Economic Foundations of Management
- The purpose of the course is to teach the students how to apply the principles and models of economic theory for making managerial decisions: 1) estimating and analyzing demand, 2) cost analysis, 3) smart pricing (price discrimination, tying, bundling, non-linear pricing), 3) competing in various market structures, 4) making decisions about product quality and differentiation, 5) using network effects, 6) spending on advertising, 7) investing in R&D, 8) in labour markets, 9) in natural resources markets, 10) in international operations.
- Upon the course completion, the student is expected know how to use marginal analysis in managerial decisions.
- Upon the course completion, the student is expected know how find optimal distribution of resources, optimal prices and quantities.
- Upon the course completion, the student is expected know how to estimate demand on the basis of available data
- Upon the course completion, the student is expected know how to make production and pricing decisions for various cost structures
- Upon the course completion, the student is expected know how to use various techniques of smart pricing (price discrimination, tying, bundling, etc.)
- Upon the course completion, the student is expected know how to make decisions about of price and quantity competition in various market structures
- Upon the course completion, the student is expected know how to make decisions about product quality and degree of differentiation
- Upon the course completion, the student is expected know how to use advertising expenses to maximize profit
- Upon the course completion, the student is expected know how to invest in R&D to maximize profit and create competitive advantage
- Demand Evaluation and Simple Profit MaximizationMarket power and demand function with negative slope. How to evaluate demand? Surveys, experiments and historical data. Class experiment with demand evaluation. Marginal revenue function.
- Perfect Price DiscriminationDefinition of price discrimination. Reservation prices. Perfect Price discrimination vs. traditional pricing. Examples: bazaar, professional services, B2B pricing, auctions, taxation. English, Dutch and sealed-bid auction. Class experiment with auction.
- Group Price Discrimination.Observed characteristics. Personal (gender, age, citizenship, appearance, etc.). Space (country, city, district, captive audience). Time (season, weekday, hour). Examples of group prices discrimination.
- Versioning.Menu of options. Self-selection of various types of consumers. Versioning in functionality and in quality. Damaging products. Examples of versioning.
- Bundling.Definition of bundling. Software bundling: two products and two groups of consumers. Condition of successful bundling. Graphical tool for bundling analysis. Examples of bundling.
- Tying and Subscription.Definition of tying. Tying and tied goods. Examples of tying. Ownership vs. Subscription. Examples of choice between ownership and subscription.
- Block Pricing and Two-Part Tariff.Block pricing as an instrument to extract all consumer surplus. Block demand curve. Block pricing as a method of price discrimination. Two-Part Tariff: entry fee and unit price.
- Optimal Tariffs.Tools for comparisons of various tariffs and designing an optimal combination of tariffs.
- Cost Calculation.Fixed costs and variable costs. Total, average and marginal costs. Cost tables and cost curves. Relationship between various cost functions. Short run and long run costs. Economy of scale. Economy of scope.
- Perfect Competition.Market with many sellers. Price takers. Individual firm supply. Market supply. Short run equilibrium. Long run equilibrium. Shifts in demand and costs.
- Quantity Competition.Oligopoly (few sellers) and interdependency. Game theory. Duopoly. Cournot model. Simultaneous and Sequential equilibriums. How to apply this model to reality?
- Price Competition.Bertrand model. Homogeneous product. Simultaneous and Sequential equilibriums. Second mover advantage. How to apply this model to reality?
- Anticompetitive Pricing.Limit price and deterrence of entry. When limit price is possible? Expanding capacities. Predatory price. Credible threats. Examples of anticompetitive pricing.
- Collusion.Types of collusion: explicit agreement, cartel, implicit collusion. Profit maximization. Factors of stability of a cartel (number of seller, stability of demand, differentiation of products, etc.). Class experiment with cartel.
- Product Differentiation.Vertical and horizontal differentiation. Demand for characteristics model (hedonic demand). Hotelling model. Choice of price and choice of location. Collusion. Median voter theorem.
- Network Effects.Externalities and network effect. Demand for network good. Types of network effect. Battle of standards. Excess Inertia and Excess momentum. Compatibility. Two-side markets (platforms).
- Advertising.Optimal spending of advertising. Information vs. persuasion advertising. Advertising under monopoly. Advertising under competition: homogeneous vs. heterogeneous products. Free-riding problem and its solutions. Wasteful Persuasion.
- R&D.Product and process innovation. Innovation under monopoly, competition and oligopoly. Trade secrets vs. patents. Economics of patents.
- Interim assessment (4 module)0.18 * Class Participation + 0.18 * Essay (project work) + 0.4 * Exam + 0.24 * Tests
- Leon Bazil. (2012). Business Games for Management and Economics:Learning by Playing. World Scientific Publishing Co. Pte. Ltd. https://doi.org/10.1142/8191
- Dawsey, A. E. (2014). ECNS 301.01: Intermediate Microeconomics with Calculus.