Economics of Strategy
The economics of strategy is a subset of the broader field of industrial organization. The latter includes antitrust and regulation, and means that in most universities it is taught across two 15-week terms. Well, not here! This course is designed as a non-technical introduction with a focus on real-world case studies. We will develop theory, but for us theory is a tool rather than a goal in itself.
Firms in competitive markets – think wheat farmers – have no need for strategy. No single farmer is large enough to influence the market price, while the product is homogeneous. Of course being technically proficient is important; it’s a high-skilled occupation. But the focus is on choosing the quantity of inputs given expected prices. It’s the core production model of Econ 101.
What we mean by strategy is that your decision as a manager is contingent upon the decisions of others. That is generally relevant only in markets with small numbers of players. If General Motors comes out with an electric car (which they have) then should you as Ford or Toyota come out with one, too? If Budweiser is $10.77 a 12-pack, how should Miller price their Lite beer? These are several of the many topics of behavior in an oligopoly, where small numbers mean that firms interact strategically in setting prices and quantities, choosing product characteristics, and investment in R&D.
How should Verizon set up its menu of cell phone plans? How can Windows maintain its market share, even though there are many other operating systems out there? Why bundle products? – Excel, Word, and PowerPoint are commonly offered together. What is the benefit of patenting your invention, and from the flip side, what sorts of intellectual property rights should a legal system make available? My interest is in how industry structure and corporate strategy are affected by – and utilize – technology.
We will approach these and other questions in the context of extended case studies of the beer and the automotive industries, which incorporate the issues of oligopolistic interaction, product differentiation, price discrimination, and technology issues, with vignettes on many others. We should have at least two outside speakers and a tour of a local brewery.
Formal Output: Problem Sets, Papers, Blogging
There will be a takehome midterm and a final to check that you’ve been grappling with the formal models we develop. The most important part of the course, however, will be writing. There will be two longer papers, a short paper and a memo. Guidelines for what I expect in written work are on the course web site. Adhere to them! Above all, I require clean, succinct writing. You should all avail yourselves of the CommCenter. I require that you hand in hard copies, but you should always maintain an electronic copy. Of course due dates and topics will be on the web site as well.
You will also be asked to blog. Feel free to post on topics that interest you. Since in past practice few of you did that on a regular basis on your own initiative, I will assign dates and topics on a rotating basis. However, you are all expected to regularly read and comment on the posts of your classmates (and those your professor) on a regular basis. I will periodically assess that, and assign grades on comments and on the quality of your posts. Again, see the web site for guidelines on blogging.
Papers will be given letter grades, and weighted by whether they are memos, short papers or long papers. The midterm and final will be given equal weight, each equivalent with a short paper. The long papers are key. Short paper + memo = midterm + final = one long paper = one long paper. Follow?
My office is HU125B next to the handicap ramp entrance on the lower level. However, I frequent meet students at Lexington Coffee Shop on Washington St. If we meet there, your coffee is on me. Please use email rather than texting me, except for last-minute logistics. My cell is 540-460-6288.
Web Site and Contacts
Most of you have already joined the WordPress course site at http://econ274.academic.wlu.edu. I will provide an introduction to the mechanics of blogging, and there are also how-to pages on the web site.
Some classes will be chalk-and-talk. It takes a while to go through the formal models, and in my experience going through by yourself is tough, at least until you’ve done a year or two of doing it. Hang in there; you’ll at least get a sense of how economists attempt to formalize strategic issues.
But the focus of the course is not theory but the use of simple constructs to help understand real-world behavior. So think how the market for beer evolved, the shifting value chain for autos, economies of scale in steel – or is it steels? – and innovation…
You can’t participate if you don’t do readings in advance of class, or work through notes when that’s the task at hand. Because of the focus on discussion, attendance is mandatory. Cell phones and computers should be put away except we are actively using online resources.
- Ogle, Maureen (2006). Ambitious Brew: The Story of American Beer. Orlando, FL: Harcourt Books.
- Mike Smitka & Peter Warrian (2016). A Profile of the Global Auto Industry: Innovation and Dynamics. New York: Business Expert Press. Paperback ISBN 978-1631572968, ASIN (eBook) B01MS2ALIU.
- Reference books. I encourage you to get a used text, which will lay out our basic models in detail beyond what we do in class. Here are titles I recommend. Cabral is coming out with a new edition but it will not be available in time for this term.
- Luis Cabral, Introduction To Industrial Organization, MIT Press, 2000.
- Stephen Martin, Industrial Organization in Context, Oxford University Press, 2010.
- There are also books by Victor and Carol Tremblay; Pepall and Richards; and Waldman and Jensen.
- An outstanding but very challenging book that emphasizes pure theory is Paul Belleflamme and Martin Peitz, Industrial Organization: Markets and Strategies, Cambridge University Press, 2015. If you’re thinking of graduate school in economics, you should pick this up. I’d be happy to help you work through some of the extensions they develop of the basic models that we will examine in class, though that might best be done as an independent study some subsequent term.
- There will be scattered papers, including readings tied to our outside speakers.
Please let me know privately if you have been approved for special accommodations.
version January 9, 2017