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Class Notes

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Class 02: Sept 14
• various on WordPress issues.
– bottom line #1: try doing a post. don’t worry about content. if you can’t figure out how to delete it, I can do so.
– bottom line #2: read/comment on my post on the strategy of Saudi Arabia.
= note that I use formal jargon. that’s fine if I’m targeting the cognoscenti of economic science. writers ought to be conscious of their intended audience.
• Miller Lite versus Bud Lite.
– as per Friday, we must assume the delay was deliberate
> we did not examine advertising today.
> one hypothesis raised on Friday was that AB / Bud Lite benefited from a second mover advantage: Miller Lite bore the advertising costs to familiarize consumers with that style beer, so the delay in launching Bud Lite wasn’t just risk aversion or stiff management but was the a priori profitable choice.
– how does Bud Lite break into the market?
= underprice. but that has the disadvantage AB makes little money up front.
– “net present value:” is it sensible [jargon: rational] to lose money up front for a few years in the hopes of recouping it down the road [we’ll carefully define NPV later this term]
= advertise. but not for today
= distribution channels / how you sell: in fact identical, thanks to immediate post-prohibition-era legislation that constrains strategy on that dimension
– we’ll see other margins of strategic choice … I wanted to add one outside your experience
= and how will Miller react?
> Miller Lite is the known brand, so if they match Bud Lite in price, then they may be able to keep them out of the market.
– however this again means losses up front versus nebulous gains.
– part is whether AB management is the 800 gorilla that can’t be bluffed, or at least has deep pockets and doesn’t have to “bet the company” or even suffer shareholder ire.
– can we as economists identify factors that may make them “tough” and not “weak”?
> but then AB may drop the price on Bud Lite. price wars are not unknown
– in a war the equilibrium price is p = MC [marginal cost] or economic profit π = 0.
– note that is the bottom line of perfect competition, which in Econ 101 we normally assume requires large numbers of firms.
– if one firm has lower costs through EOS economies of scale, then the war is asymmetric
– we’ll see later that there are other factors that may predictably lead firms to avoid competition on price. special cases, subtle changes in modeling assumptions…
> elasticities!! if consumers are not very sensitive to price [more accurately here, price differentials = “cross-price elasticity of demand”] then price cutting doesn’t work.
– one point we did not look at in detail: if undercutting is synonymous with throat cutting, then how do you set price?
– we can (hopefully!) rule out collusion, a felony (crimimal) offense. indeed 20-odd executives of wire harness makers and other automotive parts firms have received sentences of “1 year and 1 day” and at least some of them actually served time.
– we know that the bottom line (at least at the Lexington Walmart) is identical price. how do you get there?
– note that this is the opposite extreme: with identical prices, there is thus the suspicion that we consumers [OK, W&L students have refined tastes and deep pockets, surely not us?!] are paying prices that are too high, potentially at the monopoly level.
• there is one other set of competitive strategies revolving around quantity competition, to which I did not point the discussion, already enough threads. soon…
∑: so jargon (an elasticity or two, economies of scale, collusion, price wars) though in