Managerial economics : an analysis of business issues / created by Howard Davies and Pun-Lee Lam

Includes bibliographical references and index.

List of figures xii List of tables xv Preface to the Second Edition xvii Preface to the Third Edition xix Publisher's acknowledgements xx The definition and scope of managerial economics 1 (8) A definition of managerial economics 1 (1) The origins and methods of managerial economic analysis 1 (4) The links between managerial economics and industrial economics 5 (1) The links between managerial economics and management science 6 (1) Illustration: Economic theory and business practice -- the overtaking analogy 7 (1) The structure of this book 8 (1) References and further reading 8 (1) Part I THE FIRM 9 (92) Business objectives and basic models of the firm 11 (20) The neo-classical economic model of the firm 11 (6) Managerial discretion models of the firm 17 (6) The behavioural approach to the firm 23 (4) In defence of the profit-maximising model 27 (1) Illustration: Using calculus to solve Williamson's utility-maximising model 27 (2) References and further reading 29 (1) Self-test questions 29 (1) Essay question 29 (2) The nature of the firm 31 (18) Why do firms exist? 31 (1) Some simple explanations 31 (2) Transaction cost analysis 33 (7) Transaction costs and the vertical boundaries of the firm 40 (3) Limitations of the TCA approach 43 (1) Illustration: A diversity of applications 44 (3) References and further reading 47 (1) Self-test questions 48 (1) Essay questions 48 (1) Ownership and control, diversification and mergers 49 (26) Do firms really try to maximise profits? 49 (9) New directions in the debate on ownership and control: did Berle and Means get it wrong? 58 (2) The extent of diversification 60 (3) Trends in diversification and the relationship with firm performance 63 (1) Mergers and take-overs 64 (5) Illustration 1: The impact of hostile take-overs on managerial turnover in the United Kingdom 69 (1) Illustration 2: Incumbent British insiders resist US-style pressure for change in Hong Kong, but for how long? 69 (3) References and further reading 72 (2) Self-test questions 74 (1) Essay question 74 (1) The multinational enterprise 75 (26) The development of the multinational enterprise 75 (4) Economic theory and the multinational 79 (5) The impact of the multinational 84 (4) The impact of the MNE on its home country 88 (2) Global competition and corporate strategy 90 (4) Illustration 1: Multinationals in the hotel industry 94 (2) Illustration 2: Globalisation in the hard disk drive industry 96 (1) References and further reading 97 (2) Self-test questions 99 (1) Exercise 99 (2) Part II THE MARKET ENVIRONMENT 101 (160) Consumer behaviour 103 (22) Economic theories of consumer behaviour 103 (1) Utility theory 104 (1) Indifference analysis 104 (9) Revealed preference theory 113 (3) The characteristics approach to demand 116 (3) Becker's revision of demand theory 119 (2) Limited information and conspicuous consumption 121 (1) The practical application of demand theory 121 (1) Illustration: Housing in Hong Kong -- prices, characteristics and feng shui 122 (1) References and further reading 123 (1) Self-test questions 123 (1) Essay question 124 (1) Demand and elasticity 125 (16) The market demand curve 125 (1) The demand curve 126 (1) Concepts of elasticity 127 (10) Illustration: Missing the demand curve -- how a pricing mistake damaged Jaguar 137 (1) References and further reading 138 (1) Self-test questions 138 (1) Essay question 139 (2) Estimating and forecasting demand 141 (24) Alternative methods of estimation 141 (4) Some estimates of elasticity 145 (2) Forecasting demand 147 (8) The marketing approach to demand measurement 155 (4) Illustration 1: Measuring the elasticity of demand for liquor -- a US example 159 (1) Illustration 2: Estimating the elasticity of demand for gas in Hong Kong 160 (2) Illustration 3: Forecasting the demand for high definition televisions 162 (1) References and further reading 163 (1) Self-test questions 164 (1) Essay question 164 (1) Production and the determination of costs 165 (32) Production functions and isoquants 165 (5) Cost curves in the short run and the long run 170 (3) Economies and diseconomies of scale 173 (3) Empirical evidence on scale economies 176 (6) Economies of scope and learning effects 182 (2) Costs in the information industries 184 (1) Other 'cost drivers' 185 (1) Linear cost functions and break-even analysis 186 (4) Illustration 1: Scale economies in industrial plants -- a classic study 190 (2) Illustration 2: Scale economies in the service sector -- the case of life assurance in the United Kingdom 192 (1) References and further reading 193 (1) Self-test questions 194 (1) Essay question 195 (2) Models of market structure 197 (22) The analysis of market structure 197 (1) Perfect competition 198 (5) Monopoly 203 (2) Monopolistic competition 205 (2) Oligopoly 207 (7) Illustration 1: Price collusion and market structure 214 (2) Illustration 2: Monopolistic competition and international trade 216 (1) References and further reading 217 (1) Self-test questions 217 (1) Essay question 218 (1) The 'five forces' approach to competitive structure 219 (20) The structural analysis of competition 219 (2) The intensity of rivalry among existing competitors 221 (3) The threat of new entry 224 (4) The threat of substitutes 228 (1) The power of buyers 229 (2) The power of suppliers 231 (4) Illustration: Carrying out a structural analysis of an industry 235 (2) References and further reading 237 (1) Self-test questions 237 (1) Essay question 238 (1) Risk and uncertainty 239 (22) Alternative states of information 239 (1) Techniques for decision-making in risky conditions 239 (12) Techniques for coping with uncertainty 251 (3) The broader implications of uncertainty for the theory of the firm 254 (2) Illustration: Betting on butter -- Sainsbury's profits from the careful analysis of a risky decision 256 (2) References and further reading 258 (1) Self-test questions 258 (1) Essay question 259 (2) Part III BUSINESS DECISIONS 261 (166) Game theory and its applications 263 (28) Introduction: game theory brings managerial economics and industrial economics together 263 (1) Some basic concepts in game theory 264 (1) Different types of game 265 (1) Representing and solving games 266 (4) Applications of game theory I: price collusion 270 (5) Applications of game theory II: Cournot, Bertrand and von Stackelberg competition 275 (3) Applications of game theory III: entry deterrence 278 (2) Applications of game theory IV: how involving the government can give firms a strategic advantage in international competition 280 (2) An evaluation of game theory: how much can it contribute to the understanding of business decisions? 282 (2) Illustration: Auctions, bidding and selling the airwaves 284 (3) References and further reading 287 (1) Self-test questions 288 (1) Essay question 289 (2) Pricing in theory 291 (22) Price in the simple economic model of the firm 291 (2) Pricing and market structures 293 (3) Entry conditions and pricing 296 (6) Price discrimination 302 (4) Pricing and the product life cycle 306 (2) Pricing new products 308 (1) Illustration: Price elasticity and the life cycle of brands 309 (2) References and further reading 311 (1) Self-test questions 312 (1) Essay question 312 (1) Appendix: Reworking the MC = MR condition 312 (1) Pricing in practice, transfer pricing and pricing for public enterprise 313 (18) Pricing in practice 313 (7) Transfer pricing 320 (4) Pricing in public enterprises 324 (4) Illustration: Accountants misunderstand economists -- interpreting evidence on the use of cost data in price decisions 328 (1) References and further reading 329 (1) Self-test questions 330 (1) Essay question 330 (1) Non-price competition and the marketing mix 331 (28) The marketing mix 331 (1) Advertising, promotion and selling 332 (10) Product policies 342 (4) Marketing channels 346 (2) The location decision 348 (3) Technology development 351 (3) Illustration: Marketing expenditures -- an analysis of their determinants 354 (2) References and further reading 356 (1) Self-test questions 357 (1) Essay question 358 (1) Investment decisions and the cost of capital 359 (20) Investment appraisal 359 (1) The principle of discounting 360 (16) Illustration: Investment appraisal -- a worked example of NPV and IRR 376 (1) References and further reading 377 (1) Self-test questions 378 (1) Exercise 378 (1) Economics and business strategy 379 (18) Definitions of strategy 379 (1) The conceptualisation of business performance 380 (2) The determinants of business performance: SWOT analysis as an overall framework 382 (1) Business strategy and the structure-conduct-performance approach to industrial organisation 382 (3) Resources, capabilities and competences 385 (4) Business strategy and the `new' industrial economics 389 (1) Illustration: Resource-based competition in the bearings industry 390 (3) References and further reading 393 (2) Self-test questions 395 (1) Essay question 395 (2) Network economics and the information sector 397 (30) The structure of costs and revenues in the information economy 398 (1) Networks and their effects 398 (4) The choice of standards 402 (7) The cost structure of information industries 409 (1) The implications of near-zero marginal costs 410 (1) Price discrimination and profitability 410 (2) 'Versioning' and pricing information products 412 (3) Switching costs and lock-in 415 (3) The debate over 'increasing returns' 418 (4) Illustration: Microsoft in operating systems, spreadsheets, word processing and financial software 422 (2) References and further reading 424 (1) Self-test questions 425 (1) Essay question 425 (2) Part IV PUBLIC POLICY 427 (60) Competition and competition policy 429 (32) Alternative concepts of competition and monopoly power 429 (5) The contestable markets approach 434 (3) The rationale for competition law 437 (2) Different approaches to monopoly policy and competition law 439 (2) Policy towards monopoly or `dominant position' 441 (8) Policy towards mergers 449 (4) Policy towards restrictive practices 453 (4) Illustration: Different approaches to the cost of monopoly 457 (2) References and further reading 459 (1) Self-test questions 460 (1) Essay question 460 (1) The economic of regulated industries 461 (26) Theories of regulation 461 (3) Rate-of-return regulation 464 (3) Price-cap regulation 467 (4) Franchise bidding and regulation 471 (2) Privatisation and deregulation 473 (7) Illustration 1: Does the privatisation of refuse collection lead to efficiency gains? 480 (2) Illustration 2: Water privatisation in the United Kingdom 482 (1) References and further reading 483 (2) Self-test questions 485 (1) Essay question 485 (2) Solutions to questions 487 (33) Glossary of terms 520 (5) Index 525

Highly accessible, with a clear introduction to the subject for the non-specialist, this book covers all aspects of managerial economics. It also contains some material on corporate strategy and a section devoted to marketing issues