Managerial Economics and Public Policy

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Nov 8, 2013 (3 years and 7 months ago)

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Managerial Economics and Public Policy

BUSI 681


Fall,
2012



Professor Charles E. Olson

3419 Van Munching Hall

Phone: (301) 405
-
8666

Email: colson@rhsmith.umd.edu


Office Hours:
Mondays and Wednesdays, 5:30


6:30 p.m. and 1:00


3:00 p.m.
on Thursday
s.



COURSE OBJECTIVE


This course is intended to provide the student with a basic introduction to
economics for managers. The emphasis will be on the firm decision making
process and how that process influences firm performance. Firm performance
can ha
ve many dimensions but this course will primarily concern itself with
profitability. The course is divided into three sections. The first section
introduces the basic microeconomic principles that firms utilize in making
business decisions, including sup
ply, demand, costs and pricing. The second
section will examine the industry environment that the firm faces. In this section
the concepts of rivalry, competition, substitutes, company conduct and company
performance will be discussed. The third section

addresses vertical integration
and the role of government in business.


The primary attention in the course is given to applications. This is accomplished
primarily by the use of cases. The cases provide practice in applying economic
concepts to firm de
cision
-
making.

Second, it is expected that the major concepts
of microeconomics that are applicable to business problems will be learned.
Finally, attention will go to current economic news that will be discussed each
week. Reading The Wall Street Journ
al will be helpful in this regard.


After taking this course students should be better able to:


1.Understand the microeconomic content of general business publications.


2. Understand supply and demand as applied to industry situations.


3. Strategize ind
ustry issues such as competitive behavior, entry and pricing.


4. Understand regulatory and public policy issues that affect business.



COURSE REQUIREMENTS


2


The requirements for this course are as follows:

1.Each student
must

bring the Harvard course
mate
rial in printed form

to each
class. The material will be referred to in each class.


2.Each student
must

bring a printed tent card with her/his name printed in large
letters so that it is easy for the professor to identify the student.


3.Laptops, cell ph
ones and other communication devices must be turned off and
stowed while class is in session.

This means that the cases must be available
in printed form.



GRADE DETERMINANTS


Case Report (1): 20%

Midterm Quiz: 20%

Final Exam: 40%

Class Contribution: 20%


Course requirements and grades will be discussed in detail during the first class.
Be prepared with your questions because this is your only opportunity. I do not
answer individual requests regarding grades
, course material

or tests.


GROUPS


The case
reports should be completed as group projects. Groups of four to six
students should be formed in the first week to work on these assignments. If
anyone has a problem in getting attached to a group, please let the professor
know. Groups are also useful
for class preparation and note taking. All groups
must include at
least one international student

and both genders.


MAJOR ECONOMIC CONCEPTS


The course in managerial economics is focused on obtaining a working
understanding of the major economic concepts

that have applicability to business
situations. These concepts will be covered in the cases and class discussion.
Explanations can be found at Wikipedia. In learning these concepts, be certain
to become familiar with examples that illuminate the logic
involved. Be prepared
to stand up in class with an explanation of each concept and a couple of
examples.


CASE REPORTS


Each group is required to submit one case report. Case reports must be turned
in before the class in which the case is discussed.
No
late reports will be

3

accepted.
Each case includes a series of discussion questions. These
questions should form the basis for your case report. Groups should address all
case questions, as well as any additional issues that the group feels are relevant.

However, the analysis should be limited to the material presented in the case.
Reports will be evaluated on the insight provided concerning the case.
Organization, analysis and writing style will also enter into the evaluation. The
reports should be
in printed form, double spaced and no more than ten pages
long. The ten page limit applies to text; figures, charts, tables and references will
not count towards the ten page limit. The font size should be no smaller than 12
point.


Cases may be selected

from the following:
DeBeers, Coming Soon, Arauco,
Aviation Security, Breakfast Cereal and Global Wine Wars.
Email y
our
preferences after August 25, 2012
. State your second and third preferences.
Priority will be given to the teams with the earliest requ
ests. Friends do not
necessarily make the best teammates. I expect both genders to be represented
on all teams along with at least one international student.

Do not choose cases
whose dates conflict with a likely absence.


Groups are required to work in
dependently of one another.



COURSE GRIEVANCE PROCEDURES


Effective HRM involves providing a procedure through which employees can
complain when they believe they have been treated unfairly. Likewise, students
should have a similar process. If YOU feel y
ou have been graded unfairly in this
course, you may use the following procedure to voice your complaint:


1. Within
eight days

of the grade becoming available, give me a
written
appeal. After eight days, I will assume that you agree with my assessment
and consider the grade final. In other words, you should
NOT

wait until the
end of the term to contest grades earned at an earlier date.


2. To file an appeal, prepare a
written statement

detailing why you think the
grade is unfair. Be sure to document
your reasons by referring to
inconsistency in grading standards, misinterpreted meaning, etc. Stating
simply that you feel you “deserve” a higher grade because you worked hard
is not sufficient grounds for an appeal. Performance is a combination of hard
work AND ability.


3.

Submit the written statement together with the graded material in the original
and printed form. I will consider your complaint and make a decision. You
will be notified in writing of my decision.


Like many work organizations, I ha
ve no provisions for a second layer of

4

appeals. If you are not satisfied with my decision, you may use university
grievance procedures as your “appeal.” Please note that I will document, to the
fullest extent possible, my rationale for all grades.


COURS
E MATERIAL


The course material is available from Harvard Busin
ess School Publishing in
electronic form. Go to http://
cb
.hbsp.harvard.edu
/cb/access/14403523.

Do not
wait until right before the class to order this material. I expect to hear of any
problems

you mi
ght have with HBSP by August 20, 2012
.

If you have a problem
consider calling HBSP technical support before contacting me.


SUGGESTIONS


1. Don’t take notes in class. Focus on “getting it” as we go along. This is
comparable to what you need to d
o in many business situations. If this
thought makes you uncomfortable, consider assigning one member of your
group to take notes while the others focus on the discussion.


2.

When you ask a question or provide a response in class, speak to the entire
cla
ss and not just to the professor. Use each opportunity to develop your
communication skills.


3.

Don’t attempt to memorize the cases. Focus on answering the questions
and understanding the answers. Read the cases in an active, questioning
way.


4.

Pay a
ttention to the answers and comments of others in the class. They may
have comments or points of view that are insightful. Taking into account the
opinions of others is a necessary business skill. People who don’t listen to
others don’t advance.


5.

Don
’t decide that the course “takeaway” is a set of facts. Focus instead on
developing your ability to reason through a situation.


6.

Don’t study for the quiz or exam. Spend your course time on the cases
instead.



ADDITIONAL CLASS POLICIES


1. All known
student disabilities and

major

religious holidays will be
accommodated. If you have a documented condition (e.g., learning disability,
physical disability, pregnancy, etc.) or a religious holiday that requires
accommodation, please see me
early

so that we

can determine appropriate
steps.


5


2. Academic dishonesty, as defined by university policy, will
not

be tolerated
in
any form.
The course is structured to provide many opportunities for you to
excel, so I will
NOT

be understanding in matters of academic
dishonesty. If
you observe instances of dishonesty that I miss, please report them to me
immediately. Academic dishonesty cheapens the value of your degree and
undermines the quality of your education. University procedures (involving an
impartial commi
ttee composed mostly of other students) will be use to
investigate reported instances of dishonesty.


“The University’s
Code of Academic Integrity
is designed to ensure that the
principles of academic honesty and integrity are upheld. All students are
exp
ected to adhere to this Code. The Smith School does not tolerate academic
dishonesty. All acts of academic dishonesty will be dealt with in accordance with
the provisions of this code.


Please visit the following website for more information on the unive
rsity’s
Code of
Academic Integrity


http://www.studenthonorcouncil.umd.edu/code.html


3. I will not mediate group disputes. If your case group doesn’t work out, arrange
another situation.




CLASS SCHEDULE AND ASSIGNMENTS


Week

No. 1



Supply and Demand




Tuesday, August 28
,
2012

at
D.C.


Monday
,
August 27 & Wednesday, August 29, 2012

at
College Pk.


A Note on Microeconomics for Strategists 799
-
128


This note summarizes the core ideas about the microeconomics of

markets that
are most relevant to business strategy. No background in economics is required
to understand the material presented. The note is one of several in the course
that provide the conceptual material necessary for an understanding of the cases
a
nd industry analysis. There will be no lecture on this note but it will be
discussed in class. Students should be prepared at the beginning of class with
any questions related to this material. No questions, no discussion.


Major Concepts:


Demand Curve

Price Elasticity

Income Elasticity

Cross Price Elasticity


6

Average Cost

Marginal Cost

Long
-
run v. short
-
run

Market/Industry Definitions

Fixed and variable costs

Sunk Costs

Supply Curve

Exit

MR=MC

Price Discrimination


The Offshore Drilling Industry 799
-
111


Study Questions


1. Why does the offshore drilling industry experience such severe cycles in rig
day
-
rates and profitability? What determines how low prices fall in downturns?
What determines how high they rise in upturns?


2. Imagine that you contr
ol a fully
-
utilized fleet of jack
-
up rigs in the Gulf of
Mexico in late 1997. What does the industry supply curve look like? Think
about how you would decide whether and when to stack some of your rigs as
oil prices and rig day
-
rates fall. How would you
r decisions depend on your
expectations about the recovery of oil prices? Would your decision depend on
your market share in the Gulf market?


3. An operator is contemplating drilling a well, which is expected to yield 700
barrels of oil a day for 3 years
, with ongoing “lifting costs” of $3 per barrel. Up
-
front outlays for “finding and development,” exclusive of drilling, are expected
to total $4.1 million. Sixty days of drilling, at a $15,000 day
-
rate, will add
$900,000 to the up
-
front expenditures. Th
e opportunity cost of this $5 million
in capital expenditures over the life of the project is estimated to be $1.8
million. At what price of oil does the company undertake the project (you may
ignore discounting of revenues, which is reflected in the abov
e opportunity
cost of capital)? If the price of oil goes up by $1, by how much does the
operator’s willingness to pay for the rig increase (assuming other up
-
front
outlays remain unchanged)? What does this tell you about the cyclicality of
day
-
rates?


4.

Is offshore drilling an attractive industry? Is it becoming more or less
attractive? Which segments are most attractive? Which are least?


Week

No. 2



Five Forces



Tuesday, September 4
,
2012

at
D.C.



Wed
nesday, Sept. 5
,

and Monday Sept.10,

2012

at
College Pk.



7

Understand
ing

Industry Strategy 707
-
493


This is a classic piece by Professor Michael Porter that introduces the “Five
Forces Model.” Five forces is used in many cases to analyze the competitive
situation. A major effort to understand the concept will pay big dividends later in
the program, especially in strategy courses and in case competitions.


Major Concepts:


Porter’s five forces

Antitrust

Economics of scale

Minimum efficient scale

Natural m
onopoly


The Ready
-
to
-
Eat Breakfast Cereal Industry in 1994 795
-
191


Study Questions


1. Why has RTE cereal been such a profitable business? What changes have
led to the current industry crisis?


2. Why have private labels been able to enter this ind
ustry successfully? How
do the cost structures of private label and branded cereal manufacturers
differ?


3. What does General Mills hope to accomplish with its April 1994 reduction in
trade promotions and prices?


4. What are the risks associated with

these actions? How do you expect
General Mills’ competitors to respond?



Bally Total Fitness 706
-
450


Study Questions


1.

What is driving the health club phenomenon? What are the basis economics
of the health club industry? What value is created? W
hat does it cost to
deliver that value? How do these costs behave?


2.

How structurally attractive was the health club industry in 2004? What
average level of returns would you expect it to support?


3.

What do you see as the key trends in the industry i
n 2004? How do you
think these trends will affect profitability over time?


8


4.

What advantages did Bally’s scale bring? What challenges did Bally face in
2004?


Week

No. 3


Five Forces (continued)



Tuesday, September 11
,
2010

at

D.C.



Wednesday, Sept.12
,

& Monday, Sept.17,

2012

at
College Pk.


Global Wine War 2009

910
-
405


Study Questions


1.

How did the French become the dominant competitors in the increasingly
global wine industry for centuries? What
sources of competitive advantages
were they able to develop to support their exports? Where were they
vulnerable?


2.

What changes in the global industry structure and competitive dynamics led
France and other traditional produces to lose market share to
challengers
from Australia, United States and other New World countries in the late
twentieth century?


3.

What advice would you offer today to the French Minister of Agriculture? To
the head of the French wine industry association? To the owner of a mid
-
size, well regarded vineyard producing wines in the premium and super
premium categories?


The Global Oil and Gas Industry
-

2010

TB0223


This industry note examines the oil and gas industry, one of the largest and most
global industries. The note desc
ribes the industry value and major business
segments, including exploration and production, refining and marketing, natural
gas, and petrochemicals. The note provides background information on industry
financial performance, the role of OPEC and the probl
ems oil
-
producing nations
have had in capitalizing on their resource wealth (i.e., the resource curse). The
note summarizes the major competitors among the integrated oil companies
(IOCs), national oil companies (NOCs) and independents.


Study Questions


1.

Describe the structure of the oil and gas industry.


2.

What is the basis for competitive advantage?


3.

Why are many of the larger companies vertically integrated
?



9

4.

What will the industry look like in 10 years
?


Week

No. 4


Monopoly and Pricing




Tuesday, September 18
,
2012

at
D.C.



Wednesday, Sept. 19, & Monday
,

Sept. 24

2012

at
College Pk.


QUIZ


6:25 to 6:50 p.m.

at D.C., beginning of class, Sept. 19 at College Pk.


Major concepts:


Monopoly

Monopol
y production decision

MR=MC


Forever: De Beers
at the Millennium

706
-
518


Study Questions


1.

Who writes the rules of the international diamond market? How are they
enforced?


2.

How has De Beers structured its relationship with U.S. diamond dealers an
d
the U.S. government? Are these relationships sustainable?


3.

What should the U.S. government do about the flow of diamonds from
Angola, the Congo and Sierra Leone? What should De Beers do?


Dakota Office Products 102
-
021


Study Questions


1.

Why wa
s Dakota’s existing pricing system inadequate for its current
operating environment?


2.

Develop an activity
-
based cost system for Dakota Office Products (DOP)
based on Year 2000 data. Calculate the activity cost driver rate for each
DOP activity in 200
0.

3.

Using your answer to Question 2, calculate the profitability of Customer A
and Customer B.


4.

What explains any difference in profitability between the two customers?


5.

What are the limitations, if any, to the estimates of profitability of the two

customers?




10


Toyota Motor Corporation: Launching Prius 706
-
458


Study Questions


1.

What buyer value is created with the hybrid powertrain as implemented in the
Pruis?


2.

How attractive is the automobile industry? Does the hybrid powertrain
technolo
gy make the industry more or less attractive?


3.

Why is Toyota pursuing the Prius project? What factors are important to
make this project a success?



Week

No. 5



Game Theory



Tuesday, September 25
,
2012

at
D.C.



Wednesday, Sept. 26
,

& Monday, Oct.1,

2012

at
College Pk.


Major Concept:


Game Theory


Coming Soon: A Theater Near You 797
-
011


Study Questions


1.

Are the trading relationships between movie studios and movie exhibitors
stable? Which trading p
artner has more power at the time of negotiation to
exhibit a movie?


2.

Why are movie exhibitors opening large multiplexes and diminishing screen
sizes?


3.

What options are available to exhibitors for reducing the holdup problem?


Cigarette Wars 904M1
0


Study Questions


1. Why did Rothman’s cut the price of NUMBER 7 brand?


2. What should Imperial do in response?


Mittal Steel in 2006: Changing the Steel Game PGO 002



11

Mittal Steel’s remarkable rise to the top of the steel industry spearheaded a
wave
of cross
-
border consolidation that aimed to fundamentally change the industry’s
competitive and geographic structure. This case provides the opportunity to
examine how Mittal built his company’s position via international acquisitions, to
assess the
logic of global integration in the steel industry and to think through
how Mittal can continue adding value to its acquired operations on an ongoing
basis (i.e., post
-
turnaround) as a global steel company.


Study Questions


1. How has Mittal managed to
expand from a marginal position to become the


steel producer in the world?


2. Compare Mittal’s economics per ton of crude steel with its competitors.


3. What threats does Mittal face?


4. To what extent is profitability driven by global

scale? What else is relevant?


5. Is vertical integration a value driver for Mittal? Why?


6. How would a merger of Mittal with Arcelor add value?


Week

No. 6



Vertical Integration



Tuesday, October 2
,
2012

at
D.C.



We
dnesday, Oct. 3
,

& Monday, Oct. 8,

2012

at
College Pk.


Major Concepts:


Vertical integration

Horizontal integration

Merger


“Vertical Integration is Dead, or is it?” BH089


Vertically integration is generally not viewed as a good appr
oach to earning
above average market returns. This article takes a new approach to this long
-
standing concept.



Arauco: Forward Integration? 705
-
474


Study Questions


1.

Is

Arauco an efficient producer of pulp? What advantages does it have?
Disadvan
tages?



12

2.

Has

Arauco expanded too much already?


3.

What should Perez do?


Cola Wars Continue: Coke and Pepsi in 20
10

711
-
462


Study Questions


1.

Why, historically, has the soft drink industry been so profitable?


2.

Compare the economics of the conce
ntrate business to that of the bottling
business: Why is the profitability so different?


3.

How has the competition between Coke and Pepsi affected the industry’s
profits?


4.

Can Coke and Pepsi sustain their profits in the wake of flattening demand
and
the growing popularity of non
-
CSDs?



Week

No. 7



Government in Business



Tuesday, October 9
,
2012

at
D.C.



Wednesday, Oct. 10
,

& Monday, Oct. 15,

2012

at
College Pk.


Major Concepts:


Adverse selection

Exter
nalities

Public Goods

Taxes and Subsidies as incentives


Government Games: Understanding the Role of Government in Business
Strategy 902
-
222


Government affects business in so many ways that it can confuse the best of
managers. How do you figure out wh
at is critical and what is not?


Can Florida Orange Growers Survive Globalization? 904
-
415


Study Questions


1.

Is generic advertising a sound economic concept?


2.

Does the “box tax” help the Florida growers?


3.

Can Florida orange growers survive globa
lization? Should they be

13

protected?


Aviation Security after September 11
th
: Public or Private? 702
-
021


Study Questions


1.

Why has the government got involved in the airline industry and aviation
security? Have regulatory interventions improved soci
al welfare?


2.

Who is most to blame for poor performance in aviation security: airlines,
security contractors, regulators, politicians, citizens, or something/somebody
else?


3.

Which of these two bills would you vote for and why?


4.

As an executive in
an airline company, what would you be most concerned
about with (a) the Senate bill and a federal takeover (b) the house bill? What
strategy would you adopt to address each of these possibilities?


5.

Consider the following range of goods and services: g
arbage collection, fire,
police, airports, road repair, landfills, libraries and water supply. Rank them
from the most desirable to the least desirable being provided by the public
sector and make a cutoff between the public and private sector. Is the
ra
tionale you used to decide on whether aviation security should be a private
or public responsibility the same one you used to come with your list?



Week

No. 8
-

Tuesday, October 16
,
2012

at
D.C.



FINAL EXAM



6:25


8:30 p.m.

for D.C. students


Exam time

to be announced for College Park students.