MGT 405: Managerial Economics

Fall 2010, Full-Time 12

Professor: Dominique Lauga

Email: dlauga@ucsd.edu
Phone: 858-822-7457
Office Hours: by appointment

Teaching Assistants: Anlin Sethi and Sarah Judson

TAs Email: Anlin.Sethi@rady.ucsd.edu
Sarah.Judson@rady.ucsd.edu

Website: https://radar.rady.ucsd.edu

Lectures: Mondays from 9 to 12 AM

Review Sessions: TBD

DESCRIPTION

This course is an introduction to the use of microeconomics in managerial decision-making. We examine

how the optimal strategy of a firm is impacted by the structure of the market, the competitive and
regulatory constraints, and the structure of information. Topics include supply and demand analysis, price
discrimination techniques, contractual relationships, and asymmetric information. Throughout we highlight
the importance of marginal analysis in decisions.

All the sub-fields of management education (marketing, finance, organizational behavior, operations,
information systems, accounting, and strategy) deal in some way with how businesses and other
organizations work to allocate scarce resources among competing needs. Because of this, economics
can serve as a unifying framework. I will show you connections between economics and many of the
other courses you will take as part of your MBA.

OBJECTIVES

The basic objective of this course is to familiarize you with the approach, language, and techniques of
managerial economics. After this course, you will understand economic principles sufficiently to apply
them to real world issues and make real world decisions. 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 problems. At a more specific level, this course has three objectives:
• Develop specific tools – quantitative as well as broadly analytical – that are useful for tackling basic
managerial economics problems.
• Instill an “economic point of view” which is extremely powerful and has proven to be a useful
analytical perspective in many circumstances, including business decision making at the highest
level.
• Discuss the functioning of the economy from an analytical point of view.

MATERIALS

The required text for the course is William F. Samuelson & Stephen G. Marks, Managerial Economics,
Sixth Edition, John Wiley & Sons, 2010. There is an accompanying study guide (same authors) that some
students may find helpful. Additional readings are available in the course reader.

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GRADING

Your performance will be evaluated on a final exam, a midterm exam, homework assignments, and class
participation by one of the following two formulas (the one leading to the higher grade):

Percentage Percentage
Final Exam 40% 60%
Midterm Exam 25% 5%
Homework 15% 15%
Class Participation 20% 20%

In other words, if you perform better on the final than you did on the midterm exam, I will heavily discount
your midterm grade toward your class grade. I still encourage you to try your best at the midterm exam.

FINAL EXAM

The Final Exam will be held in class on Monday, December 6. The material covered consists of all in-
class material, discussions, and homework assignments from sessions 1 to 10. The exam is open book,
open notes, calculator allowed, no laptop connected to the Internet, and no cell phones. You are
expected to understand the message of the readings discussed in class, but not to memorize the facts of
the articles or cases.

MIDTERM EXAM

The Midterm Exam will be held in class on Monday, November 1. The material covered consists of all in-
class material, discussions, and homework assignments from sessions 1 to 5. The exam is open book,
open notes, calculator allowed, no laptop connected to the Internet, and no cell phones. You are
expected to understand the message of the readings discussed in class, but not to memorize the facts of
the articles or cases.

HOMEWORK ASSIGNMENTS

There will be five homework assignments. They are to be handed in individually by each student. While I
strongly encourage you to discuss assignments with other students, you have to try first by yourself and
alone.

The assignments will be graded, but the lowest grade will be dropped. If you have an emergency that
prevents you from turning in one assignment, that assignment will be the one with the lowest grade. Thus,
no late assignments will be accepted.

CLASS PARTICIPATION

Your class participation will be evaluated subjectively, but will rely upon measures of professional
behavior, familiarity with the required readings, and relevance and insight reflected in classroom
questions and commentary. Your class participation will be judged by what you add to the class
environment, regardless of your technical background. Although several lectures will be didactic, we will
rely heavily upon interactive discussion within the class. Students will be expected to be familiar with the
required readings. Your participation will be beneficial to you and to your classmates. But be considerate
with your classmates’ time – it is the quality of what you say that is most appreciated rather than the
quantity.

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PREPARING FOR CLASS

For this course, I list required and suggested reading. I post lecture slides and supplemental reading.
How should you allocate your prep time so you can be best prepared for each class session?

You should first do the required reading and prepare the discussion questions.

Then you should skim the suggested reading. Your aim in doing this reading before class should be to get
a big picture idea of what our class session will focus on. Don’t spend time before class trying to
understand every little detail in the text. Spend time after class reviewing the parts of the reading that I
focused on in class.

We will be going over the lecture slides in class. Therefore, there is no need to review them before class.
Finally, you will find more examples in the supplemental reading illustrating the topics covered in class.

HELP

You may need some out-­‐of-class help as the term progresses. There are several places to find it.

First, you can talk to me. Questions right after class, when the questions are fresh in your mind, are often
a good idea. Questions right before class are less good; I usually have to arrange the presentation and
would like to begin class on time. Whether it is a specific question, general confusion about a topic or you
are just unclear as to where you stand, you can always come and see me in my office.

Next are the course TAs. This course will have two TAs. The TAs will hold one weekly review session
plus have some office hours. Review sessions are used to review and reinforce material covered in the
lectures. Review session attendance is encouraged, but it is not mandatory. Some students find the
review session period a very efficient time to absorb and reinforce the class material, while other students
may prefer to absorb the class material at their own desired time. Office hours are unstructured Q&A
sessions - you come with requests to discuss this or that, or (re)work problem X. It may sound like office
hours are the better deal, and in extreme cases they are, but many students have found review sessions
to be more helpful -­‐ hearing classmate's questions and concerns can be enlightening.

ACADEMIC INTEGRITY

Integrity of scholarship is essential for an academic community. As members of the Rady School, we
pledge ourselves to uphold the highest ethical standards. The University expects that both faculty and
students will honor this principle and in so doing protect the validity of University intellectual work. For
students, this means that all academic work will be done by the individual to whom it is assigned, without
unauthorized aid of any kind. The complete UCSD Policy on Integrity of Scholarship can be viewed at:
http://www-senate.ucsd.edu/manual/appendices/app2.htm#AP14

STUDENTS WITH DISABILITIES

A student who has a disability or special need and requires an accommodation in order to have equal
access to the classroom must register with the Office for Students with Disabilities (OSD). The OSD will
determine what accommodations may be made and provide the necessary documentation to present to
the faculty member. The student must present the OSD letter of certification and OSD accommodation
recommendation in order to initiate the request for accommodation in classes, examinations, or other
academic program activities. No accommodations can be implemented retroactively.

Please visit the OSD website for further information or contact the Office for Students with Disabilities at
(858) 534-4382 or fosorio@ucsd.edu.

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WEEKLY SCHEDULE

Session Date Topic Deliverable

1 Sep. 27 Pricing
Demand Curves and Elasticities

2 Oct. 4 Price Discrimination HW1

Versioning, Bundling, and Tying

3 Oct. 11 Production and Costs HW2

4 Oct. 18 Perfect Competition HW3

5 Oct. 25 Applications

6 Nov. 1 Midterm
Simulation

7 Nov. 8 Imperfect Competition

Dominant firm and Monopolistic Competition

8 Nov. 15 Antitrust HW4

Vertical Relationships

9 Nov. 22 Risk and Information

10 Nov. 29 Externalities HW5

Public Goods
Review and Wrap-up

Dec. 6 Exam

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 COURSE OUTLINE

This is a tentative, week-by-week syllabus of the material we will cover over our time together. Any changes
to this schedule will be announced in class.

Session 1 Pricing; Demand Curves and Elasticities

Required Reading
“Seeking Perfect Prices, CEO Tears Up the Rules,” The Wall Street Journal, March 27, 2007.
“Apple Computer in the Mid 90s,” John Wiley & Sons, 2006.

Discussion Questions: Be prepared to discuss these questions in class.

About the WSJ article:

1. The article makes a vague reference to 20,000 data points. What data would you want to
collect to determine the right price for a product? How would you use this data?
2. Are margin-based rules of thumb (as Parker Hannifin used prior to 2001) ever a good idea?
3. Why does Washkewicz need to create the “pricing guru” job, rather than telling his division
managers here's a way to boost your profits?

And the questions at the end of “Apple Computer in the Mid 90s.”

Suggested Reading
Samuelson and Marks, Chap 1 (skim) – 2 – 3.

Session 2 Price Discrimination; Versioning, Bundling, and Tying

Required Reading
“Fun Fair,” Tuck School of Business
“Cambridge Software Corp.,” Harvard Business School Case

Discussion Questions:

Be prepared to present the different pricing schemes in class.

Be prepared to discuss these questions in class.

1. If Cambridge Software Corporation offers only one version of Modeler, which version should it
offer? At what price?
2. Should the firm offer more than one version of Modeler? If so, which versions should it offer? At
what prices?

Suggested Reading
Firms, Prices, and Markets, Timothy Van Zandt, Chap 9 – 10.
“Blaming High-Priced Oil for Ruining Your Weekends,” The New York Times, April 22, 2008.
“Versioning: The Smart Way to Sell Information,” Harvard Business Review, Nov-Dec 1998.

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Sessions 3 Production and Costs

Required Reading
“Berkshire Threaded Fasteners Company,” Dartmouth College Case.

“New Recipe for Cost Savings: Replace Highly Paid Workers,” The Wall Street Journal, June 11,
2003.

Discussion Questions: Be prepared to discuss these questions in class.

The assignment questions at the end of the Berkshire case.

About the WSJ article:

1. Is firing your best employees a winning business strategy?

2. What data would you collect to determine the right staffing mix for Circuit City stores? And what
would you do with the data?
3. If it was a good idea for this firm to fire highly paid salespeople, then was it a bad idea to have
hired them in the first place?

Suggested Reading
Samuelson and Marks, Chap 5 – 6.
“Intel to Tout Chip Trifecta in Turnaround Bid,” eWeek.com, June 20, 2006.
“Because, not in spite of,” New York Times: Freakonomics, May 5, 2008.

Sessions 4 Perfect Competition

Required Reading
“Corn-Fed Ethanol Drives Stock Prices,” The Wall Street Journal (Eastern Edition), April 22,
2007.

Discussion Questions: Be prepared to discuss these questions in class.

1. How did tractors and fertilizer companies benefit from having more people concerned about U.S.
“addiction to oil?”
2. If your company relied heavily on corn, what data would you collect in order to be prepared in
case the price of corn rises sharply?

Suggested Reading
Samuelson and Marks, Chap 7.

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Session 5 Applications

Required Reading
“The Aluminum Industry in 1994,” Harvard Business School Case.
“Alusaf Hillside Project,” Harvard Business School Case.

Discussion Questions:

Be prepared to discuss these questions in class. Be prepared to present the supply curve and your
recommendation in class.

1. Is primary aluminum production an attractive industry? Why or why not?

2. Using information in the case and data from the spreadsheet (see class website), construct the
industry supply curve for primary aluminum.
3. At what rate do you expect primary aluminum demand (be careful this is different from total
aluminum demand) to grow over the coming years? What do you expect the price of aluminum
to be in 5 years? in 10 years?
4. Should Alusaf build the proposed Hillside smelter? Is your recommendation particularly sensitive
to any assumptions you have made?

Suggested Reading
“The Oil Tanker Shipping Industry,” Harvard Business School Case.
Teekay Inc. Annual Report.

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Sessions 7 Imperfect Competition; Dominant firm and Monopolistic Competition

Required Reading
“The Cost of Gas,” Abilen Reporter-News, May 25, 2008.
“Delta to add Philadelphia Flights,” The Boston Globe, August 30, 2007.

Discussion Questions: Be prepared to discuss these questions in class.

About the Abilen article: What do you think of Kehler’s pricing strategy?

About the Globe article:

1. Delta entered the BOS/PHL market with 50 and 70 seat jets, meaning they'll run between 150
and 210 seats daily. If you were a Delta analyst, how would you determine the right number of
seats with which to enter?
2. A key determinant of Delta's success in this market is US Airways’ response to Delta's entry.
How should US Airways respond?
3. As Delta thinks about expanding its BOS-to-New-York service, should it think of train travel as
just another form of competition (same as another rival airline)? Or is there something specific
about trains that make them different?

Suggested Reading
Samuelson and Marks, Chap 9.
“Bitter Competition: The Holland Sweetener Co vs. NutraSweet,” Harvard Business School
Case, November 2000.

Session 8 Antitrust; Vertical Relationships

Required Reading
“Collusive Predation: Matsushita vs. Zenith,” The Antitrust Revolution.
“Retailer-Instigated Restraints on Suppliers’ Sales: Toys ‘R’ Us,” The Antitrust Revolution.

Discussion Questions: Be prepared to discuss these questions in class.

About the Predation article:

1. According to Zenith and NUE, how did the predatory pricing scheme work in the American
market?
2. Ideally, what pieces of evidence would you have gathered to prove the predatory case?
3. Why did the Supreme Court think that the facts in that case “make no economic sense?”

About the TRU article:

1. Why did TRU introduce a new policy in 1992? Did the policy work?
2. What was illegal about the policy?
3. What do you think TRU should have done in 1992?

Suggested Reading
Modern Industrial Organization, chap 19.
“The Economics and Legal Context,” The Antitrust Revolution.

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Session 9 Risk and Information

Required Reading
“Health Care for Everyone? We found a Way,” The Wall Street Journal (Eastern Edition), April
11, 2006.
“Performance Pay at Safelite Auto Glass,” Harvard Business School Case.

Discussion Questions: Be prepared to discuss these questions in class.

About the WSJ article:

1. Is it a problem that some people choose not to buy health insurance? Why is there so much
worry about the uninsured?
2. Health insurance is expensive for the self-employed, and cheaper when provided by a large
employer. Why?
3. Why were young, healthy men so well represented among the Massachusetts uninsured?
About the HBS case:
1. Why was the productivity of Safelite installers so low?
2. Does the proposed PPP plan address the problems described in question 1? Does it
introduce new problems? Explain.
3. What are the pros and cons of switching wage rates to piece rate pay? Are Safelite installers
good candidates for piece-rate pay? Why?
4. What are the likely consequences of a switch form wage to piece rates for turnover,
recruitment, productivity, and product quality?

Suggested Reading
Samuelson and Marks, Chap 12 (p 484-505) – 13 – 14 (p 544-554).

Session 10 Externalities and Public Good

Required Reading
“That Buzz in Your Ear May be Green Noise,” The New York Times, June 15, 2008.
“Charging by the Byte to Curb Internet Traffic,” The New York Times, June 15, 2008.
“To tax or trade is the question in taking on climate change Carbon levy is best approach to cut
emissions,” Houston Chronicle, April 5, 2009.

Discussion Questions: Be prepared to discuss these questions in class.

1. Environmentally conscious consumers keep mental lists of what's bad for the planet. How does
this compare to pricing the externalities?
2. Why should consumers have to pay by the byte for internet access?
3. Assuming we need to reduce carbon emissions, why do we need government intervention in
markets to do it? Why can't markets do this without government involved?
4. Using our model of perfect competition, think through how a cap-and-trade system is different
from taxing carbon?
5. Are there any advantages of cap-and-trade relative to a tax?

Suggested Reading
Samuelson and Marks, Chap 11.