International Programme on Business Administration Erasmus University BAP 56 - MICROECONOMICS AND MARKETS Microeconomics is the branch of economics that deals with the activities of the individual units of the economy. The traditional domain of microeconomics is the marketplace where the focus is on the behaviour of consumers and firms and the interaction between the two under different assumptions about the market structure (perfect competition, monopoly etc.). The aim of this course is to provide students with the tools from intermediate microeconomics, game theory, and industrial organisation that they need to make sound managerial decisions. More in detail, the objective of this series of lectures is to develop a fundamental understanding of the economic model of individual and market behaviour. The course will provide indications of how this model is used to gain theoretical insights about the working of the economy and the effects of economic policy; and how it is used to derive testable predictions that a manager could use in order to take effective and efficient decisions. In the course special emphasis is given to market structure and the environment in which firms operate. Coordinator: prof. Dr. Maarten C.W. Janssen Instructors: Dr. Jose-Luis Moraga, Dr. Emanuela Sciubba, Drs. Ewa Mendys, Drs. Rob van der Noll, Prof. dr. ing. F.A.J. van den Bosch and others to be announced. Format of the Course: weekly lectures (2 hours, weeks: 49, 50, 51, 2, 3, 4, 5, 6, 7, 8) and weekly practicums (in 4 groups, 2 hours, weeks: 49, 50, 51, 2, 3, 4, 5, 6, 7, 8). Exam: Multiple choice test in week TO BE ADDED Course Assessment: Fully determined by the final exam Web-site for the Course: Please check the following web-site regularly, as announcements and course materials will be posted there by instructors http://bassie.fbk.eur.nl/courses/BAP56/ Essential Readings The textbook for this course is: •

Michael R. Baye: "Managerial Economics and Business Strategy", Mc-Graw Hill Higher Education, 2000. (3rd edition)

In addition, the following readings constitute course material:

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Stigler, G.J. (1961): "The Economics of Information", Journal of Political Economy 69, 213-225.

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Janssen, M. and J. L. Moraga (2000): "Pricing, Consumer Search and the Size of Internet Markets" Tinbergen Institute Discussion Paper TI 2000-042/1. (Nontechnical summary available from http://www2.tinbinst.nl/~moraga/searchsummary.pdf)

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McAfee, R. P. and McMillan, J. (1996): "Competition and Game Theory", Journal of Marketing Research 33(3), 263-8.

• Porter, M.E. (1991): "Towards a dynamic theory of Strategy", Strategic Management Journal 12, 95- 117. This article complements chapter 6 and 7 and addresses issues raised in chapter 12 and 13. •

van den Bosch, F.A.J., H.W. Volberda, M. de Boer (1999): "Coevolution of firm absorptive capacity and knowledge environment: organizational forms and combinative capabilities", Organization Science 10(5), 551-568. This article complements chapter 6 by addressing a knowledge-based theory of the firm and combines firm and industry levels of analysis. As knowledge is activated by information, this paper is also related to chapter 12.

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van den Bosch, F.A.J. and A.P. de Man (1994): "Government’s Impact on the Business Environment and Strategic Management", Journal of General Management 19(3), 50-59. This article illustrates chapter 13.

The following case-studies will be discussed: • Bundling: Harvard Business School case study 9-191-177 • Starbuck Corporation: p. c.160-c.175 in: Hill & Jones (1998) • Transformation at Harley-Davidson, p. 325-341, in: Hill & Jones (1998) • Amazon.com, p. c.107-c.122, in: Hill & Jones (1998)

Overview of Lectures Lecture 1 (Monday 4th December - Dr. Emanuela Sciubba) Market Forces: Supply and Demand; and Quantitative Demand Analysis After a brief introduction on microeconomics and markets, this lecture covers the essentials of supply and demand, including demonstration problems that help the students work through the theory. Price ceilings and price floors, as well as own-price elasticity, income elasticity and cross-price elasticity are also covered.

Readings: Baye, chapters 1 (complementary), 2 (essential) and 3 (pp. 69-87 essential; pp. 88-112 complementary). Lecture 2 (Monday 11th December – Dr. Emanuela Sciubba) The Theory of Individual Behaviour This lecture provides a basic model of individual behaviour that enables the manager to understand the impact of various managerial decisions on the actions of consumers. The underlying assumptions of consumer theory help to obtain a better understanding of demand theory. Readings: Baye, chapter 4. Lecture 3 (Monday 18th December – Dr. Emanuela Sciubba) The Production Process and Costs This lecture provides the basic tehory of production and costs. We cover isoquants, isocosts, the short-run versus the long-run, average product, marginal product, value of marginal product and the profit maximising input usage. A graphical presentation of cost curves is also provided, together with a discussion of the theory of economies of scale. Readings: Baye, chapter 5. Lecture 4 (Monday 8th January – Dr. Jose-Luis Moraga) Perfect competitive markets, monopolies and monopolistically competitive markets This lecture discusses the optimal decisions of managers in three paradigmatical frameworks: (i) perfect competition, (ii) monopoly, and (iii) monopolistic competition. Understanding these market structures is a crucial step to be prepared to manage a firm that operates in virtually any environment. Readings: Baye, chapter 8 and Stigler (1961) Lecture 5 (Monday 15th January – Dr. Jose-Luis Moraga) Game Theory In this lecture we will develop general tools that help managers to make decisions in oligopolisitic markets, including what prices to charge, how much and what type of advertising to use, what markets to enter etc. The basic tool we will use to analyze such questions is game theory. This tool can be further employed to analyze decisions within the firm, such as wage bargaining. Readings: Baye, chapter 10 and McAfee, McMillan (1996) Lecture 6 (Monday 22nd January – Dr. Jose-Luis Moraga) Oligopoly This lecture builds upon the previous session to answer a variety of questions related to managers' decision making. In particular, it addreses selection of prices, quantities, price discrimination, group pricing, bundling and versioning, and price matching policies. Readings: Baye, chapters 9 and 11 and Janssen, Moraga (1999) Lecture 7 (Monday 29th January – Prof. dr. ing. F.A.J. van den Bosch) The organization of the firm Readings: Baye, chapter 6 and Van den Bosch, Volberda & De Boer (1999) Lecture 8 (Monday 5th February – Prof. dr. ing. F.A.J. van den Bosch)

The nature of industry Readings: Baye, chapter 7 and Porter (1991) Lecture 9 (Monday 12th February – Prof. dr. ing. F.A.J. van den Bosch) The Economies of Information Reading: Baye, chapter 12 (excluding p. 462-474) and Van den Bosch, Volberda, De Boer (1999) Lecture 10 (Monday 19th February – Prof. dr. ing. F.A.J. van den Bosch) A Manager’s Guide to Government in the market place Readings: Baye, chapter 13 and Van den Bosch & De Man (1994)

Overview of Practicums Practicum 1 (Friday 8th December - E.Mendys / R. van der Noll) Market Forces: Supply and Demand; and Quantitative Demand Analysis Selected problems from Baye, chapter 3. Practicum 2 (Friday 15th December - E.Mendys / R. van der Noll) The Theory of Individual Behaviour Selected problems from Baye, chapter 4 Practicum 3 (Friday 22th December - E.Mendys / R. van der Noll) The Production Process and Costs Selected problems from Baye, chapter 5 Practicum 4 (Friday 12th January - E.Mendys / R. van der Noll) Perfect competitive markets, monopolies and monopolistically competitive markets Selected problems from Baye, chapter 8 Case study: Bundling Practicum 5 (Friday 18th January – E.Mendys / R. van der Noll) Game Theory Selected problems from Baye, chapter 10 Practicum 6 (Friday 26th January– E.Mendys / R. van der Noll) Oligopoly Selected problems from Baye, chapters 9 and 11 Case study: Bundling Practicum 7 (Friday 2th February – to be announced / to be announced) The organization of the firm Selected problems from Baye, chapter 6 Case study: Starbucks Corporation Practicum 8 (Friday 9th February – to be announced / to be announced)

The nature of industry Selected problem from Baye, chapter 7 Case study: Transformation of Harley-Davidson Practicum 9 (Friday 16rd February – to be announced / to be announced) The Economies of Information Selected problems from Baye, chapter 12, related to p.439-461 Case study: Amazon.com Practicum 10 (Friday 23rd February – to be announced / to be announced) A Manager’s Guide to Government in the market place Selected problem from Baye, chapter 13 Example of multiple choice questions.