NINTH EDITION Managerial and Economics Business Strategy Michael R. Baye Bert Elwert Professor of Business Economics & Public Policy Kelley School of Business Indiana University Jeffrey T. Prince Associate Professor of Business Economics & Public Policy Harold A. Poling Chair in Strategie Management Kelley School of Business Indiana University Mc Graw Hill Education Contents CHARTER 1 The Fundamentals of Managerial Economics 1 HEADLINE: Amcott Loses $3.5 Million; Manager Fired 1 INTRODUCTION 2 The Manager 2 Economics 3 Managerial Economics Defined 3 THE ECONOMICS OF EFFECTIVE MANAGEMENT 4 Identify Goals and Constraints 4 Recognizethe Nature and Importance of Profits 4 Economic versus Accounting Profits 4 The Role of Profits 5 The Five Forces Framework and Industry Profitability 7 Understand Incentives 10 Understand Markets 11 Consumer-Producer Rivalry 11 Consumer-Consumer Rivalry 11 Producer-Producer Rivalry 11 Government and the Market 12 Recognize the Time Value of Money 12 Present Value Analysis 12 Present Value of Indefinitely Lived Assets 14 Use Marginal Analysis 16 Discrete Decisions 17 Continuous Decisions 19 Incremental Decisions 20 LEARNING MANAGERIAL ECONOMICS 21 ANSWERING THE HEADLINE 22 KEY TERMS AND CONCEPTS 23 i CONCEPTUAL AND COMPUTATIONAL QUESTIONS 23 / PROBLEMS AND APPLICATIONS 25 / SELECTED READINGS 28 / APPENDIX: THE CALCULUS OF MAXIMIZING NET BENEFITS 29 INSIDE BUSINESS 1-1: The Goals of Firms in Our Global Economy 6 INSIDE BUSINESS 1-2: Profits and the Evolution of the Computer Industry 9 INSIDE BUSINESS 1-3: Joining the Jet Set 16 CHARTER 2 Market Forces: Demand and Supply 30 HEADLINE: Samsung and Hynix Semiconductor to Cut Chip Production 30 INTRODUCTION 31 DEMAND 31 Demand Shifters 33 Income 33 Prices of Related Goods 34 Advertising and Consumer Tastes 35 Population 35 Consumer Expectations 36 Other Factors 36 The Demand Function 36 Consumer Surplus 38 SUPPLY 39 Supply Shifters 40 Input Prices 40 Technology or Government Regulations 40 Number of Firms 40 Substitutes in Production 41 Taxes 41 Producer Expectations 42 The Supply Function 43 Producer Surplus 44 MARKET EQUILIBRIUM 45 PRICE RESTRICTIONS AND MARKET EQUILIBRIUM 47 Price Ceilings 47 Price Floors 51 xix XX Contents COMPARATIVE STATICS 53 Changes in Demand 53 Changes in Supply 54 Simultaneous Shifts in Supply and Demand 55 ANSWERING THE HEADLINE 57 SU M MARY 58 / KEY TERMS AND CONCEPTS 58 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 58 / PROBLEMS AND APPLICATIONS 60 / SELECTED READINGS 63 INSIDE BUSINESS 2-1: Asahi Breweries Ltd. and the Asian Recession 34 INSIDE BUSINESS 2-2: The Trade Act of 2002, NAFTA, and the Supply Curve 42 INSIDE BUSINESS 2-3: Unpopulär Equilibrium Prices 46 INSIDE BUSINESS 2-4: Price Ceilings and Price Floors around the Globe 50 INSIDE BUSINESS 2-5: Globalization and the Supply of Automobiles 54 INSIDE BUSINESS 2-6: Using a Spreadsheet to Calculate Equilibrium in the Supply and Demand Model 55 CHARTER 3 Quantitative Demand Analysis 64 HEADLINE: Walmart Hoping for Another Big Holiday Showing 64 INTRODUCTION 65 THE ELASTICITY CONCEPT 65 OWN PRICE ELASTICITY OF DEMAND 66 Elasticity and Total Revenue 67 Factors Affecting the Own Price Elasticity 71 Available Substitutes 71 Time 72 Expenditure Share 72 Marginal Revenue and the Own Price Elasticity of Demand 73 CROSS-PRICE ELASTICITY 75 INCOME ELASTICITY 77 OTHER ELASTICITIES 79 OBTAINING ELASTICITIES FROM DEMAND FUNCTIONS 79 Elasticities for Linear Demand Functions 80 Elasticities for Nonlinear Demand Functions 81 REGRESSION ANALYSIS 84 Evaluating the Statistical Significance of Estimated Coefficients 85 Confidence Intervals 86 The t-Statistic 87 Evaluating the Overall Fit of the Regression Line 88 The R-Square 88 The F-Statistic 89 Regression for Nonlinear Functions and Multiple Regression 89 Regression for Nonlinear Functions 89 Multiple Regression 91 A Caveat 93 ANSWERING THE HEADLINE 94 SUMMARY 94 / KEY TERMS AND CONCEPTS 95 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 95 / PROBLEMS AND APPLICATIONS 97 / SELECTED READINGS 100 INSIDE BUSINESS 3-1: Calculating and Using the Are Elasticity: An Application to the Housing Market 70 INSIDE BUSINESS 3-2: Inelastic Demand for Prescription Drugs 74 INSIDE BUSINESS 3-3: Using Cross-Price Elasticities to Improve New Car Sales in the Wake of Increasing Gasoline Prices 77 INSIDE BUSINESS 3-4: Shopping Online in Europe: Elasticities of Demand for Personal Digital Assistants Based on Regression Techniques 93 CHARTER 4 The Theory of Individual Behavior 101 HEADLINE: Packaging Firm Uses Overtime Pay to Overcome Labor Shortage 101 INTRODUCTION 102 CONSUMER BEHAVIOR 102 CONSTRAINTS 106 The Budget Constraint 106 Changes in Income 108 Changes in Prices 110 Contents CONSUMER EQUILIBRIUM 111 COMPARATIVE STATICS 112 Price Changes and Consumer Behavior 112 Income Changes and Consumer Behavior 114 Substitution and Income Effects 116 APPLICATIONS OF INDIFFERENTE CURVE ANALYSIS 117 Choices by Consumers 117 Buy One, Get One Free 117 Cash Gifts, In-Kind Gifts, and Gift Certificates 118 Choices by Workers and Managers 121 A Simpiified Model of Income-Leisure Choice 121 The Decisions of Managers 122 THE RELATIONSHIP BETWEEN INDIFFERENCE CURVE ANALYSIS AND DEMAND CURVES 124 Individual Demand 124 Market Demand 125 ANSWERING THE HEADLINE 126 SUMMARY 727/KEY TERMS AND CONCEPTS 1271 CONCEPTUAL AND COMPUTATIONAL QUESTIONS 1281 PROBLEMS AND APPLICATIONS 130 / SELECTED READINGS 133 / APPENDIX: A CALCULUS APPROACH TO INDIVIDUAL BEHAVIOR 133 INSIDE BUSINESS 4—1: Indifference Curves and Risk Preferences 105 INSIDE BUSINESS 4-2: The Budget Constraints and Credit Cards 109 INSIDE BUSINESS 4-3: Price Changes and Inventory Management for Multiproduct Firms 113 INSIDE BUSINESS 4-4: Income Effects and the Business Cycle 115 INSIDE BUSINESS 4-5: The "Deadweight Loss" of In-Kind Gifts 122 INSIDE BUSINESS 4-6: Public Health Centers and Output-Oriented Incentives 126 CHARTER 5 The Production Process and Costs 135 HEADLINE: Boeing Loses the Battie but Wins the War 135 INTRODUCTION 136 xxi THE PRODUCTION FUNCTION 136 Short-Run versus Long-Run Decisions 137 Measures of Productivity 138 Total Product 138 Average Product 138 Marginal Product 138 The Role of the Manager in the Production Process 140 Produce on the Production Function 140 Use the Right Level ofinputs 140 Algebraic Forms of Production Functions 143 Algebraic Measures of Productivity 144 Isoquants 146 Isocosts 148 Cost Minimization 149 Optimal Input Substitution 151 THE COST FUNCTION 152 Short-Run Costs 153 Average and Marginal Costs 156 Relations among Costs 158 Fixed and Sunk Costs 159 Algebraic Forms of Cost Functions 160 Long-Run Costs 160 Economies of Scale 161 A Reminder: Economic Costs versus Accounting Costs 162 MULTIPLE-OUTPUT COST FUNCTIONS 163 Economies of Scope 164 Cost Complementarity 164 ANSWERING THE HEADLINE 166 SUMMARY 166 /KEY TERMS AND CONCEPTS 1671 CONCEPTUAL AND COMPUTATIONAL QUESTIONS 167 / PROBLEMS AND APPLICATIONS 169 / SELECTED READINGS 173 / APPENDIX: THE CALCULUS OF PRODUCTION AND COSTS 173 INSIDE BUSINESS 5-1: Where Does Technology Come From? 142 INSIDE BUSINESS 5-2: The Affordable Care Act, Employer Mandate, and Input Substitution 154 INSIDE BUSINESS 5-3: Estimating Production Functions, Cost Functions, and Returns to Scale 162 INSIDE BUSINESS 5-4: International Companies Exploit Economies of Scale 163 xxii Contents CHARTER 6 The Organization of the Firm 175 HEADLINE: Google Buys Motorola Mobility to Vertically Integrale 175 INTRODUCTION 176 METHODS OF PROCURING INPUTS 177 Purchase the Inputs Using Spot Exchange 177 Acquire Inputs Under a Contract 177 Produce the Inputs Internally 178 TRANSACTION COSTS 179 Types of Specialized Investments 179 Site Specificity 179 Physical-Asset Specificity 180 Dedicated Assets 180 Human Capital 180 Implications of Specialized Investments 180 Costly Bargaining 180 Underinvestment 180 Opportunism and the "Hold-Up Problem" 181 OPTIMAL INPUT PROCUREMENT 182 Spot Exchange 182 Contracts 183 Vertical Integration 186 The Economic Trade-Off 186 MANAGERIAL COMPENSATION AND THE PRINCIPAL-AGENT PROBLEM 189 FORCES THAT DISCIPLINE MANAGERS 191 Incentive Contracts 191 External Incentives 192 Reputation 192 Takeovers 192 THE MANAGER-WORKER PRINCIPAL-AGENT PROBLEM 192 Solutions to the Manager-Worker Principal-Agent Problem 192 Profit Sharing 192 Revenue Sharing 193 Piece Rates 193 Time Clocks and Spot Checks 194 ANSWERING THE HEADLINE 195 SUMMARY 795/KEY TERMS AND CONCEPTS 196/ CONCEPTUAL AND COMPUTATIONAL QUESTIONS 196 / PROBLEMS AND APPLICATIONS 197 / SELECTED READINGS 200 / APPENDIX: AN INDIFFERENCE CURVE APPROACH TO MANAGERIAL INCENTIVES 200 INSIDE BUSINESS 6-1: The Cost of Using an Inefficient Method of Procuring Inputs 182 INSIDE BUSINESS 6-2: What Determines Contract Length in Franchising? 186 INSIDE BUSINESS 6-3: The Evolution of Input Decisions in the Automobile Industry 187 INSIDE BUSINESS 6-4: Paying for Performance 194 CHARTER 7 The Nature of Industry 203 HEADLINE: AT&T Puts Halt to T-Mobile Merger 203 INTRODUCTION 204 MARKET STRUCTURE 204 Firm Size 204 Industry Concentration 205 Measures of Industry Concentration 206 The Concentration ofU.S. Industry 207 Limitations of Concentration Measures 208 Technology 209 Demand and Market Conditions 210 Potential for Entry 212 CONDUCT 214 Pricing Behavior 214 Integration and Merger Activity 215 Vertical Integration 216 Horizontal Integration 216 Congiomerate Mergers 217 Research and Development 217 Advertising 217 PERFORMANCE 218 Profits 218 Social Weifare 218 THE STRUCTURE-CONDUCT-PERFORMANCE PARADIGM 219 The Causal View 220 The Feedback Critique 220 Relation to the Five Forces Framework 220 OVERVIEW OF THE REMAINDER OF THE BOOK 221 Perfect Competition 221 Monopoly 222 Monopolistic Competition 222 Oligopoly 222 ANSWERING THE HEADLINE 224 Contents SUMMARY 224 / KEY TERMS AND CONCEPTS 224 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 225 / PROBLEMS AND APPLICATIONS 226 / SELECTED READINGS 228 INSIDE BUSINESS 7-1: The 2012 North American Industry Classification System (NAICS) 210 INSIDE BUSINESS 7-2: The Elasticity of Demand at the Firm and Market Levels 213 INSIDE BUSINESS 7-3: The Evolution of Market Structure in the Computer Industry 223 CHARTER 8 xxiii OPTIMAL ADVERTISING DECISIONS 260 ANSWERING THE HEADLINE 262 SUMMARY 263 / KEY TERMS AND CONCEPTS 263 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 263 / PROBLEMS AND APPLICATIONS 265 / SELECTED READINGS 268 / APPENDIX: THE CALCULUS OF PROFIT MAXIMIZATION 269 / APPENDIX: THE ALGEBRA OF PERFECTLY COMPETITIVE SUPPLY FUNCTIONS 269 INSIDE BUSINESS 8-1: Peugeot-Citroen of France: A Price-Taker in China's Auto Market 235 INSIDE BUSINESS 8-2: Patent, Trademark, and Copyright Protection 246 INSIDE BUSINESS 8-3: Product Differentiation, Cannibalization, and Colgate's Smile 255 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets 229 HEADLINE: McDonald's New Buzz: Speciaity Coffee 229 INTRODUCTION 230 PERFECT COMPETITION 230 Demand at the Market and Firm Levels 231 Short-Run Output Decisions 232 Maximizing Profits 232 Minimizing Losses 236 The Short-Run Firm and Industry Supply Curves 238 Long-Run Decisions 239 MONOPOLY 241 Monopoly Power 241 Sources of Monopoly Power 242 Economies of Scale 242 Economies ofScope 243 Cost Complementarity 244 Patents and Other Legal Barriers 244 Maximizing Profits 244 Marginal Revenue 245 The Output Decision 248 The Absence ofa Supply Curve 251 Multiplant Decisions 251 Implications of Entry Barriers 253 MONOPOLISTIC COMPETITION 255 Conditions for Monopolistic Competition 255 Profit Maximization 256 Long-Run Equilibrium 257 Implications of Product Differentiation 259 CHARTER 9 Basic Oligopoly Models 270 HEADLINE: Crude Oil Prices Fall, but Consumers in Some Areas See No Relief at the Pump 270 INTRODUCTION 271 CONDITIONS FOR OLIGOPOLY 271 THE ROLE OF BELIEFS AND STRATEGIC INTERACTION 271 PROFIT MAXIMIZATION IN FOUR OLIGOPOLY SETTINGS 273 Sweezy Oligopoly 273 Cournot Oligopoly 274 Reaction Functions and Equilibrium 275 Isoprofit Curves 279 Changes in Marginal Costs 281 Collusion 283 Stackelberg Oligopoly 284 Bertrand Oligopoly 288 COMPARING OLIGOPOLY MODELS 290 Cournot 290 Stackelberg 291 Bertrand 291 Collusion 291 CONTESTABLE MARKETS 292 ANSWERING THE HEADLINE 293 SUMMARY 295 / KEY TERMS AND CONCEPTS 295 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 295 / PROBLEMS AND APPLICATIONS 297 / SELECTED xxiv Contents READINGS 300 / APPENDIX: DIFFERENTIATEDPRODUCT BERTRAND OLIGOPOLY 300 INSIDE BUSINESS 9-1: OPEC Members Can't Help but Cheat 285 INSIDE BUSINESS 9-2: Commitment in Stackelberg Oligopoly 287 INSIDE BUSINESS 9-3: Price Competition and the Number of Seilers: Evidence from Online and Laboratory Markets 289 INSIDE BUSINESS 9-4: Using a Spreadsheet to Calculate Cournot, Stackelberg, and Collusive Outcomes 292 CHARTER 10 Game Theory: Inside Oligopoly 302 HEADLINE: Bring Back Complimentary Drinks! 302 INTRODUCTION 303 OVERVIEW OF GAMES AND STRATEGIC THINKING 303 SIMULTANEOUS-MOVE, ONE-SHOT GAMES 304 Theory 304 Applications of One-Shot Games 307 Pricing Decisions 307 Advertising and Quaiity Decisions 309 Coordination Decisions 310 Monitoring Empioyees 311 Nash Bargaining 312 INFINITELY REPEATED GAMES 314 Theory 314 Review of Present Value 314 Supporting Collusion with Trigger Strategies 314 Factors Affecting Collusion in Pricing Games 317 Number of Firms 317 Firm Size 317 History of the Market 317 Punishment Mechanisms 318 An Application of Infinitely Repeated Games to Product Quaiity 319 FINITELY REPEATED GAMES 320 Games with an Uncertain Final Period 320 Repeated Games with a Known Final Period: The End-of-Period Problem 323 Applications of the End-of-Period Problem 324 Resignations and Ouits 324 The "Snake-Oil" Salesman 325 MULTISTAGE GAMES 325 Theory 325 Applications of Multistage Games 328 The Entry Game 328 Innovation 329 Sequential Bargaining 330 ANSWERING THE HEADLINE 331 SUMMARY 332 / KEY TERMS AND CONCEPTS 332 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 333 / PROBLEMS AND APPLICATIONS 335 / SELECTED READINGS 339 INSIDE BUSINESS 10-1: Hollywood's (not so) Beautiful Mind: Nash or "Opie" Equilibrium? 307 INSIDE BUSINESS 10-2: Cola Wars in India 309 INSIDE BUSINESS 10-3: Trigger Strategies in the Waste Industry 318 INSIDE BUSINESS 10-4: Multimarket Contact and Price Competition 320 INSIDE BUSINESS 10-5: Entry Strategies in International Markets: Sprinkler or Waterfall? 327 CHARTER 1 1 Pricing Strategies for Firms with Market Power 340 HEADLINE: Mickey Mouse Lets You Ride "for Free" at Disney World 340 INTRODUCTION 341 BASIC PRICING STRATEGIES 341 Review of the Basic Rule of Profit Maximization 341 A Simple Pricing Rule for Monopoly and Monopolistic Competition 342 A Simple Pricing Rule for Cournot Oligopoly 345 STRATEGIES THAT YIELD EVEN GREATER PROFITS 347 Extracting Surplus from Consumers 347 Price Discrimination 347 Two-Part Pricing 351 Block Pricing 354 Commodity Bundling 356 Pricing Strategies for Special Cost and Demand Structures 358 Peak-Load Pricing 358 Cross-Subsidies 359 Transfer Pricing 360 Contents Pricing Strategies in Markets with Intense Price Competition 362 Price Matching 362 Inducing Brand Loyalty 364 Randomized Pricing 364 ANSWERING THE HEADLINE 366 SUMMARY 366 / KEY TERMS AND CONCEPTS 367 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 367/ PROBLEMS AND APPLICATIONS 369 / SELECTED READINGS 371 INSIDE BUSINESS 11-1: Pricing Markups as Rules ofThumb 343 INSIDE BUSINESS 11-2: Is Price Discrimination Bad for Consumers? 352 INSIDE BUSINESS 11-3: Bundling and "Price Frames" in Online Markets 357 INSIDE BUSINESS 11-4: The Prevalence of Price-Matching Policies and Other Low-Price Guarantees 363 INSIDE BUSINESS 11-5: Kroger Combines Pricing Strategies 364 INSIDE BUSINESS 11-6: Randomized Pricing in the Airline Industry 365 CHARTER 12 The Economics of Information 372 HEADLINE: Firm Chickens Out in the FCC Spectrum Auction 372 INTRODUCTION 373 THE MEAN AND THE VARIANCE 373 UNCERTAINTY AND CONSUMER BEHAVIOR 375 Risk Aversion 375 Manageriai Decisions with Risk-Averse Consumers 376 Consumer Search 378 UNCERTAINTY AND THE FIRM 380 Risk Aversion 381 Producer Search 383 Profit Maximization 383 UNCERTAINTY AND THE MARKET 384 Asymmetrie Information 384 Adverse Seiection 386 Moral Hazard 387 Signaling and Screening 388 XXV AUCTIONS 390 Types of Auctions 391 English Auction 391 First-Price, Sealed-Bid Auction 391 Second-Price, Sealed-Bid Auction 392 Dutch Auction 392 Information Structures 393 Independent Private Values 393 Correlated Vaiue Estimates 394 Optimal Bidding Strategies for Risk-Neutral Bidders 394 Strategies for Independent Private Values Auctions 394 Strategies for Correlated Values Auctions 396 Expected Revenues in Alternative Types of Auctions 397 ANSWERING THE HEADLINE 399 SUMMARY 4001 KEY TERMS AND CONCEPTS 400 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 400/ PROBLEMS AND APPLICATIONS 402 / SELECTED READINGS 405 INSIDE BUSINESS 12-1: Risk Aversion and the Vaiue of Selling the Firm: The St. Petersburg Paradox 376 INSIDE BUSINESS 12-2: Obfuscation to Counter Low Internet Search Costs 379 INSIDE BUSINESS 12-3: Groucho Marx the Economist? 386 INSIDE BUSINESS 12-4: Second-Price Auctions on eBay 392 INSIDE BUSINESS 12-5: Auctions with Risk-Averse Bidders 399 CHARTER 13 Advanced Topics in Business Strategy 406 HEADLINE: Local Restaurateur Faces Looming Challenge from Morton's 406 INTRODUCTION 407 LIMIT PRICING TO PREVENT ENTRY 408 Theoretical Basis for Limit Pricing 408 Limit Pricing May Fail to Deter Entry 409 Linking the Preentry Price to Postentry Profits 410 Commitment Mechanisms 411 Learning Curve Effects 412 Incomplete Information 412 Reputation Effects 413 Dynamic Considerations 413 xxvi Contents PREDATORY PRICING TO LESSEN COMPETITION 415 RAISING RIVALS' COSTS TO LESSEN COMPETITION 417 Strategies Involving Marginal Cost 418 Strategies Involving Fixed Costs 419 Strategies for Vertically Integrated Firms 419 Vertical Foreclosure 420 The Price-Cost Squeeze 420 PRICE DISCRIMINATION AS A STRATEGIC TOOL 420 CHANGING THE TIMING OF DECISIONS OR THE ORDER OF MOVES 421 First-Mover Advantages 421 Second-Mover Advantages 423 PENETRATION PRICING TO OVERCOME NETWORK EFFECTS 424 What Is a Network? 424 Network Externalities 425 First-Mover Advantages Due to Consumer Lock-In 426 Using Penetration Pricing to "Change the Game" 427 ANSWERING THE HEADLINE 429 SUMMARY 429 / KEY TERMS AND CONCEPTS 430 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 430 / PROBLEMS AND APPLICATIONS 432 f SELECTED READINGS 434 INSIDE BUSINESS 13-1: Business Strategy at Microsoft 410 INSIDE BUSINESS 13-2: Limit Pricing and the "Southwest Effect" 415 INSIDE BUSINESS 13-3: First to Market, First to Succeed? Or First to Fail? 423 INSIDE BUSINESS 13-4: Network Externalities and Penetration Pricing by Yahoo! Auctions 427 CHARTER 14 A Manager's Guide to Government in the Marketplace 435 HEADLINE: FTC Conditionally Approves $10.3 Billion Merger 435 INTRODUCTION 436 MARKET FAILURE 436 Market Power 436 Antitrust Policy 437 Price Regulation 440 Externalities 444 The Clean Air Act 446 Public Goods 448 Incomplete Information 451 Rules against Insider Trading 452 Certification 452 Truth in Lending 453 Truth in Advertising 454 Enforcing Contracts 454 RENT SEEKING 455 GOVERNMENT POLICY AND INTERNATIONAL MARKETS 457 Quotas 457 Tariffs 459 Lump-Sum Tariffs 459 Excise Tariffs 460 ANSWERING THE HEADLINE 461 SUMMARY 461 / KEY TERMS AND CONCEPTS 461 / CONCEPTUAL AND COMPUTATIONAL QUESTIONS 462! PROBLEMS AND APPLICATIONS 464 / SELECTED READINGS 466 INSIDE BUSINESS 14-1: European Commission Movesto Protect Small Businesses 439 INSIDE BUSINESS 14-2: Electricity Deregulation 443 INSIDE BUSINESS 14-3: Canada's Competition Bureau 455 CASE STUDY Time Warner Cable 468 HEADLINE 468 BACKGROUND 469 Time Warner Cable History 469 Cable Television History 469 Broadband Internet 470 BUSINESS AND MARKETS 471 Video Programming 471 Internet Services 473 Telephone 473 COMPETITION 474 Cable Companies 474 Comcast 474 Comcast/Time Warner Cable Proposed Acquisition 475 Charter Communications 475 Other Cable Players 476 Contents Satellite 476 AT&T DirecTV 476 Dish Network 477 Telephone Providers 477 Verizon 477 AT&T 477 Other Companies 478 Online Video Distributors 478 Netflix 478 Amazon Prime Video 479 Hulu 479 Google/YouTube 479 SUPPLIERS 480 Cable Networks 480 Broadcast Networks 480 Sports Programming 481 Carriage Disputes 481 Over-the-Top Content 482 MARKET TRENDS AND CONSUMER BEHAVIOR 482 Digital Video Recorders (DVRs) 482 Cutting the Cord 483 Going Mobile 483 REGULATION IN THE CABLE INDUSTRY 483 Carriage of Broadcast Television 484 Cable Pricing Regulation 484 Net Neutrality 484 Connect America Fund 484 CHALLENGES 484 CASE-BASED EXERCISES 485 MEMOS 485 SELECTED READINGS AND REFERENCES 492 / APPENDIX: EXHIBITS 493 Glossary 497 Appendix Additional Readings and References 505 Name Index General Index 525 534 xxvii
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