
Cost Curves 161
Q&A 6.2 163
Production Functions And The Shapes
Of Cost Curves 164
Short-Run Cost Summary 167
6.3 Long-Run Costs 168
Mini-Case Short Run Versus Long Run
In The Sharing Economy 168
Input Choice 169
Managerial Implication Cost Minimization
By Trial And Error 174
Mini-Case The Internet And Outsourcing 175
Q&A 6.3 176
The Shapes Of Long-Run Cost Curves 176
Mini-Case Economies Of Scale At Google 178
Q&A 6.4 179
6.4 The Learning Curve 179
Mini-Case Solar Power Learning Curves 180
6.5 The Costs Of Producing Multiple Goods 181
Mini-Case Medical Economies Of Scope 182
Managerial Solution Technology
Choice At Home Versus Abroad 182
Summary 184
Questions 184
Appendix 6a Calculating Cost Curves 189
Appendix 6b Long-Run Cost Minimization 190
Chapter 7 Firm Organization And
Market Structure 191
Managerial Problem Amazon’s
Delivery Services 191
7.1 Ownership And Governance Of Firms 192
Private, Public, And Nonprofit Firms 192
Mini-Case Chinese State-Owned Enterprises 193
Ownership Of For-Profit Firms 194
Firm Governance 196
7.2 Profit Maximization 196
Profit 196
Two Steps To Maximizing Profit 197
Using Calculus Maximizing Profit 199
Q&A 7.1 200
Managerial Implication Marginal
Decision Making 200
Social Responsibility 202
Mini-Case Trends In Social Responsibility 203
Forcing Firms To Maximize Profit: The Survivor Principle And Competition For Corporate Control 204
7.3 Profits Over Time 206
Interest Rates 206
Investing And Profit Maximizing Over Time 208
Q&A 7.2 208
Managerial Implication Stock Prices
Versus Profit 209
7.4 The Make Or Buy Decision 210
Stages Of Production 210
Vertical Integration 210
Profitability And The Supply Chain Decision 213
Mini-Case Netflix 214
Mini-Case The Gig Economy 215
Market Size And The Life Cycle Of A Firm 216
7.5 Market Structure 217
The Four Main Market Structures 217
Comparison Of Market Structures 219
Disruptive Innovations And The Evolution
Of Market Structure 220
Road Map To The Rest Of The Book 220
Managerial Solution Amazon’s
Delivery Services 221
Summary 221
Questions 222
Chapter 8 Competitive Firms
And Markets 225
Managerial Problem The Rising Cost
Of Keeping On Truckin’ 225
8.1 Perfect Competition 226
Characteristics Of A Perfectly
Competitive Market 226
Deviations From Perfect Competition 228
8.2 Competition In The Short Run 228
How Much To Produce 229
Q&A 8.1 231
Using Calculus Profit Maximization
With A Specific Tax 232
Whether To Produce 233
Mini-Case Fracking And Shutdowns 235
Q&A 8.2 236
Managerial Implication Sunk Costs
And The Shutdown Decision 237
The Short-Run Firm Supply Curve 237
The Short-Run Market Supply Curve 238
Short-Run Competitive Equilibrium 240
8.3 Competition In The Long Run 241
Long-Run Competitive Profit
Maximization 241
The Long-Run Firm Supply Curve 242
Mini-Case The Size Of Ethanol
Processing Plants 242
The Long-Run Market Supply Curve 242
Mini-Case Industries With High Entry And
Exit Rates 243
Mini-Case An Upward-Sloping Long-Run
Supply Curve For Cotton 246
Long-Run Competitive Equilibrium 246
Q&A 8.3 247
Zero Long-Run Profit With Free Entry 247
8.4 Competition Maximizes Economic
Well-Being 247
Consumer Surplus 248
Managerial Implication Willingness To
Pay On Ebay 250
Mini-Case Digital Surplus 251
Producer Surplus 252
Q&A 8.4 254
Q&A 8.5 254
Competition Maximizes Total Surplus 255
Mini-Case The Deadweight Loss Of
Holiday Gifts 257
Effects Of Government Intervention 258
Q&A 8.6 258
Managerial Solution The Rising Cost
Of Keeping On Truckin’ 260
Summary 261
Questions 262
Chapter 9 Monopoly 266
Managerial Problem Brand-Name
And Generic Drugs 266
9.1 Monopoly Profit Maximization 268
Marginal Revenue 268
Using Calculus Deriving A Monopoly’s
Marginal Revenue Function 271
Q&A 9.1 271
Choosing Price Or Quantity 273
Two Steps To Maximizing Profit 274
Using Calculus Solving For The
Profit-Maximizing Output 275
Mini-Case Apple’s Ipad 276
Q&A 9.2 276
Effects Of A Shift Of The Demand Curve 277
Q&A 9.3 279
Mini-Case Taylor Swift Concert Pricing 280
Q&A 9.4 280
9.2 Market Power 281
Market Power And The Shape Of The
Demand Curve 281
Managerial Implication Checking
Whether The Firm Is Maximizing Profit 282
The Lerner Index 283
Q&A 9.5 283
Sources Of Market Power 284
9.3 Market Failure Due To Monopoly Pricing 284
Q&A 9.6 286
9.4 Causes Of Monopoly 287
Cost-Based Monopoly 288
Q&A 9.7 289
Government Creation Of Monopoly 289
Mini-Case The Canadian Medical
Marijuana Market 290
Mini-Case Botox 291
9.5 Advertising 293
Deciding Whether To Advertise 293
How Much To Advertise 295
Using Calculus Optimal Advertising 295
Q&A 9.8 296
Mini-Case Super Bowl Commercials 296
9.6 Internet Monopolies: Network Effects
And Scale Economies 297
Network Externalities 297
Managerial Implication
Introductory Prices 298
Behavioral Network Externalities 298
Two-Sided Markets 299
Natural Monopoly On The Internet 299
Mini-Case Critical Mass And Ebay 300
Managerial Solution Brand-Name
And Generic Drugs 301
Summary 302
Questions 302
Chapter 10 Pricing With Market Power 307
Managerial Problem Sale Prices 307
10.1 Conditions For Price Discrimination 309
Why Price Discrimination Pays 309
Mini-Case Disneyland Pricing 311
Which Firms Can Price Discriminate 311
Managerial Implication Preventing Resale 312
Mini-Case Preventing Resale Of Designer Bags 312
Not All Price Differences Are Price
Discrimination 313
Types Of Price Discrimination 313
10.2 Perfect Price Discrimination 313
How A Firm Perfectly Price Discriminates 314
Perfect Price Discrimination Is
Efficient But Harms Some Consumers 315
Mini-Case Botox Revisited 317
Q&A 10.1 318
Individual Price Discrimination 318
Mini-Case Google Uses Bidding For
Ads To Price Discriminate 319
10.3 Group Price Discrimination 320
Group Price Discrimination With
Two Groups 320
Using Calculus Maximizing Profit For
A Group Discriminating Monopoly 321
Mini-Case Age Discrimination 323
Q&A 10.2 323
Identifying Groups 325
Managerial Implication Discounts 325
Effects Of Group Price Discrimination
On Total Surplus 326
10.4 Nonlinear Price Discrimination 327
10.5 Two-Part Pricing 329
Two-Part Pricing With Identical Consumers 330
Two-Part Pricing With Differing
Consumers 331
Mini-Case Available For A Song 333
10.6 Bundling 334
Pure Bundling 334
Mixed Bundling 336
Q&A 10.3 337
Requirement Tie-In Sales 338
Managerial Implication Ties That Bind 339
10.7 Peak-Load Pricing 339
Mini-Case Downhill Pricing 340
Peak-Load Pricing With A Capacity Constraint 340
Dynamic Pricing 341
Q&A 10.4 342
Managerial Solution Sale Prices 343
Summary 344
Questions 345
Chapter 11 Oligopoly And
Monopolistic Competition 350
Managerial Problem Gaining An Edge
From Government Aircraft Subsidies 350
11.1 Cartels 352
Why Cartels Succeed Or Fail 352
Mini-Case Employer “No-Poaching” Cartels 354
Maintaining Cartels 355
Mini-Case Cheating On The Maple
Syrup Cartel 356
11.2 Cournot Oligopoly 357
Airlines 359
Using Calculus Deriving The Cournot
Equilibrium 362
The Number Of Firms 363
Mini-Case Mobile Phone Number
Portability 364
Nonidentical Firms 365
Q&A 11.1 366
Q&A 11.2 368
Mergers 369
Mini-Case Airline Mergers 370
11.3 Bertrand Oligopoly 370
Identical Products 370
Differentiated Products 372
Managerial Implication Differentiating
A Product Through Marketing 373
Mini-Case Rising Market Power 374
11.4 Monopolistic Competition 374
Managerial Implication Managing In
The Monopolistically Competitive Food
Truck Market 375
Equilibrium 376
Q&A 11.3 377
Profitable Monopolistically
Competitive Firms 377
Mini-Case Subsidizing The Entry Cost
Of Dentists 378
Managerial Solution Gaining An Edge
From Government Aircraft Subsidies 378
Summary 380
Questions 380
Appendix 11a Nash-Bertrand Equilibrium 384
Chapter 12 Game Theory And
Business Strategy 385
Managerial Problem Dying To Work 385
12.1 Oligopoly Games 388
Dominant Strategies 388
Best Responses 390
Failure To Maximize Joint Profits 392
Mini-Case Strategic Advertising 394
Q&A 12.1 395
Pricing Games In Two-Sided Markets 396
12.2 Types Of Nash Equilibria 397
Multiple Equilibria 397
Mini-Case Cheap Talk In Ebay’s Best
Offer Market 399
Mini-Case Timing Radio Ads 400
Mixed-Strategy Equilibria 400
Mini-Case Competing E-Book Formats 404
Q&A 12.2 404
12.3 Information And Rationality 405
Incomplete Information 406
Managerial Implication Solving
Coordination Problems 407
Rationality 407
Managerial Implication Using Game
Theory To Make Business Decisions 408
12.4 Bargaining 409
Bargaining Games 409
The Nash Bargaining Solution 409
Q&A 12.3 411
Using Calculus Maximizing The
Nash Product 411
Mini-Case Nash Bargaining Over Coffee 412
Inefficiency In Bargaining 412
12.5 Auctions 413
Elements Of Auctions 413
Bidding Strategies In Private-Value Auctions 414
Mini-Case Experienced Bidders 415
The Winner’s Curse 416
Managerial Implication Auction Design 417
Managerial Solution Dying To Work 417
Summary 418
Questions 419
Chapter 13 Strategies Over Time 424
Managerial Problem Intel And Amd’s
Advertising Strategies 424
13.1 Repeated Games 426
Strategies And Actions In Dynamic Games 426
Cooperation In A Repeated
Prisoners’ Dilemma Game 426
Mini-Case Tit-For-Tat Strategies In
Trench Warfare 429
Implicit Versus Explicit Collusion 430
Mini-Case Signaling Drug Price Increases 430
Finitely Repeated Games 430
13.2 Sequential Games 431
Stackelberg Oligopoly 432
Q&A 13.1 435
Credible Threats 436
Q&A 13.2 436
13.3 Deterring Entry 437
Exclusion Contracts 438
Mini-Case Pay-For-Delay Agreements 439
Limit Pricing 440
Mini-Case Pfizer Uses Limit Pricing
To Slow Entry 440
Q&A 13.3 441
Entry Deterrence In A Repeated Game 442
13.4 Cost And Innovation Strategies 443
Investing To Lower Marginal Cost 443
Learning By Doing 445
Raising Rivals’ Costs 445
Q&A 13.4 445
Mini-Case Auto Union Negotiations 446
13.5 Disadvantages Of Moving First 447
The Holdup Problem 447
Mini-Case Venezuelan Nationalization 448
Managerial Implication Avoiding
Holdups 449
Too-Early Product Innovation 450
Mini-Case Advantages And
Disadvantages Of Moving First 450
13.6 Behavioral Game Theory 451
Ultimatum Games 451
Mini-Case Gm’s Ultimatum 451
Levels Of Reasoning 453
Managerial Implication Taking
Advantage Of Limited Strategic Thinking 454
Managerial Solution Intel And Amd’s
Advertising Strategies 454
Summary 455
Questions 456
Appendix 13a A Mathematical Approach
To Stackelberg Oligopoly 461
Chapter 14 Decision Making Under
Uncertainty 462
Managerial Problem Bp’s Risk And
Limited Liability 462
14.1 Assessing Risk 464
Probability 464
Mini-Case Risk Of A Cyberattack 465
Expected Value 466
Q&A 14.1 467
Variance And Standard Deviation 467
Managerial Implication Summarizing Risk 469
14.2 Attitudes Toward Risk 469
Expected Utility 469
Risk Aversion 470
Q&A 14.2 472
Using Calculus Diminishing Marginal
Utility Of Wealth 472
Mini-Case Stocks’ Risk Premium 473
Risk Neutrality 473
Risk Preference 474
Mini-Case Gambling 474
Risk Attitudes Of Managers 476
Q&A 14.3 476
14.3 Reducing Risk 477
Obtaining Information 478
Mini-Case Bond Ratings 478
Diversification 479
Managerial Implication Diversify Your
Savings 481
Insurance 482
Q&A 14.4 483
Mini-Case Flooded By Insurance Claims 484
14.4 Investing Under Uncertainty 485
Risk-Neutral Investing 485
Risk-Averse Investing 486
Q&A 14.5 487
Oligopolistic R&D Investments Under
Uncertainty 487
14.5 Behavioral Economics And Uncertainty 488
Biased Assessment Of Probabilities 488
Mini-Case Biased Estimates 489
Violations Of Expected Utility Theory 490
Prospect Theory 491
Managerial Implication Loss Aversion
Contracts 493
Managerial Solution Bp’s Risk And
Limited Liability 493
Summary 494
Questions 495
Chapter 15 Asymmetric Information 500
Managerial Problem Clawing Back
Bonuses 500
15.1 Adverse Selection 502
Adverse Selection In Insurance Markets 502
Products Of Unknown Quality 503
Q&A 15.1 505
Q&A 15.2 506
Mini-Case Reducing Consumers’ Information 506
15.2 Reducing Adverse Selection 507
Restricting Opportunistic Behavior 507
Equalizing Information 508
Managerial Implication Using Brand
Names And Warranties As Signals 509
Mini-Case Discounts For Data 510
Mini-Case Adverse Selection And
Remanufactured Goods 511
15.3 Moral Hazard 512
Moral Hazard In Insurance Markets 512
Moral Hazard In Principal-Agent
Relationships 513
Mini-Case Honest Cabbies? 513
The Owner-Manager Relationship 514
Mini-Case Company Jets 514
Q&A 15.3 518
15.4 Using Contracts To Reduce Moral Hazard 519
Fixed-Fee Contracts 519
Contingent Contracts 520
Q&A 15.4 521
Mini-Case Sing For Your Supper 523
Q&A 15.5 524
15.5 Using Monitoring To Reduce Moral Hazard 525
Hostages 526
Mini-Case Capping Oil And Gas Bankruptcies 527
Managerial Implication Efficiency Wages 527
After-The-Fact Monitoring 528
Managerial Solution Clawing Back Bonuses 528
Summary 529
Questions 530
Chapter 16 Government And Business 536
Managerial Problem Licensing Inventions 536
16.1 Market Failure And Government Policy 537
The Pareto Principle 537
Cost-Benefit Analysis 538
16.2 Regulation Of Imperfectly
Competitive Markets 539
Regulating To Correct A Market Failure 539
Q&A 16.1 541
Mini-Case Natural Gas Regulation 543
Regulatory Capture 544
Applying The Cost-Benefit Principle
To Regulation 544
16.3 Antitrust Law And Competition Policy 545
Mergers 547
Mini-Case Are Monopoly Mergers Harmful? 548
Q&A 16.2 548
Predatory Actions 549
Vertical Relationships 550
Mini-Case Piping Up About Exclusive Dealing 551
16.4 Externalities 552
Managerial Implication Disney
Internalizes An Externality 552
The Inefficiency Of Competition With
Externalities 553
Reducing Externalities 555
Mini-Case Pulp And Paper Mill Pollution
And Regulation 557
Q&A 16.3 558
Mini-Case Why Tax Drivers 559
The Coase Theorem 560
Managerial Implication Buying A Town 562
16.5 Open-Access, Club, And Public Goods 562
Open-Access Common Property 563
Mini-Case Spam 564
Club Goods 565
Mini-Case Piracy 565
Public Goods 565
16.6 Intellectual Property 568
Patents 568
Q&A 16.4 569
Managerial Implication Trade Secrets 570
Copyright Protection 571
Managerial Solution Licensing Inventions 571
Summary 573
Questions 574
Chapter 17 Global Business 579
Managerial Problem Responding To
Exchange Rates 579
17.1 Reasons For International Trade 581
Comparative Advantage 581
Q&A 17.1 583
Managerial Implication Brian May’s
Comparative Advantage 584
Increasing Returns To Scale 584
Mini-Case Barbie Doll Varieties 585
17.2 Exchange Rates 586
Determining The Exchange Rate 586
Exchange Rates And The Pattern Of Trade 587
Managerial Implication Limiting
Arbitrage And Gray Markets 587
Managing Exchange Rate Risk 588
17.3 International Trade Policies 589
Quotas And Tariffs In Competitive Markets 589
Mini-Case Russian Food Ban 591
Q&A 17.2 594
Rent Seeking 595
Noncompetitive Reasons For Trade Policy 596
Mini-Case Protection Of U.S. Steel,
Aluminum, And Washing Machines 598
Trade Liberalization And The World
Trading System 599
Trade Liberalization Problems 600
17.4 Multinational Enterprises 601
Becoming A Multinational 601
Mini-Case What’s An American Car? 602
International Transfer Pricing 602
Q&A 17.3 604
Mini-Case Profit Repatriation 606
17.5 Outsourcing 606
Managerial Solution Responding
To Exchange Rates 608
Summary 609
Questions 610
Answers To Selected Questions E-1
Definitions E-14
References E-19
Sources For Managerial Problems,
Mini-Cases, And Managerial Implications E-27
Index E-38
Credits E-74