Economics 411
Business Economics
Instructor: Professor Kenneth Troske
Spring 2015
Office: 103 Mandrell Hall
Class Meeting Time: 8:00a-9:15a Tu, Th
Office Hours: 4:00-5:00 T, Th and by appt.
Classroom: BE 206
Office Phone: 257-1282
E-mail: ktroske@uky.edu
Class Website: http://gatton.uky.edu/faculty/Troske/teaching/Eco411/index.html
Course Description
Business Economics applies basic economic principles to the types of problems faced by
business decision-makers. Particular attention is paid to the economics of organizations
and to the economics of firm strategy. Topics covered include the nature of economic
organizations, the make or buy decision and the vertical chain of production, distribution
channels, external market structure, compensation issues, rivalry and strategy.
Reading Assignments:
Many of the reading assignments will come from:
Besanko, Dranove, Shanley, and Schaefer, Economics of Strategy (6th edition), John
Wiley & Sons, Inc., 2013. (Referred to as BDSS below).
I will use two chapters from the following:
Brickley, Smith, and Zimmerman, Managerial Economics and Organizational
Architecture (4th edition), McGraw-Hill Irwin, 2006.
Instructions for purchasing electronic versions of these texts are at the end of this
syllabus. There will also be assigned readings for each class taken from business
periodicals such as the Wall Street Journal New York Times and Harvard Business
Review. Instructions for accessing the supplemental readings are also provided below.
Class Structure
Below is a detailed outline of the course. My plan is to cover new material in a series of
two to three lectures. We will then have a class period in which we discuss the material.
This discussion will be structured around the supplemental readings, which illustrate how
businesses actually utilize the concepts covered in the lectures. These readings will be
articles from periodicals such as the Wall Street Journal, New York Times, or Harvard
Business Review. Essentially, the articles will be case-studies. While I will direct the
discussion, each of you are expected to do much of the talking. Therefore, it is imperative
that you come to class each day having completed the assigned readings. In order to
ensure that you have completed the assigned readings, I will start out each discussion
1
period with a short quiz over the assigned readings. Twenty percent of your grade will be
based on classroom participation and your performance on these short quizzes.
Grading
Your grade will be determined by: your participation in class and your performance on
the in-class quizzes, a midterm exam, a final exam and a research project. I will take
attendance every period. You are expected to attend class every period, arrive prepared
and on time. If you are absent for more than five class periods you will fail the class.
There will be eight quizzes. I will drop your lowest quiz and count your top seven scores.
I will ask you to write an 8-10 page research report (I will provide more information later)
that will be based on the topics we cover in the class. This report will be due on the day of
final. You should email me your report. The final exam will be cumulative. Your final
grade will be determined by:
Class participation and quizzes
20%
Midterm exam
20%
Research project
30%
Final Exam (Cumulative)
30%
I grade on a curve. The curve and your final grade will be determined at the end of the
semester. I will provide you with a midterm grade after the midterm exam has been
graded.
In determining your final grade I follow the University’s rules regarding the marking
system. It is the following (with slight paraphrasing):
A:
B:
C:
D:
E:
Represents exceptionally high achievement.
Represents high achievement.
Represents average achievement.
Represents the minimum passing grade.
Represents unsatisfactory performance and indicates failure in the course.
The midterm exam is scheduled for Tuesday, March 3rd. The final exam is scheduled
for Tuesday May 5, 2015 from 8:00am-10:00am.
Make-up Exams
A makeup exam may be given if you are unable to take the exam at the scheduled
time. However, you must make arrangements with me, in person, at least two weeks
prior to the date of the regularly scheduled exam. Unless you make arrangements
prior to the exam, no makeup exams will be offered. For those who miss the midterm
exam due to an extreme emergency, the weight on the final exam will be adjusted to
include the midterm exam. You will have to provide documentation proving you had an
emergency and could not attend the exam.
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Special Needs
Any student with a disability who is taking this course and needs classroom or exam
accommodations should contact the Disability Resource Center, Room 2 Alumni Gym,
257-2754.
Academic Honesty
Cheating is in no way tolerated at The University of Kentucky. Anyone caught cheating
will be penalized severely. The full penalty will be determined in consultation with the
Chairman of the Department of Economics. The minimum penalty is an "E" for the
course.
Instructions for Purchasing Electronic Textbooks:
While the electronic textbooks are from the 6th edition of each book, you may be able to
find a different editions online for a cheaper price. That should work equally well.
Besanko, Dranove, Shanley, and Schaefer, Economics of Strategy (6th edition), John
Wiley & Sons, Inc., 2007. The ISBN is 9781119099970.
Go to the Vital Source website (http://store.vitalsource.com/show/9781119099970) to
purchase the eBook. You can also search for the Custom book by typing the ISBN into
the Search box in the upper right corner of the Welcome page. You will need to
download the free Vital Source Bookshelf reader to use the eBook. To do so go to:
https://support.vitalsource.com/hc/en-us/articles/201344733 and follow the instructions.
If you would like help downloading or using the eBook, please direct go to the Vital
Source Customer Support page: http://support.vitalsource.com/.
Brickley, Smith, and Zimmerman, Managerial Economics and Organizational
Architecture (6th edition), McGraw-Hill Irwin, 2007:
Click on https://create.mheducation.com/shop/#/catalog/details/?isbn=9781308438689.
Buy the book. If you have problems go to http://www.mhhe.com/support. The ISBN for
the book is: 9781308438689.
Accessing Supplemental Readings:
Links to all of the supplemental readings are provided below. Since all of the readings
have copyrights, I need to restrict access to the readings. You will need the following
username and password to access the readings: username: be-web\eco411; password:
troske411!
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Detailed Course Outline
Jan. 15 & 20: Introduction and basics of the market system
Text:
BDSS, Introduction, pgs. 1-8; Economics Primer, pgs. 9-31.
Jan. 22: Quiz and discussion of supplemental readings
Supplemental readings:
Jensen, Michael and Meckling, William, “The Nature of Man,” Journal of
Applied Corporate Finance, Summer 1994.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Jensen Meckling-The
Nature of Man.pdf
“China’s Winter of Discontent,” WSJ, 3/14/06.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/China Winter
Heating WSJ 3-14-06.pdf
“Lawmakers struggle to define gasoline price ‘gouging,’” WSJ, 11/9/05.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Lawmakers Price
Gouging WSJ 11-9-05.pdf
“Corn’s Rally Sends Ripples,” WSJ, 1/18/07.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Corn Rally WSJ 118-07.pdf
Jan. 27 & 29: Production, economic costs, economic profit.
Text:
BDSS, Economics Primer, pgs. 9-31.
Feb. 3: No class; read ahead
Feb. 5: Quiz and discussion of supplemental readings
Supplemental readings:
“Holiday Hiring Call: People vs. Robots,” WSJ, 12/20/10.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Holiday Hiring
Robots WSJ 12-20-10.pdf
“Can Wal-Mart Clerks Keep Up With Amazon?” WSJ, 12/19/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Wal-Mart Clerks
Amazon WSJ 12-19-14.pdf
“Honda’s Flexible Plants Provide Edge,” WSJ, 9/23/08.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Honda Plant WSF
23-09-08.pdf
“Ford Unveils Aluminum Truck, in Gamble on Top Seller,” New York Times,
11/12/14.
http://gatton.uky.edu/faculty/Troske/teaching/Eco411/Articles/Ford_Unveils_Alu
minum_Truck,_in_Gamble_on_To.PDF
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“How Recycling Shaves Ford's Material Costs --- Aluminum Suppliers Reuse F150 Scrap,” WSJ, 12/17/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Recycling Ford Costs
WSJ 12-17-14.pdf
“Decimated U.S. Industry Pulls Up Its Socks,” WSJ, 12/26/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Decimated Industry
Socks WSJ 12-26-14.pdf
“With Farm Robotics, the Cows Decide When It’s Milking Time,” New York
Times, 4/22/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/With_Farm_Robotics
,_the_Cows_Decide_When_It NYT 4-22-14.PDF
Individual assignment: take online virtual plant tours of Toyota’s Georgetown
manufacturing facility (http://www.youtube.com/watch?v=5a5ewV_2fwk) and Purity
Dairy’s dairy processing facility
(http://www.puritydairies.com/company/tour/index.html).
Feb. 10 & 12: Horizontal boundaries of the firm—economies of scale and scope,
diseconomies of size, the learning curve.
Text:
BDSS, Ch. 2, The Horizontal Boundaries of the Firm, pgs. 61-97.
Feb. 17: Quiz and discussion of supplemental readings
Supplemental readings:
“Power Pork: Corporations Begin to Turn Hog Business into an Assembly Line,”
WSJ, 3/28/94.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Power Pork WSJ 2803-94.pdf If you want to see a pork processing plant in action, try
http://www.youtube.com/watch?v=LsEbvwMipJI
“Meet the World’s Largest Cargo Ships,” WSJ, 1/8/13.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Cargo Ships WSJ 0801-13.pdf
“Starbucks Aims to Boost Its Food Sales in the U.S.,” WSJ 12/5/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Starbucks Boosts
Food Sales WSJ 12-5-14.pdf
“McDonald's Menu Problem: It's Supersized,” WSJ, 12/4/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/McDonalds Menu
Problems WSJ 12-4-14.pdf
“How We Eat: Beer Conglomerates Cultivate Their Crafty Side,” WSJ, 12/29/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Beer Conglomerates
Crafty WSJ 12-29-14.pdf
“Dreamliners Idle on Tarmac --- Boeing Struggles to Unload Early Version 787s
Made at Height of Design Issues,” WSJ, 8/30/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Boeing Dreamliners
Idle WSJ 30-08-14.pdf
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Feb. 19: Vertical boundaries of the firm—make or buy, transactions costs, asset
specificity, hold-up, vertical control devices.
Text:
BDSS, Ch. 3: The Vertical Boundaries of the Firm, pgs. 98-131.
Feb. 24: Alternatives to Vertical Integration—backward and forward integration,
franchising, joint ventures, implicit contracts.
Text:
BDSS, Ch. 4: Integration and Its Alternatives, pgs. 132-161.
Feb 26: Quiz and discussion on supplemental readings
Supplemental readings:
Dyer, Jeffrey, “Dedicated Assets: Japan’s Manufacturing Edge,” Harvard
Business Review, Nov. – Dec. 1994.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Dedicated Assets
HBR Nov-Dec 94.pdf
“Made to Measure: Invisible Supplier Has Penney’s Shirts All Buttoned Up,”
WSJ, 9/11/03.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Penny's Shirts WSJ
11-09-03.pdf
“Companies More Prone to Go ‘Vertical,’” WSJ, 11/30/09.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Companies Vertical
WSJ 30-11-09.pdf
“Boeing Tightens Its Grip on Dreamliner Production,” WSJ, 7/2/09.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Boeing Dreamliner
Production WSJ 02-07-09.pdf
“An Amazon-Disney Dispute Erupts --- In Echo of Hachette Fight, E-Commerce
Giant Not Allowing Customers to Pre-Order Some Movies.” WSJ 8/11/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Amazon Disney WSJ
11-08-14.pdf
“Ericsson Joint Venture Looks Like Sony's Show,” WSJ, 4/26/01.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Ericsson Sony Joint
Venture WSJ 4-26-01.pdf
“Sony Buys Ericsson Stake in Handset Joint Venture,” WSJ, 10/28/11.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Sony Buys Ericsson
WSJ 10-28-11.pdf
March 3: Midterm
March 5, 10 & 12, Competition, Monopoly, Monopolistic Competition and Oligopoly—
defining a market, elements of market structure, types of market structure, perfectly
competitive markets.
Text:
BDSS, Ch. 5: Competitors and Competition, pgs. 165-195.
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March 12: One-page description of research project due.
March 17 & 19: Spring break—read ahead; start on research project
March 24: Quiz and discussion of supplemental readings
Supplemental readings:
“Winds of Change for Boeing, Airbus,” WSJ, 3/16/10.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Boeing Airbus WSJ
3-16-10.pdf
“Show Stopper: How Plastic Popped the Cork Monopoly,” WSJ, 5/1/10.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Plastic Cork WSJ 0501-10.pdf
“Alligator Farming Shows There’s a Lot to be Said for Cows,” WSJ, 8/2/89.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Alligator Farm 1
WSJ 02-08-89.pdf
“Economic Woes Take a Bite out of Alligator Ranching,” WSJ, 11/12/97.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Alligator Farm 2
WSJ 12-11-97.pdf
“A Run on Alligators Sends Designers Scrambling,” WSJ, 3/18/06.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Alligator Farm 3
WSJ 18-03-06.pdf
“A Crocodile's Bumpy Road From Farm to Handbag,” Bloomberg Businessweek,
10/24/2013.
http://www.businessweek.com/articles/2013-10-24/a-crocodiles-bumpy-roadfrom-farm-to-handbag
“How a Fight Over a Board Game Monopolized an Economist’s Life,” WSJ,
10/20/09.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Fight Monopoly WSJ
20-10-09.pdf
March 26: Pricing with Market Power—profit maximization, block pricing, two-part
tariffs, price discrimination
Text:
BSZ, Ch. 7: Pricing with Market Power, pgs. 110-143.
March 31: Quiz and discussion of supplemental readings
Supplemental readings:
“Seeking Fame in Apple’s Sea of Apps,” WSJ, 7/15/09.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Apple Apps WSJ 1507-09.pdf
“Seeking Perfect Prices, CEO Tears Up the Rules,” WSJ, 3/27/07.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Perfect Prices WSJ
27-03-07.pdf
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“Cruise Lines Slash Their Prices as War Fears Rattle Travelers,” WSJ, 1/29/03.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Cruise Lines Slash
Prices WSJ 01-29-03.pdf
“Amazon Offers All-You-Can-Eat Books. Authors Turn Up Noses, NY Times,
12/28/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Amazon_Offers_AllYou-Can-Eat_Books._Authors NYT 12-28-14.PDF
“Sprint Escalates Wireless Price War With Half-Off Bills,” WSJ, 12/2/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Sprint Wireless Price
War WSJ 12-2-14.pdf
“Attention, 'Discount Junkies' --- Retailers Increasingly Promote Their Clearance
Sales Only to Bargain Hunters,” WSJ, 12/29/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Discount Junkies
WSJ 12-29-14.pdf
Individual assignment: go to http://disneyworld.disney.go.com/wdw/index and check out
Disney World’s pricing strategy for its theme parks, resort hotels, special events, etc.
Also visit your favorite airline’s web site, e.g. http://www.delta.com/home/index.jsp, and
analyze pricing for air travel and vacation packages.
April 2: No class—catch up on readings; work on research project.
April 7 & 9: Rivalry, strategic behavior, game theory
Text:
BDSS, Economic Primer, pgs. 31-35; Ch. 7: Dynamics: Competing Across Time,
pgs. 226-257.
BSZ, Ch. 9: Economics of Strategy: Game Theory, pgs. 145-176.
April 14: Quiz and discussion of supplemental readings
Supplemental readings:
“Haven’t Shareholders Had Enough Chicken?” WSJ, 4/4/01.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Shareholder Chicken
WSJ 04-04-01.pdf
“Techdom’s Two Cold Wars,” WSJ, 7/22/09.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Techdoms Cold War
WSJ 22-07-09.pdf
“Upstart’s Tactics Allow it to Fly in Friendly Skies of a Big Rival,” WSJ, 6/23/99.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Friendly Skies WSJ
23-06-99.pdf
“Oil Firms’ Predicament: Who Should Cut Output?” WSJ, 12/23/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Oil Firms Output
WSJ 12-23-14.pdf
“For Wal-Mart in Mexico, Bodega Format Trumps Big Box,” WSJ, 12/31/14.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Wal-Mart in Mexico
WSJ 12-31-14.pdf
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April 16: Entry and Exit—barriers to entry and exit, limit pricing, contestable markets.
Text:
BDSS, Ch. 6: Entry and Exit, pgs. 196-225.
April 21 & 23: Pay and Productivity—principle agent problem, types of compensation,
tournaments, efficiency wages, performance in teams
Text:
BDSS, Ch. 12: Performance, Measurement and Incentives, pgs. 401-436.
April 28: Strategy and Structure
Text:
BDSS, Ch. 13: Strategy and Structure, pgs. 437-469.
April 30: Quiz and Discussion of supplemental readings
Supplemental readings:
“Jeans Therapy: Levi's Factory Workers Are Assigned to Teams, And Morale
Takes a Hit,” WSJ, 5/20/98.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Levi's Factory
Workers WSJ 05-20-98.pdf
“New Competitor: East Europe's Industry Is Raising Its Quality And Taking On
West,” WSJ, 9/21/94.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/East Europe's
Industry . . . WSJ 09-21-94.pdf
“The Need for Greed,” The Economist, 5/4/96.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/The Need for Greed
Economist 05-04-96.pdf
Kohn, Alfie, “Why Incentive Plans Cannot Work,” Harvard Business Review,
Sept./Oct. 1993.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Why Incentive Plans
Cannot Work - HBR Sept-Oct 94.pdf
“Rethinking Rewards,” Harvard Business Review, Nov./Dec. 1993.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Rethinking Rewards
- HBR Nov-Dec 93.pdf
“How to Fix Executive Compensation,” WSJ, 2/27/12.
http://gatton.uky.edu/faculty/troske/teaching/eco411/articles/Fix Exec
Compensation WSJ 02-27-12.pdf
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