BRIEF CONTENTS Preface PART l Introduction 1 Introduction and Goals of the Firm 2 Fundamental Economic Concepts 2A Differential Calculus Techniques in Management XI l 2 26 Demand and Forecasting 75 3 Demand Analysis 76 4 Estimating Demand 112 4A Problems in Applying the Linear Regression Model 145 5 Business and Economic Forecasting 161 6 Managing Exports 202 PART III Production and Cost 257 7 Production Economics 258 7A Maximization of Production Output Subject to a Cost Constraint 297 8 Cost Analysis 299 8A Long-Run Costs with a Cobb-Douglas Production Function 329 9 Applications of Cost Theory 333 9A Mass Customization and the Learning Curve 365 PART IV Pricing and Output Decisions: Strategy and Tactics 10 Prices, Output, and Strategy: Pure and Monopolistic Competition 11 Price and Output Determination: Monopoly and Dominant Firms 57 371 372 423 12 Price and Output Determination: Oligopoly 452 13 Best-Practice Tactics: Game Theory 485 13A Entry Deterrence and Accommodation Games 531 14 Pricing Techniques and Analysis 542 Organizational Architecture and Regulation 15 Contracting, Governance, and Organizational Form 15A Auction Design and Information Economics 16 Government Regulation 17 Long-Term Investment Analysis Appendices A B C Index The Time Value of Money Tables Check Answers to Selected End-of-Chapter Web Appendices A Consumer Choice Using Indifference Curve Analysis B International Parity Conditions C Production Decisions and Linear Programming D Capacity Planning and Pricing against a Low- Cost Competitor A Case Study E Pricing of Joint Products and Transfer Pricing F Decisions Under Risk and Uncertainty 591 592 630 660 695 A- 1 B-l C- 1 I- 1 IV
CONVENI Preface PA RT l Introduction CHAPTER 1 Managerial Challenge: Executive Performance Bonus Plan: General Electric What îs Managerial Economics? The Decision-Making Model The Role of Profits Objective of the Firm Separation of Ownership and Control: The Principal- Agent Problem Saturn Corporation Implications of Shareholder Wealth Maximization Eli Lilly Depressed by Loss of Prozac Patent Case : Designing a Managerial Incentives Contract Reducing Greenhouse Gases CHAPTER 2 EC 26 Managerial Challenge: Revenue Management at American Airlines 26 Demand and Supply: A Quick Review Marginal Analysis The Net Present Value Concept 41 Meaning and Measurement of Risk 44 Long-Term Capital Management (LTCM) 49 The Relationship Between Risk and Return 52 54 55 XI 2 4 5 5 12 15 15 16 23 24 25 APPENDIX2A DlFFERENTIAL CALCULUS TECHNIQUES INjŞ4ANAGEM[ENT ^ Relationship Between Marginal Analysis and Differential Calculus 57 Managerial Challenge: A Skeleton in the Stealth Bomber's Closet 58 Applications of Differential Calculus to Optimization Problems 65 Parţial Differentiation and Multivariate Optimization 70 72 PART II Demand and Forecasting 75 CHAPTER 3 DEMAND ANALYSIS 76 Managerial Challenge: Health Care Reform and Cigarette Taxes Demand Relationships The Price Elasticity of Demand International Perspectives: Free Trade and the Price Elasticity of Demand: Nestle Yogurt The Income Elasticity of Demand Cross Price Elasticity of Demand Other Demand Elasticity Measures The Combined Effect of Demand Elasticities Case Exercise: Polo Golf Shirt Pricing CHAPTER 4 76 76 81 97 98 100 104 105 106 106 111 112 Managerial Challenge: The Demand for Public Transportation 112 Estimating Demand Using Marketing Research Techniques 114
Statistical Estimation of The Demand Function A Simple Linear Regression Model Multiple Linear Regression Model Case Exercise: Soft Drink Demand Estimation APPENDIX4A PROBLEMS IN APPLYING THE LINEAR Introduction Nonlinear Regression Models CHAPTER 5 Managerial Challenge: Export Market Pricing at Toyota 115 119 132 137 138 143 145 156 158 158 161 Managerial Challenge: Excess Fiber Optic Capacity at Global Crossing Inc. 161 The Significance of Forecasting 1 63 Selecting a Forecasting Technique 163 Alternative Forecasting Techniques 165 Deterministic Time-Series Analysis 165 Smoothing Techniques 173 Barometric Techniques 179 Survey and Opinion-Polling Techniques 1 84 Econometric Models 185 Stochastic Time-Series Analysis 189 Forecasting with Input-Output Tables 192 International Perspectives: Long-Term Sales Forecasting by General Motors in Overseas Markets 193 193 194 Case : South Pole Ice Cream Company 199 Cruise Ship Arrivals in Alaska 199 Lumber Price Forecast 200 CHAPTER 6 MANAGING EXPORTS 202 202 202 Introduction 203 Import-Export Sales and Exchange Rates 204 International Perspectives: The Collapse of Export and Domestic Sales at Cummins Engine 206 Outsourcing 207 China Trade Blossoms 209 The Market for U.S. Dollars as Foreign Exchange 210 Foreign Exchange Risk Management 214 International Perspectives: Toyota and Honda Buy U.S. Assembly Capacity 215 The Determinants of Long-Run Trends in Exchange Rates 216 Purchasing Power Parity 221 Ford Motor Co. and Exide Batteries: Are Country Managers Here to Stay? 222 International Trade: A Managerial Perspective 231 Free Trade Areas: The European Union and NAFTA 241 Perspectives on the U.S. Trade Deficit 250 251 253 Case : Predicting the Long-Term Trends in Value of the U.S. Dollar, DM, and Euro 254 U.S. Energy Policy, Oii Imports, and the Price of Gasoline 255 Production and Cost CHAPTER 7 PRODUCTION ECONOMICS 257 258 258 Managerial Challenge: What Went Wrong in California's Deregulation of Electricity? 258 The Production Function 260 Production Functions with One Variable Input 263 Factory Bottlenecks at a Boeing Assembly Plant 265 Determining the Optimal Use of the Variable Input 270 Production Functions with Multiple Variable Inputs 272 Determining the Optimal Combination of Inputs 277 VI
CONTENTS A Fixed Proportions Optimal Production Process 281 Returns to Scale 286 291 292 Case Exercise: The Production Function for Wilson Company 295 Break-Even Analysis Versus Contribution Analysis 348 Linear Break-Even Analysis 349 359 359 Case : Cost Functions 361 Charter Airline Operating Decisions 363 APPENDIX 7 A MAXIMIZATION OF PRODUCTION OUTPUT SUBJECT TO A COST CONSTRAINT 297 Exercise CHAPTER 8 COST ANALYSIS 298 299 299 Managerial Challenge: US Airways Cost Structure 299 The Meaning and Measurement of Cost 300 Short-Run Cost Functions 305 Long-Run Cost Functions 312 Economies and Diseconomies of Scale 316 International Perspectives: How Japanese Companies Deal with the Problems of Size 320 323 323 Case Exercise: Cost Analysis 327 APPENDIX 8A LONG-RUN COSTS WITH A COBB-DOUGLAS PRODUCTION FUNCTION 329 CHAPTER 9 APPLICATIONS OF COST THEORY 332 333 333 Managerial Challenge: How Exactly Have Computerization and Information Technology Lowered Costs at Chevron, Timken, and Merck? 333 Types of Cost Functions 334 Estimating Short-Run Cost Functions 335 Boeing: The Rising Marginal Cost of 747s 338 Long-Run Cost-Output Relationships 340 APPENDIX 9A MASS CUSTOMIZATION AND THE LEARNING CURVE 365 Learning Curve Relationship The Percentage of Learning Exercise PA RT IV Pricing and Output Decisions: Strategy and Tactics CHAPTER 10 PRICES, OUTPUT, AND STRATEGY: PURE AND MONOPOLISTIC COMPETITION 365 368 369 371 372 372 Managerial Challenge: Resurrecting Apple 372 Introduction 374 Competitive Strategy 375 Xerox 376 Porter's Five Forces Strategic Framework 380 A Continuum of Market Structures 391 Price-Output Determination Under Pure Competition 394 Price-Output Determination Under Monopolistic Competition 400 The Dynamics of Competition at Amazon.com 402 Selling and Promotional Expenses 405 Competitive Markets Under Asymmetric Information [Opţional Advanced Section] 408 Solutions to the Adverse Selection Problem 413 418 419 Case : HP and Dell Personal Computers 422 Saving Sony Music 422 vii
CONTENTS CHAPTER11 PRICE AND OUTPUT DETERMINATION: MONOPOLY AND DOMINANT FlRMS 423 423 Managerial Challenge: Dominant Microprocessor Company Intel Adapts to Next Trend 423 Monopoly Defined 424 The Sources of Market Power for a Monopolist 425 Pilot Error at Palm 429 Price and Output Determination for a Monopolist 430 The Optimal Markup, Contribution Margin, and Contribution Margin Percentage 433 Regulated Monopolies 439 The Public Service Company of New Mexico 440 The Economic Raţionale for Regulation 441 445 445 Case Exercise: Differential Pricing of Pharmaceuticals: The HIV/ AIDS Crisis CHAPTER 12 PRICE AND OUTPUT DETERMINATION: 450 452 Managerial Challenge: Are Nokia's Margins on Cell Phones Collapsing? Oligopolistic Market Structures Interdependencies in Oligopolistic Industries Ignoring Interdependencies Cartels and Other Forms of Collusion 452 453 458 459 460 International Perspectives: The Organization of Petroleum Exporting Countries (OPEC) Cartel 467 Price Leadership 471 The Kinked Demand Curve Model 475 Avoiding Price Wars 476 Good-Better-Best Product Strategy at Kodak 478 481 482 Case Exercise: Cell Phones Displace Mobile Phone Satellite Networks 484 CHAPTER 13 BEST-PRACTICE TACTICS: GAME THEORY 485 Managerial Challenge: Large-Scale Entry Deterrence of Low-Cost Discounters: Southwest, People Express, Value Jet, Kiwi, and JetBlue Oligopolistic Rivalry and Game Theory Analyzing Simultaneous Games The Escape from Prisoner's Dilemma Analyzing Sequential Games Business Rivalry as a Self-Enforcing Sequential Game Credible Threats and Commitments Replacement Guarantees Case Exercise: International Perspectives: The Superjumbo Dilemma APPENDIX13A ENTRY DETERRENCE AND ACCOMMODATION 485 485 487 492 496 507 511 515 518 524 525 529 531 Excess Capacity as a Credible Threat 531 Precommitments Using Non-Redeployable Assets 533 540 541 CHAPTER 14 PRICING TECHNIQUES AND ANALYSIS 542 542 Computers: Market Share Versus Current Profitability 542 A Conceptual Framework for Proactive, Systematic-Analytical, Value-Based Pricing 543 Optimal Differential Price Levels 546 Differential Pricing in Target Market Segments 555 $19.95 for "Unlimited Access" at AOL Time Warner 561 Pricing in Practice 567 The Practice of Revenue Management, Advanced Material 573 viii
CON' j N' S 585 586 Case Exercise: Congestion Pricing Library Research 589 PART V Organizational Architecture and Regulation CHAPTER 15 CONTRACTING, GOVERNANCE, AND ORGANIZATIONAL FORM 591 592 592 Managerial Challenge: Controlling the Vertical: Ultimate TV 592 Introduction 593 The Role of Contracting in Cooperative Games 594 Corporale Governance and the Problem of Moral Hazard 600 Moral Hazard and Holdup at Enron and Worldcom 604 The Principal-Agent Model 604 Why Have Restricted Stock Grants Replaced Executive Stock Options at Microsoft? 610 Choosing the Efficient Organizational Forrn 612 Cable Allies Refuse to Adopt Microsoft's WebTV as an Industry Standard 616 International Perspectives: Economies of Scale and International Joint Ventures in Chip Making 617 Vertical Integration 619 Dell Replaces Vertical Integration with Virtual Integration 623 625 626 Case : Borders Books and Amazon.com Decide to Do Business Together 627 Designmg a Managerial Incentive Contract 628 The Division of Investment Banking Fees 629 Library Exercise: Vertical Integration at GM-Fisher Body 629 APPENDIX15A AUCTION DESIGN AND INFORMATION ECONOMICS 630 Queue Service Rules 630 Auctions 633 Incentive-Compatible Revelation Mechanisms 648 International Perspectives: Joint Venture in Memory Chips: IBM, Siemens, and Toshiba 653 International Perspectives: Whirlpool's Joint Venture in Appliances Improves Upon Maytag's Outright Purchase of Hoover 655 656 657 Case : Spectrum Auction 658 Debugging Computer Software: Intel 659 CHAPTER 16 GOVERNMENT REGULATION 660 660 Managerial Challenge: Deregulation and the Coase Theorem 660 The Regulation of Market Structure and Conduct 661 Antitrust Regulation Statutes and their Enforcement 664 Antitrust Prohibition of Selected Business Decisions 667 Command and Control Regulatory Constraints: An Economic Analysis 673 The Regulation of Externalities 675 Governmental Protection of Business 683 The Optimal Deployment Decision: To License or Secure Captive Use 683 Aventis 684 Technology Licenses Cost Palm Its Lead in PDAs 686 Motorola: What They Didn't Know Hurt Them 688 690 691 Case : Price Fixing of Auction House Commissions Microsoft Tying Arrangements Music Recording Industry Blocked from Consolidating 693 693 694 IX
CONTENTS CHAPTER 17 LONG-TERM INVESTMENT ANALYSIS 695 695 Managerial Challenge: Multigenerational Effects of Ozone Depletion and Greenhouse Gases 695 The Nature of Capital Expenditure Decisions 696 A Basic Framework for Capital Budgeting 697 The Capital Budgeting Process 698 Estimating the Firm's Cost of Capital 707 Cost-Benefit Analysis 714 Steps in Cost-Benefit Analysis 716 Objectives and Constraints in Cost-Benefit Analysis 718 Analysis and Valuation of Benefits and Costs 719 The Appropriate Rate of Discount 722 Cost-Effectiveness Analysis 724 726 727 Case : Cost-Benefit Analysis 731 Industrial Development Tax Relief and Incentives 734 Appendices A The Time Value of Money A-l B Tables B-l C Check Answers to Selected End-of-Chapter C-l Index 1-1 Web Appendices A Consumer Choice Using Indifference Curve Analysis B International Parity Conditions C Production Decisions and Linear Programming D Capacity Planning and Pricing against a Low- Cost Competitor A Case Study E Pricing of Joint Products and Transfer Pricing F Decisions Under Risk and Uncertainty