Course Syllabus:
Managerial Economics

Faculty

Professors Robert G. Hansen, Victor O. Stango

Objectives

Economic forces are a fundamental determinant of firms’ profitability and growth, and economic thinking should be a fundamental influence in nearly every managerial decision. In this course, we will examine the principles of microeconomics, and illustrate how they apply to managerial decision-making.

The first section of the course studies essential concepts such as supply, demand and costs, using examples from telecommunications, airlines, and the oil and aluminum industries to illustrate the main points. We move from these basic concepts to studying how firms behave when they have market power. Topics include differences between imperfectly competitive markets and competitive markets, optimal pricing for firms with monopoly power, and the use of advanced pricing such as bundling and versioning to capture value. Examples in this module include many from high-tech industries such as software. The final section of the course focuses on advanced topics in market analysis. These include the role of externalities/network effects and imperfect/asymmetric information. We’ll discuss examples from network industries such as credit cards, as well as industries where vertical relationships such as franchising are important. Throughout, the focus of the course will be on applications. You should expect to leave the course with a firm grip on how economists think about business problems, and the ability to apply tools from the course to a variety of these problems.

Requirements

Materials

REQUIRED TEXT:
Png, Ivan: "Managerial Economics", 2/e, Blackwell Publishing;
ISBN: 0631225161.

AVAILABLE AT WHEELOCK BOOKS IN HANOVER

Honor Code and Attendance

Honor Code
We consider honor an individual matter guided by the policy set forth in the MBA Student handbook. Please read it again to refresh your understanding. If there are any questions about what is expected, please raise them.

Attendance
You are expected to be in class--and prepared--each day. If you cannot make class for some reason, please let us know in advance. The final exam and midterm are to be individual efforts. They are open-book, open-note and you may use your laptops. You are welcome to use any written material or computing tools. You may prepare with the help of others. During the course, problems, cases, and other material will be distributed and used as a basis for class meetings. You should review and work through these materials before class. Group discussion is encouraged.

Grading

Grading Criteria and Exam Schedule

TYPE               RECEIVE  RETURN         WT

MIDTERM: Take home 11/19    11/29-8:30 am. 40%

CLASS PARTICIPATION.........................5%

FINAL: In Class    12/21--9-12 am..........55%

Schedule

Session 1
Wednesday, 11/3

A. Introduction

The outline below will be supplemented each week by emails from us that will give more data on the upcoming week's sessions.
We plan on having review sessions during the term, conducted by a combination of second-year students and us.

Key Topics: Demand curves, marginal cost, consumer surplus, producer surplus, economic efficiency

1. "Pricing Coin Phone" (Tuck Case)

2. Png: Chapter 2.

3. "How Do You Mean Fair?," Economist, 29 May 1993.

4. Edward L. Glaeser and Erzo F.P. Luttmer, "The Misallocation of Housing Under Rent Control," The American Economic Review, Vol. 93, No. 4, (September), 2003, pp. 1027-1046

5. "So Long to Long Distance?; Calling Packages, Internet Phoning Swiftly Ending a High-Cost Category," by Christopher Stern, 5 August 2004, The Washington Post
(from): see website below

Session 2
Friday, 11/5
B. Exchange, Markets, Price Determination, Efficiency

NOTE: Sections 1 & 3 ONLY will meet in ROSENWALD TODAY ONLY.

Key Topics: Marginal value, demand, equilibrium, producer surplus, consumer surplus, economic efficiency, Coase theorem, property rights.

1. Png: Chapter 6.

2. Alchian and Allen, Exchange and Production, Chapter 2, "Consumer Demand -- The Unit of Analysis Is the Individual", pp. 13-44; Chapter 3, "Exchange -- Trade Without Surplus Goods", pp. 45-56. 3/e, 1983.

3. Delays at Logan Airport (HBS 9-102-011)

4. Joan M. Feldman, "Calling the Slots," Air Transport World, July, 1998; pp. 154-156.

5. Richard Schmalensee, Paul L. Joskow, A. Denny Ellerman, Juan Pablo Montero, Elizabeth Bailey, 1998 "An Interim Evaluation of sulfur dioxide Emissions Trading," Journal of Economic Perspectives, Vol. 12(3), Summer, 1998, pp. 53-68.

Session 3
Wednesday, 11/10
C. Costs in Economic Analysis

NOTE: Sections 1&3 ONLY will meet in WHITTEMORE LEARNING LABS TODAY ONLY

Key Topics: Total costs, average costs, marginal costs, fixed costs, sunk costs, economies of scale, economic versus accounting costs.

Png: Chapters 4 and 7.

1. Berkshire Threaded Fasteners Company (Tuck Case)

Session 4
Friday, 11/12
D. Competitive Industry Equilibrium

Key Topics: Long run and short run, market equilibrium, economic versus accounting profit, entry and exit.

1. Competitive Industry Equilibrium (numerical problem)

2. Png: Chapter 5.

3. Alchian and Allen, Exchange and Production, Chapter 4, "Market Prices as Social Coordinators", 3/e, 1983, pp. 57-86.

Session 5
Wednesday, 11/17
E. Applying the Model: Oil Tanker Industry

NOTE: Sections 1&3 ONLY will meet in WHITTEMORE LEARNING LABS TODAY ONLY

Key Topics: Demand elasticity, supply elasticity, shut down decisions, real options, incidence of tax, deadweight loss.