V
E
R
T
Competitive forces through bargaining and economic leverage
PRODUCERS
OF SUBSTITUTES:
Competitive forces through rivalry of sellers in different markets through price, advertising, lobbying etc.
C
A
L
T
I
O
N
R
E
L
A
S
Competitive forces through rivalry of sellers in same market through price, advertising, lobbying etc.
Competitive forces through bargaining and economic leverage
POTENTIAL
COMPETITORS:
Competitive for ce from threat of entry

Horizontal W A R
Lowest Highest
?
Vertical
W A R
?
Vertical
W A R
P
(A) (B) (C) (D)
SUPPLY SHIFTS: DEMAND SHIFTS:
LEFTWARD (up) RIGHTWARD (down) LEFTWARD (down) RIGHTWARD (up)
Supply P
Supply P Demand P
Demand
Q Q
Q Q

Lower
Output
Leftward
(downward)
Shift of Demand
Leftward
(upward)
Shift of
Supply
Higher
Output
Rightward
(downward)
Shift of
Supply
Rightward
(upward)
Shift of Demand
Breakdown all shifts into their output and price vectors

EXAMPLES OF THE INTERPRETATION OF THE MEDIA
EXAMPLE 1.
A Business Week article entitled "At Compaq, a Desktop Crystal Ball."
(March 20, 1995, pp. 96-97) contained the following excerpts about the decision of Compaq to use older 486 computer chips for computers rather than the new Pentium chips: i.
Parides had persuaded his bosses at Compaq Computer Corp . to back a radical plan: Use complex simulation software to manage product introductions for the world's biggest PC maker . Parides' program was designed to model trends in customer demand, pricing, and even dealer inventories… ii.
As a result, it can simulate conditions such as component price changes, fluctuating demand for a given feature or price, and the impact of rival models. By modeling supplier and competitor behavior, the system lets managers consider the risk of certain actions before taking them. iii.
...While rivals such as Dell Computer Corp . and Gateway 2000 Inc.
were doing a booming business in Pentiums [a semiconductor chip], Compaq was amassing a huge inventory of PCs based on the older 486 [a semiconductor] design. Compaq stuck to its plan, because the model said most corporate buyers wouldn't want Pentiums until early
1995. The gamble proved successful: Fourth-quarter earnings rose 61%. iv.
....He (Parides ran)... new scenarios and tweak(ed) the model to show the financial risks of moving up the announcement of Pentium PCs. The findings: Shifting too quickly to
Pentium-based models would wreak havoc on pricing on Compaq's many 486-based units.
It would also mean paying higher prices for new components than if it waited ( Intel has since slashed Pentium prices). v.
For Compaq, which had often triumphed by bringing new technology to market as soon as possible, it was a tough call. "We bet against everything the company believed," says
Parides... vi.
On Oct. 28, Parides and Sheehan found themselves before CEO Eckehard Pfeiffer....
Pfeiffer, who listened intently, gave the pair all the assurance they needed. "It's about time we're doing these things," he said.
In this article, there are a confusing number of different players and markets which are shown in bold letters as they are first mentioned. To sort them out, it is useful to group them as follows:
PC makers (Compaq, Dell, Gateway 2000)
Chips 9pentiums, 486)
Corporate buyers
Chip manufacturers (Intel)

Now see if you can fill in the following vertical chain, meeting the following criteria:

Sort the above players into participants (people or organizations) on the left and the market (places of exchange or the products exchanged) at the right. Make sure that each
 market involves an exchange of money for goods or services
Start at the top with the original factors of production (labor, land, or capital), figure the market in which those factors are sold which becomes the participant, and then figure who the buyers in that market are.

Or Start at the bottom with the people who consume the good (consumers, government, export market, or investment), figure the market from which they are buying what they
 consume, and then figure who is selling the good or service into that market.
Make sure that there is always an arm’s length transaction between buyer and seller.
You should be able to fill in the following table:
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer

EXAMPLE 2 . Read the Following article from Business Week (December 14, 1998 pp. 106-119) i.
When giant retailer Wal-Mart Stores Inc. sued upstart Internet bookseller Amazon.com Inc. on Oct. 16, jaws dropped. Wal-Mart accused Amazon of raiding its executives to steal its computerized merchandising and distribution trade secrets… ii.
… it [Amazon] is jolting them [traditional retailers] into rethinking whether their traditional advantages- physical size, mass-media branding, and even the sensory appeal of shopping in stores- will be enough to thrive in the New Economy. Says Duke University marketing professor Martha
Rogers: “Amazon is an example of how an upstart can redefine its whole industry.” iii.
…Amazon offers …3.1 million titles- 15 times more than any bookstore …and without the costly overhead of multimillion-dollar buildings and scads of store clerks. That paves the way for each of its 1,600 employees to generate …$375,000 in annual revenues- more than triple that of No.
1 bricks-and-mortar bookseller Barnes & Noble Inc.’s 27,000 employees. iv.
Now, Amazon is extending its warm and fuzzy formula... On Nov. 17, the online merchant debuted a video store, as well as an expanded gift shop… in Amazon’s first full quarter selling music CDs, ending last September, it drew $14.4 million in sales, quickly edging out two-year-old cyberleader CEDnow Inc. Says analyst Lauren Cooks Levitan of Banc-Boston Robertson Stephens:
“When you think of Web shopping, you think of Amazon first.” v.
…Amazon’s stock is trading at about 209 a share, 23 times its … initial public offering price of $9 a share, post-split. That’s a market value of …$11.1 billion, or five times higher than
Barnes & Noble’s. All for a company that’s losing more millions every year and isn’t expected to turn a profit until at least 2001. The potential for E-commerce…is as vast as cyberspace. More people keep swarming online-nearly 100 million worldwide now, swelling to some 320 million by
2002, predicts market researcher International Data Corp… vi.
In books, Bezos …had no big online rivals and no dominant traditional players- even No. 1
Barnes & Noble has only about 11% of the U.S. market. But as Amazon plunges into each new category, it no longer has that crucial first-mover advantage. Instead, it faces entrenched and often much bigger rivals … vii .
Amazon can’t even dismiss the booksellers... Last month, Bertelsmann, the German media giant and owner of several publishers… paid $200 million for a 50% stake in the online arm of
Barnes & Noble, giving it a considerable war chest for its battle with Amazon. And on Nov. 6,
Barnes & Nobles jolted Amazon and the entire publishing world by announcing a $600 million deal to buy the leading book distributor Ingram Book Group- which supplies 60% of Amazon’s books.
Barnes & Noble promises no favoritism, but prudence will force Amazon to find other sources, likely at higher cost… viii .
…A new study by Boston Consulting Group found that 59% of consumer E-commerce

revenues… are generated by companies such as Eddie Bauer and 1-800-FLOWERS that also sell through traditional channels. Says Carol Sanger, a vice-president at Macy’s parent Federated
Department Stores Inc.: “We think the brand of Macy’s is far more meaningful to the consumer who is looking for traditional department-store goods than any Internet brand name.” ix .
…Amazon…has an almost unheard of two-year head start on key software that handles millions of transactions and personalizes the customer’ experience. Amazon, for instance, was the first commerce site to use so-called collaborative-filtering technology, which analyzes a customer’s purchases and suggests other books that people with similar purchase histories bought: the ultimate in targeted marketing… x.
…Bookstore and other retail chains largely depend on opening new stores to boost revenues- a huge cost that Amazon completely avoids. In the reverse of traditional retailers, Amazon has relatively high initial costs for things such as computer systems and editorial staff-which partly explain its red ink today. But unlike retailers, who must continually invest in new stores to hike revenues,
Amazon can boost sales by simply getting more people to come to its single online store… xi.
Of course… Amazon has to spend millions on marketing to bring in new customers-about
24 cents per dollar of revenue…, compared with 4 cents for traditional retailers… Physical bookstores must stock up to 160 days’ worth of inventory to provide the kind of in-store selection people want….Amazon, by contrast carries only 15 days’ worth inventory and is paid immediately by credit card. So it gets about a month’s use of interest-free money… xii.
…Once Amazon gets enough customers and sales to pay off its initial marketing and technology investments- and as that technology pays off in falling labor costs-additional revenue drops to the bottom line… xiii.
…It’s no accident that Bezos named Amazon after the river that carries the greatest volume of water. “He wants Amazon to be a $10 billion [in revenues] company,” says …board member Tom
A. Alberg.
1.
From the list of “markets and participants” below, make the longest possible vertical chain on the answer sheet below. It is not possible to use all of the names in the list, and every name can only be used once. Although some of the vertical relationships, participants, and markets are not mentioned, use your creativity to make your vertical chain as long as possible. It may not be possible to fill up all markets in the vertical chain.
LIST OF MARKETS AND PARTICIPANTS
Retail books
Macy’s
Wholesale books
Writers
Media
Book distributors (eg. Ingram)
Book Manufacturing
Customers
Boston Consulting Group
Book publishers
Amazon
Unpublished manuscripts

Product (m=many,f=few,1=one) Type of Market SHIFTS OF: Participants Markets
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
I=international,N=national,
(Y= yes, N=no) competition,etc) Left Right Left Right
Seller
R=regional, L=local
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Buyer
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer
Seller
Extent: I N R L
Buyer
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer Extent: I N R L
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer
Extent: I N R L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type
2. What would happen to this vertical chain if Barnes and Noble bought Ingrams and priced to squeeze Amazon.com
. On the answer sheet above show the supply and demand shifts due to this one event which affects the entire vertical chain.
(a) In the market where the event first has its impact, circle the letter of the appropriate shift:
"A" represents a leftward (upward) shift in supply. "B" represents a rightward
(downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
(even if a single event affects several markets, define the event narrowly enough to have its initial impact in only one market- remember ceteris paribus!!!)
(b) To indicate the vertical impacts of the initial event, place "X"'s on the answer sheet over the appropriate letter in the rest of the markets in your vertical chain. These X's

should be placed in accordance with the rules for shifts of derived demand and supply shifts due to changes in supply determinants (i.e. resource prices and availability). Every market must have a shift that is circled or have an X.
3. Describe ( and write down in the space provided on the answer sheet ) each market as monopoly, oligopoly, monopolistic competition, perfect competition, monopsony, oligopsony, bilateral monopoly, or bilateral oligopoly. Support your description first by deciding ( and circling in the above answer sheet ):
(a) What is the size of the market? Decide if it is international (I), national(N), regional(R), or local (L). Generally try to pick the widest market boundaries that evidence can possibly support.
(b) Is there product differentiation? Yes (Y) or No (N). This determines whether there is monopolistic competition or perfect competition.
(c)
How many buyers (“m” for many, “f” for few, and “l” for 1) and sellers there are in the market area?
Participants Markets Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no) competition,etc) Left Right Left Right
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Extent: I N R L
Extent: I N R L
Extent: I N R L
Extent: I N R L
Extent: I N R L
Extent: I N R L
Y N
Y N
Y N
Y N
Y N
Y N m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________
A B C D
A B C D
A B C D
A B C D
A B C D
A B C D
Seller
Buyer Extent: I N R L
Y N m f 1 m f 1 ___________
A B C D

EXAMPLE 3.
Read the Following article from the Wall Street Journal (November 12, 1998 p.
B5) which was entitled, “Anheuser Plays on Tipsiness to Sell Japan Strong Brew” i.
Anheuser-Busch Cos….hit stores over the summer with Buddy’s, a new brew created just for Japan’s $30 billion beer market A can of Buddy’s is packed with 20% more alcohol than a can of Budweiser and sells for two-thirds the price. ii.
Buddy’s is one of a number of so-called low-malt brands that have recently taken off in
Japan. They cost less because they skimp on a crucial flavor ingredient-malt. They don’t stint on alcohol: Buddy’s contains 6% alcohol, compared with 5% to 5.5% for competing low-malt beverages. The smaller price and bigger alcohol punch are a potent combination with Japanese consumers. iii.
…A new Anheuser TV commercial shows an airplane being refueled at a can of Buddy’s.
After a few loud gulps, the plane’s wings go limp-presumably because of the brew’s intoxicating power. “The fulfilling taste of 6%,” the narrator quips, as the label, “Buddy’s Extra Strong 6%,” flashes across the screen.
iv.
…The U.S. Bureau of Alcohol, Tobacco and Firearms prohibits brewers from using messages that hype strength on labels or ads. Several years ago, regulators cracked down on
American malt-liquor brewers for targeting low-income consumers with cheap, high-alcohol beverages and suggestive messages like “It’s got more.” There aren’t such regulations in Japan… v.
Buddy’s target audience in Japan is “heavy users,”mostly men in their 30s and 40s, explains
Shuntaro Ito, marketing director of Anheuser’s Japanese unit. These consumers “commute in jampacked trains everyday. They’re concerned about the recession, and they’re worn out by work,” Mr.
Ito says. “So what does 6% alcohol provide? Ultimate relaxation.” vi.
Anheuser says it is simply trying to make is mark in Japan’s fast-growing market for lowmalt brews, known as happoshu, or “sparkling alcoholic drink.”…Happoshu tends to taste harsher than beer but is taxed less: a typical 12-ounce can sells for about 145 yen ($1.20), compared with about 218 yen ($1.80) for beer. vii.
As Japan’s recession drags on beer marketers are flooding store shelves with cheap lowmalt brews, and cash-pinched drinkers are chugging them down. While overall beer shipments in
Japan are slumping, low-malt brews are expected to total as much as 15% of all beer volume this year, compared with about 6% last year…. viii.
The company which now sells its flagship Budweiser brand in more than 80 countries, has found boosting its presence in Japan to be an especially difficult task. While Anheuser commands a 46% market share in the U.S., its share in Japan was struck for years at just 1%. The company’s efforts to expand its Japanese lineup with beers like Busch and Red Wolf fizzled. To bolster its distribution network, Anheuser signed a joint venture pact with Kirin Brewery Coil., Japan’s No. 1 brewer. Still, many Japanese consumers view Budweiser as just a trendy, foreign beer to quaff

occasionally in an American-style bar. ix.
For Buddy’s, Anheuser had to figure out how to get more attention. Japan’s low-malt category had become crowded and noisy, as bigger local competitors were racing to promote hightech brewing methods and novel ingredients. A beverage from Sapporo Breweries Ltd. Called
“The Whole five Grains” touts healthy-sounding ingredients like beans, millet, rice, a barnyard grass called hie and a sprinkling of malt. Kirin, whose Tanrei low-malt brew is the top brand, is flooding supermarkets with expensive displays. x.
So, for Buddy’s advertising, Anheuser decided to cut to the chase. Mr. Ito says he believed aggressive advertising was in order. Anheuser learned its lesson from having failed to spend enough promoting the Red Wolf and Busch efforts. Armed with a 25% increase in its ad budget,
Anheuser’s Budweiser Japan unit worked with its ad agency, Hakuhodo Inc., to create the ad with the beer guzzling plane, complete with fancy computer graphics for the drooping wings…. xi.
Buddy’s sales have far exceeded Anheuser’s modest initial expectations of 500,000 cases this year. Mr. Ito says. Anhueuser expects Buddy’s to boost its corporate market share in Japan to
1.2%. The goal is to reach 3% to 4% by 2002.
1.
From the list of “markets and participants” below, make the longest possible vertical chain on the answer sheet below. It is not possible to use all of the names in the list, and every name can only be used once. Although some of the vertical relationships, participants, and markets are not mentioned, use your creativity to make your vertical chain as long as possible. It may not be possible to fill up all markets in the vertical chain.
LIST OF MARKETS AND PARTICIPANTS
Consumers Computer graphics
Malt brews & Beer distributor
Malt brews & beer brewing
Labor Market
Ad agency
Malt brewer & brewing Cos.
Computer graphics firms
Retail food and drink
Computer graphics experts
Wholesale beer & malt brews
U.S. Bureau of Alcohol,
Advertising services
American Style Bars
Tobacco and Firearms
2. Describe ( and write down in the space provided on the answer sheet ) each market as monopoly, oligopoly, monopolistic competition, perfect competition, monopsony, oligopsony, bilateral monopoly, or bilateral oligopoly. Support your description first by deciding ( and circling in the above answer sheet ):
(a) What is the size of the market? Decide if it is international (I), national(N), regional(R), or local (L). Generally try to pick the widest market boundaries that evidence can possibly support.
(b) Is there product differentiation? Yes (Y) or No (N). This determines whether there is monopolistic competition or perfect competition.
(c)
How many buyers (“m” for many, “f” for few, and “l” for 1) and sellers there are in the market area?

Product (m=many,f=few,1=one) Type of Market SHIFTS OF: Participants Markets
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
I=international,N=national,
(Y= yes, N=no) competition,etc) Left Right Left Right
Seller
R=regional, L=local
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Buyer
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer
Seller
Extent: I N R L
Buyer
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer Extent: I N R L
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer
Extent: I N R L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type
3. Based on the information in the article (and assume that both beer and malt sales respond in the same way), then show the supply and demand shifts on the answer sheet that result from the recession that is hitting Japan.
(a) In the market where the event first has its impact, circle the letter of the appropriate shift:
"A" represents a leftward (upward) shift in supply. "B" represents a rightward
(downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
(even if a single event affects several markets, define the event narrowly enough to have its initial impact in only one market- remember ceteris paribus!!!)
(b) To indicate the vertical impacts of the initial event, place "X"'s on the answer sheet over the appropriate letter in the rest of the markets in your vertical chain. These X's should be placed in accordance with the rules for shifts of derived demand and supply shifts due to changes in supply determinants (i.e. resource prices and availability). Every market must have a shift that is circled or have an X.

EXAMPLE 4.
Read the Following article from the Wall Street Journal (“Merck to cut cost of
AIDS Drug In Poorest Nations” by Rachel Zimmerman and Mark Schoofs 9/30/02??) i.
Merck & Co., trying to remain one step ahead of AIDS activists and generic-drug competition, said it will cut the price of its new once-a-day pill Stocrin to …$1 a day in the poorest and hardest-hit countries, a…30% reduction from the current price. ii.
…On Sept. 5, United Kingdom drug maker GlaxoSmithKline PLC announced price reductions of as much as 33% on several AIDS medicines in the developing world. iii
…Jeffrey Sturchio, a Merck spokesman, says the recent reductions, which would bring the cost of the new Stocrin down to $346.75 per patient per year, show that “it isn’t simply a case of generics leading the price decreases.” Indeed, four Indian generic companies currently make Stocrin for between $438 and $658 a year, according to Doctors Without
Borders iv.
…Mr. Sturchio says Merck won’t be making a profit in poor countries. New manufacturing procedures and the single large-dose pill allowed for savings that can be passed along to consumers. But he stressed that the company’s ability to offer lower prices depends on its drugs remaining profitable in the major markets such as the U.S. v.
“As long as we can get the necessary returns in developed and emerging markets we can afford to make these prices available in the least-developed and hardest-hit countries.” Said
Mr. Sturchio. vi.
He said certain safeguards are in place to prevent the cheap drugs from being diverted to other countries. Merck, for instance, requires proof of delivery when it distributes the drugs directly to customers in poor countries. Also, … Stocrin destined for developing countries have distinctive green labels, Mr. Sturchio said. vii.
Currently Stocrin is taken by about 67,000 people in the developing world, more than
16,000 of them in sub-Saharan Africa. x.
…The new 600-milligram Stocrin tablet has been approved in 17 middle-income and rich countries, but it hasn’t won regulatory approval in the poorest nations, notably sub-Saharan
Africa, where five million people are infected with HIV. xi.
Merck says it expects approval in the poor countries early next year. Mr. Sturchio says the
“catalog” price of the new Stocrin in rich countries is $8.55 a day and in middle-income countries, such as Brazil, Mexico, Jamaica and China Merck is offering the medicine at
$2.10 a day.
1.From the list of “markets and participants” below, make the longest possible vertical chain on the answer sheet below. It is not possible to use all of the names in the list, and every name can

only be used once. Although some of the vertical relationships, participants, and markets are not mentioned, use your creativity to make your vertical chain as long as possible. It may not be possible to fill up all four markets in the vertical chain.
Participants Markets Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
I=international,N=national,
(Y= yes, N=no) competition,etc) Left Right Left Right
Seller
R=regional, L=local
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Buyer
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer
Seller
Extent: I N R L
Buyer
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer Extent: I N R L
Seller
Buyer
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type
2. What happens to this vertical chain if the U.S. government required drug producers to offer their drugs at the same price that was being offered in Sub-Sahara Africa in the U.S.
?
On the answer sheet above show the supply and demand shifts due to this one event which affects

the entire vertical chain.
(a) In the market where the event first has its impact, circle the letter of the appropriate shift:
"A" represents a leftward (upward) shift in supply.
"B" represents a rightward (downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
(even if a single event affects several markets, define the event narrowly enough to have its initial impact in only one market- remember ceteris paribus!!!)
(b) To indicate the vertical impacts of the initial event, place "X"'s on the answer sheet over the appropriate letter in the rest of the markets in your vertical chain. These X's should be placed in accordance with the rules for shifts of derived demand and supply shifts due to changes in supply determinants (i.e. resource prices and availability). Every market must have a shift that is circled or have an X.
3. Describe ( and write down in the space provided on the answer sheet ) each market as monopoly, oligopoly, monopolistic competition, perfect competition, monopsony, oligopsony, bilateral monopoly, or bilateral oligopoly. Support your description first by deciding ( and circling in the above answer sheet ):
(a) What is the size of the market? Decide if it is international (I), national(N), regional(R), or local (L). Generally try to pick the widest market boundaries that evidence can possibly support.
(b) Is there product differentiation? Yes (Y) or No (N). This determines whether there is monopolistic competition or perfect competition.
(c) How many buyers (“m” for many, “f” for few, and “l” for 1) and sellers there are in the market area?
4. In the article underline an example of structure of the AIDS drugs market .
5.
6.
Circle evidence of conduct in the AIDS drugs market .
Bracket evidence of performance in the AIDS drugs market .
7. (IGNORE THIS QUESTION) Write down a demand function for AIDS drugs market based only on the information from the above quotation. Make sure you write down the names of all of the variables you use in your generalized demand function. Under each item in the function indicate the number of the paragraph in which there is evidence of the demand determinant (and price) (You don't have to fill all blanks- just get as many as you can).
Qd = f( P , ______, ______,______, ______,______,______)
Paragraph # ____, ______, ______,______, ______,______,______) where Qd = _____________________________________
P = price
= _____________________________________
= _____________________________________
= _____________________________________
= _____________________________________
= _____________________________________
= _____________________________________

EXAMPLE 5
“Rein in Runaway Costs Associated With Malpractice Insurance” By Daniel H.
Belsky, DO, MSc, Boca Raton, Florida in JAOA Vol 103 #6 (June, 2003) p. 263 Letters
1.
I may just be a country doctor from the Pine Barrens of New Jersey, but I have learned some basic math. Through the years. Although there has only been a tenfold increase in the cost of many staple items in the United States, the cost of medical malpractice insurance has multiplied a thousandfold. Am I missing information that would help explain why malpractice insurance rates are completely out of line with the rest of our economy?…
2.
How many in the medical profession have been called to the emergency departments of our hospitals to tend to an Automobile accident victim, a woman with an incomplete abortion, or a woman having a ruptured ectopic pregnancy? How many in the medical profession have refused to render care to those patients because of their inability to pay? How many in the medical profession have conducted clinics for the needy in our communities without remuneration (sic.) or have waived fees for patients in our offices when they had fallen on hard times? If attorneys offered their pro bono and contingency fee programs to alleged victims of malpractice who cannot afford services and, on successful settlement, then collected a fee for hourly services and expenses, that would be a fair and equitable system and would ultimately result in lower malpractice insurance rates. I would call that pro bono plus.
3.
Another way to bring down the number of expensive medical malpractice lawsuits involves a time-honored system to deal with injury in the workplace. It is called compulsory arbitration. The injured employee has his or her case reviewed by an arbitration board, usually consisting of a union representative, a physician who is an expert in the area of practice, an attorney, and a lay member. Responsibility is assigned, contributory negligence is determined, and the board recommends a dollar amount as award. The employee has the option of accepting the decision or taking the issue further with a lawsuit. If the case makes it to trial, the jury may be informed that the plaintiff turned down an award recommended by the arbitrators….
4.
5.
There is a move afoot at both the state and federal levels to put a cap on awards for noneconomic damage (ie., pain and suffering). Arguments abound on both sides of the issue, but I have no doubt ….it has been estimated that approximately 6% of physicians account for 100% of medical malpractice cases. If this is true, we, as a profession, had better police ourselves more effectively and act quickly when indicated. There are several ways to deal with chronic offenders. A supervisor could be assigned to oversee patient care provided by a physician with a history of malpractice lawsuits. A similar program could be instituted in a private practice. Finally, physician retraining. Programs could be initiated by hospitals and medical schools. The physician in question should be held responsible for all costs associated with his or her rehabilitation program. The state boards of medical examiners have to become more involved in the process, suspending or revoking the licenses of chronic offenders who defy rehabilitation.
…Will true reform ever take place in the arena of medical malpractice? I think that it had

better- and soon. Our brightest people are being forced to leave specialty areas with particularly high malpractice insurance rates, leaving academic. Environments for more rural areas of the country with lower medical malpractice insurance rates. What a sad loss for our academic institutions. Will young scientific minds continue to be attracted to the medical profession? I fear that most will find other ways to pursue careers in the sciences.
Although the cost of malpractice insurance continues to rise and the fixed costs of running an office are also increasing, the revenues in physicians’ practices continue to decline in an inverse ratio as the result of decreased managed care reimbursements. that limiting awards to reasonable amounts would help to drive down the cost of malpractice insurance. Once again, however, we face the obstacle of attorney-dominated legislatures.
6.
Attorneys have another gimmick to unnerve and harass the medical profession and generate even larger legal fees: punitive damages. A physician being sued has to seek private counsel to defend against punitive damage, as that aspect is not covered in a malpractice policy. The threat of the question of liability may force many physicians to rush to settlement. This aspect of the law should be handled the same as for noneconomic damages discussed earlier to rein in the runaway costs of malpractice insurance.
From the list of “markets and participants” below, make the longest possible vertical chain on the answer sheet below. It is not possible to use all of the names in the list, and every name can only be used once. Although some of the vertical relationships, participants, and markets are not mentioned, use your creativity to make your vertical chain as long as possible. It may not be possible to fill up all four markets in the vertical chain.
Patients Lawyer Services
Lawyers Labor Market (Lawyers)
Doctors Labor Market (Doctors today)
Law Firms Labor Market (Doctors in the
Educational Services future)
Med Schools Medical Students
2. What should happen to this vertical chain if malpractice legislation cuts malpractice awards in half ? On the answer sheet above show the supply and demand shifts due to this one event which affects the entire vertical chain.
(a) In the market where the event first has its impact, circle the letter of the appropriate shift:
"A" represents a leftward (upward) shift in supply.
"B" represents a rightward (downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
(even if a single event affects several markets, define the event narrowly enough to have its initial impact in only one market- remember ceteris paribus!!!)

(b) To indicate the vertical impacts of the initial event, place "X"'s on the answer sheet over the appropriate letter in the rest of the markets in your vertical chain. These X's should be placed in accordance with the rules for shifts of derived demand and supply shifts due to changes in supply determinants (i.e. resource prices and availability). Every market must have a shift that is circled or have an X.
3. Describe ( and write down in the space provided on the answer sheet ) each market as monopoly, oligopoly, monopolistic competition, perfect competition, monopsony, oligopsony, bilateral monopoly, or bilateral oligopoly. Support your description first by deciding ( and circling in the above answer sheet ):
(a) What is the size of the market? Decide if it is international (I), national(N), regional(R), or local (L). Generally try to pick the widest market boundaries that evidence can possibly support.
(b) Is there product differentiation? Yes (Y) or No (N). This determines whether there is monopolistic competition or perfect competition.
(c) How many buyers (“m” for many, “f” for few, and “l” for 1) and sellers there are in the market area?
Participants Markets Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no) competition,etc) Left Right Left Right
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Seller
Buyer
Extent: I N R L
Extent: I N R L
Extent: I N R L
Extent: I N R L
Extent: I N R L
Extent: I N R L
Y N
Y N
Y N
Y N
Y N
Y N m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________ m f 1 m f 1 ___________
A B C D
A B C D
A B C D
A B C D
A B C D
A B C D
Seller
Buyer Extent: I N R L
Y N m f 1 m f 1 ___________
A B C D

EXAMPLE 6. . Read the following article entitled “Baxter Agrees to Acquire Somatogen”(WST
Feb. 25, 1998 p. B6). i.
Baxter International, Inc.
said it agreed to acquire biotechnology company Somatogen
Inc. for at least $190 million in stock. ii.
Baxter and Somatogen…are two of the leading players in the race to create an artificial hemoglobin, the oxygen-carrying component of blood. The artificial hemoglobin could reduce or replace the need for donated blood during surgery and trauma care. iii.
By one measure, Baxter is furthest along in the industry in producing a workable blood substitute. Its product, [is] called HemAssist…. Baxter is now finishing a $110 million plant in
Neuchatel, Switzerland, to make the blood substitute. However, making HemAssist requires the use of outdated donated blood ; this unused blood then is cleansed and chemically altered to produce the artificial product. iv.
But Baxter is concerned that, in time, there may not be enough outdated blood- blood that has been stored too long in hospital supply rooms- to meet its needs. That is where Somatogen comes in. v.
Somatogen has a “recombinant” method of making blood substitutes, meaning that the genetic material to make the product is inserted into bacteria. Bacteria, such as yeast or E-coli, then make large quantities of the product. Though this is a costly procedure, it would help resolve
Baxter’s supply problem. “This move puts Baxter in strong position in terms of supply,” said Keith
Berman, A California marketing consultant who follows the blood-substitute industry. vi.
Also, Baxter’s HemAssist has a feature that some doctors see as a potential downside: It constricts blood vessels, raising a patient’s blood pressure. Health-care industry executives say
Somatogen’s future products might avoid this tendency. vii.
“We continue to believe we will be the first company with an approved, first-generation product,” said
Baxter President Harry M. Kraemer Jr. “Down the road, however, the answer is probably going to be recombinant technology. Somatogen is far and away the No. 1 company in recombinant technology in hemoglobin therapeutics.”
LIST OF PARTICIPANTS AND MARKETS
Biotechnology companies Surgery and trauma services
Yeast
Baxter president artificial blood hemoglobin
Labor market
Hospital orderlies (labor)
Consumers
Hospital supply rooms marketing consultants outdated donated blood surgery and trauma centers doctors

1.
From the “list of markets and participants” below the article, make the longest possible vertical chain for artificial blood market on the answer sheet below. It is not possible to use all of the names in the list.
Participants Markets Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
I=international,N=national,
(Y= yes, N=no) competition,etc) Left Right Left Right
Seller
R=regional, L=local
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Buyer
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer
Seller
Extent: I N R L
Y N m f 1 m f 1 ___________
A B C D
Buyer
Extent: I N R L
Seller
Y N m f 1 m f 1 ___________
A B C D
Buyer Extent: I N R L
Seller
Buyer
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type
2. Suppose hospitals suddenly discover a more efficient way to store blood so that they no longer leave blood to waste in storage and become outdated. On the answer sheet above show the supply and demand shifts due to this one event which affects the entire vertical chain. On the answer sheet
above show the supply and demand shifts due to this one event which affects the entire vertical chain.
(a) In the market where the event first has its impact, circle the letter of the appropriate shift:
"A" represents a leftward (upward) shift in supply.
"B" represents a rightward (downward) shift in supply.
"C" represents a leftward (downward) shift in demand.
"D" represents a rightward (upward) shift in demand.
(even if a single event affects several markets, define the event narrowly enough to have its initial impact in only one market- remember ceteris paribus!!!)
(b) To indicate the vertical impacts of the initial event, place "X"'s on the answer sheet

over the appropriate letter in the rest of the markets in your vertical chain. These X's should be placed in accordance with the rules for shifts of derived demand and supply shifts due to changes in supply determinants (i.e. resource prices and availability). Every market must have a shift that is circled or have an X.
3. Describe ( and write down in the space provided on the answer sheet ) each market as monopoly, oligopoly, monopolistic competition, perfect competition, monopsony, oligopsony, bilateral monopoly, or bilateral oligopoly. Support your description first by deciding ( and circling in the above answer sheet ):
(a) What is the size of the market? Decide if it is international (I), national(N), regional(R), or local (L). Generally try to pick the widest market boundaries that evidence can possibly support.
(b) Is there product differentiation? Yes (Y) or No (N). This determines whether there is monopolistic competition or perfect competition.
(c)
How many buyers (“m” for many, “f” for few, and “l” for 1) and sellers there are in the market area?

EXAMPLE 1 Compaq
Participants Markets
Labor
Chip Mfrs.
Seller
Buyer
Labor Market
Seller
Chips
Seller
Corporations
Buyer
PC Market
Goods & Svcs.
Seller
Consumers
Buyer
EXAMPLE 2 Amazon
Participants Markets
Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
I=international,N=national,
(Y= yes, N=no) competition,etc) Left Right Left Right
R=regional, L=local
Writers
Seller
Book Publishers
Buyer
Seller
Book Distributors
Buyer
Unpublished
Manuscripts
Extent: I N R L
Book mfg.
Extent: I N R L
Y N
?
m f 1 m f 1 ___________
X
Y N
?
m f 1 m f 1 ___________
X
Amazon
Customers
Seller
Buyer
Seller
Buyer
Wholesale Books Oligopoly
Y N m f 1 m f 1 ___________
A B C D
Extent: I N R L
Retail Mkt.
Y N
Oligopoly m f 1 m f 1 ___________
X
Extent: I N R L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type

EXAMPLE 3 Busch
Participants Markets
Computer Graphics
Experts
Computer Graphics
Firms
I=international,N=national,
R=regional, L=local
Seller Labor Market
Buyer
Extent: I N R
Seller
Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no) competition,etc) Left Right Left Right
Y N
Monopolistic
Competition m f 1 m f 1 ___________
Monopolistic
A B C D
Ad agency
Buyer
Competition
Y N m f 1 m f 1 ___________
A B C D
Seller
Extent: I N R
Advertising Svcs.
Brewers
Buyer
Monopolistic
Y N m f 1 m f 1 ___________
A B C D
Monopolistic
Brewing
Seller
Competition
Extent: I N R
Distributors
Buyer L
Oligopoly?
Y N m f 1 m f 1 ___________
A B C D
American Style
Bars
Seller
Buyer
Wholesale Beer
Extent: I N R
Monopolistic
Competition
Y N m f 1 m f 1 ___________
A B C D
Seller
Consumers Buyer
L
Retail food & Drink
Monopolistic
Y N
Competition m f 1 m f 1 ___________
A B C D
Extent: I N R
L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type
Extent: I N R
L
EXAMPLE 4 Merck

EXAMPLE 5 Malpractice
2 Separate Chains under Fee-for-Service
Participants Markets
Participants Markets
3 rd Party Payors
Patients Seller
Buyer
Insurance Services
Doctors
Physician Services
Patients Seller
Buyer
ONE Longer Vertical Chain under Managed Care
Participants Markets
Doctors
Seller
3 rd Party Payors
Buyer
Patients Seller
Physician Services
Prepaid Medical Service
Buyer
Participants Markets
Lawyers
Seller
Law firms
Buyer
Seller
Doctors
Buyer
Seller
Medical Schools
Buyer
Lawyer Services
Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
(Y= yes, N=no) competition,etc) Left Right Left Right
Y M f 1 m F 1 ___________
A B X
Y m
Y M
F
1 M f 1 m
F f 1 ___________
1 ___________
A B C D
A B C D
Patients
Seller Education Services Y m
F
1
M f 1 ___________
X B C D
Seller
Labor Market
(Doctors in the future) Y M f 1 M f 1 ___________
X B C D
Buyer
If malpractice reform works!
EXAMPLE 6 Baxter

Participants Markets
Product (m=many,f=few,1=one) Type of Market SHIFTS OF:
Differentiation SELLERS BUYERS (eg. Monopoly, SUPPLY DEMAND
Hospital Orderlies
I=international,N=national,
R=regional, L=local
(Y= yes, N=no) competition,etc) Left Right Left Right
Labor Market
Seller
Hospital Supply
Buyer Extent: I N R L
Y N m f 1 m f 1 ___________
A B C D
Seller
Buyer
Outdated donated
Y N
Bilateral
Oligopoly
A B C D
Biotech Cos.
Seller
Artificial blood
Surgery & Trauma units
Buyer
Surgery & Trauma
“
Y N m f 1 m f 1 ___________
A B C D
Seller Services
Y N m f 1 m f 1 ___________
A B C D
Consumers
Buyer
Extent: I N R L
Circle one for each market
Circle One Circle Circle Write down Circle One of the
One One one market four possibilities
Type