BRIGHAM YOUNG UNIVERSITY
Managerial Economics 387
Economics of Strategy
Fall Semester, 2004
David J. Bryce, Ph.D.
Telephone: 422-2963
Strategy Group
Office: 769 TNRB
Department of Organizational Leadership and Strategy
email: dbryce@byu.edu
Marriott School
Office Hours: MW 9:30-10:30 a.m.
________________________________________________________________________________
Course Description
The objective of this course is to help students learn how to use economics to create and exploit the conditions
of ‘imperfect competition’ to achieve superior profit performance for firms. This goal is a bit different from
what you would expect to find in a traditional economics course. Traditional economics tends to focus on
questions of economic welfare, efficiency, or social outcomes. In this course, we are instead concerned with
understanding how economic forces influence a specific firm’s performance and discovering how those forces
can be harnessed, leveraged, or exploited to improve the strategic prospects for the firm. The goal is to use
economic and strategic reasoning to discover how a firm may develop advantageous positions relative to
competitors and others who threaten profitability.
Drawing from industrial organization and micro economics, we will address a number of questions regarding
the structure of markets and how managers can strategically maneuver within this structure to improve firm
performance. For example, how can market power be secured relative to buyers, suppliers, or potential
entrants? How should a manager respond to the threat of a new rival entering its market? How should a firm
price its product, or select production quantities, or choose new markets for entry? How should a firm make
decisions under dynamic conditions in which rivals repeatedly react to the moves of the firm? We will learn
the economic tools and analytical techniques that are crucial to addressing these questions. These tools include
analysis of demand and supply, elasticity, transaction costs, and game theory, to name a few.
The perspective taken in this course is the perspective of the CEO or general manager who must manage the
many strategic issues facing the enterprise. Throughout the course, in both cases and class discussion, you will
apply your learning to business situations and place yourself in the decision making role of the CEO or general
manager. Thinking like a general manager is an important skill to develop early in your business education.
Even if your intended career is entirely within a functional discipline, your responsibilities will often require
you to provide inputs into the strategic management decisions of the general manager.
Course Content
Two fundamental approaches exist for strategic analysis. One is to take an external perspective of the context
in which the firm operates. The second is to take an internal perspective of the capabilities of the firm. This
course stresses the former perspective, while touching lightly upon the latter. The required course, BM499,
taken by all seniors at the Marriott School, formally introduces students to the latter perspective, while
touching lightly upon the former.
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The external environment impacts the firm in important ways. This happens through a number of ‘forces’ that
collectively define the structure of a firm’s industry. Forces we will examine in depth include customer power
and preferences, bargaining power of suppliers, the presence of product substitutes or complements, the threat
of new entrants, and the nature of competitive rivalry. We will use these five basic forces as a framework for
in-depth discussion of the economics facing the firm. These forces exist in every industry and help to define
the nature of competition. What is less well-understood, however, is what the manager can do about these
forces when they negatively impact the firm, or how the general manager can maneuver to use or enhance the
forces to the firm’s advantage. We will discuss a number of possible strategic responses or moves in these
situations that can be used by the strategizing manager to mitigate negative effects and instead create outcomes
that work in the firm’s favor. This is the sense in which the course goes beyond economics to contemplate
strategy.
My hope is that you will leave this course with a solid grasp of the economics of the firm and the various
strategic options available to the firm under a variety of economic conditions. I further hope that you will
develop insight into which strategic alternatives will have the greatest positive impact on the firm's strategic
future.
Strategy and Ethics
During our discussions we may encounter situations in which we discover important tensions that are worth
deeper exploration in the context of individual efforts to live high standards of ethical and moral behavior. I
encourage explicit discussion of these tensions when they arise. The business world repeatedly presents
opportunities for individuals to test their integrity, to challenge their moral stance, to choose actions that are
consistent or inconsistent with their character, values, or beliefs. I hope that this course can, in some small
way, help you prepare to weather such storms with your integrity intact. While the economic and strategic
situations we will discuss do not usually present ethical dilemmas, some may wonder what actions an “ethical
strategist” should take in a particular situation. Others may claim that “ethical strategist” is an oxymoron since
efforts to secure advantage relative to others are problematic in the first place. I encourage you to think
carefully about these issues as the class proceeds and reconcile your answers with your own values through
class discussion and personal reflection.
Course Format
During class sessions, we will cover economic and strategic concepts from the readings listed on the syllabus.
For each session, there will typically be a chapter reading from the textbook or a reading from Harvard
Business School—either a case or an article. During class we will cover the conceptual material to some extent
but spend much of the time discussing applications. Therefore, class preparation is an important aspect of the
course. Without adequate preparation, you may find that class lecture provides an insufficient discussion of the
material for which you will be responsible on exams.
Each student will join (or be assigned to) a group in the second week of the semester. Please be thinking about
who you would like to associate with in your groups during the first few class sessions. You are welcome and
even encouraged to work together in groups on class and case preparation, but this is your choice. However,
you must work together in your groups for the written group assignments (see below). Some groups may
prepare for every class together. Other groups may meet to prepare only some of the classes depending on the
needs of group members. Regardless of the approach you take, each individual must be prepared to answer
questions or to suggest and defend actions pertaining to the case or content of the class. Falling back on the
group in these circumstances, or providing support for your recommendations by appealing to the group’s work
in lieu of a reasoned response, e.g. “well, that’s what my group came up with,” is not acceptable.
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Course Materials
Required Text: Michael R. Baye, Managerial Economics and Business Strategy
Required Course Pack: Harvard Business School cases and articles
Class presentations and select material: Available on Blackboard and at
http://marriottschool.byu.edu/teacher/MANEC387/Bryce/ -- also accessible through the Students –
Courses – Manec 387 – Bryce link at http://marriottschool.byu.edu.
Course Evaluation
1. Class Participation
2. Pop Quizzes
3. Mid-term Examination
4. Group Write-ups (3)
5. Group Project
6. Final Examination
10%
10%
20%
10%
20%
30%
Class Participation (10%)
Success in the business world requires participants to express valuable ideas, in persuasive ways, in public, and
under pressure. Mastery of this ability is therefore fundamental to career success and an important part of
business education. Fortunately, to aid in skill development in this area, we can use the classroom setting to
mimic the corporate setting in which ideas are shared and debated. Effective participation is accomplished by
focused comments that develop insights that are not immediately discernable from the cases or readings and
that demonstrate mastery of reading and case materials. Avoid simple repetition of case or reading facts.
Comments might instead elucidate how a particular economic concept can be applied for benefit in a case or
application, or how substantive problems presented in a particular situation are made tractable by particular
approaches to thinking or analysis. Quality, not quantity of comments, is emphasized in class participation.
It is important to note that asking questions or clarifications of the professor about the material does not
“count” toward your class participation grade. This is not to say that questions are not useful to class
discussion. They are, especially if others need the same clarification. But asking questions does not substitute
for meaningful participation—such as making a useful comment that brings to light an important insight that is
not obvious to others.
Pop Quizzes (10%)
To assist in learning and to encourage preparation, I will administer “pop” quizzes at the beginning of some
class sessions. Quizzes will cover a problem or concept from a previous day’s material, or they may address
material for the current day’s class. We will typically grade them in class. I will drop two quizzes at the end of
the semester.
Some concepts are best mastered through hands-on practice. For each chapter that we cover in the textbook,
there are suggested problems listed that you may want to look at closely and be certain that you can work
correctly. These problems will help you to assess whether you are understanding the material; they will also
give you exposure to some of the types of questions that will appear on exams. As a general rule, I will not
collect homework; however, from time to time, the pop quiz offered in class may include a problem from the
previous day’s homework. You may freely work on and discuss your homework with group members or other
classmates outside of class, but quizzes are (generally) worked individually.
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Group Writeups (3) (10%)
You will be responsible for completing three group-based exercises or write-ups that are due on 9/15, 10/6, and
11/8 respectively. These exercises are designed to provide you with hands-on practice using tools and concepts
from the course. The first writeup is Part 1 of the Demand Exercise and the second writeup is Part 2 of the
Demand Exercise. The Demand Exercise asks you to plot a demand curve, compute elasticities, and make
inferences from your findings. The third exercise, Profit Maximization, asks you to compute revenue and cost
curves and compute a firm’s profit function. You will submit a brief write-up (one per group) of the results of
your analysis on the due dates for the exercises.
Group Project (20%)
Each group will be responsible for preparing an analysis of a case or economic situation. In your group, you
will choose a strategic problem facing an actual firm and then conduct economic and strategic analysis on that
problem. You will submit a 5-7 page report (plus exhibits) outlining your analysis and recommendations.
More details to follow during the semester.
Mid-term and Final Exam (20% and 30%)
The mid-term exam will be held on Monday, October 18, in class. We will review the exam a week later on
October 25. The mid-term will consist of multiple choice, short answer, and essay-type questions. It will test
your understanding of basic economic principles covered in the text but also ask you to apply concepts to reach
meaningful conclusions in several mini-case settings.
The final exam will be held at the official time outlined in the university final exam schedule. It will follow the
same basic format as the mid-term exam and will include the application of economic tools and thinking in the
context of a case analysis. Your final exam will take place in the classroom (120 TNRB) on Wednesday,
December 15, 2:30-5:30 p.m.
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Detailed Course Outline and Contents
Session Date
Module
1
8/30
Intro
2
9/1
Topic
Course Overview
Strategy and Economics
Holiday 9/6
No Class – Labor Day
3
4
5
9/8
9/13
9/15
6
7
9/20
9/22
8
9
9/27
9/29
10
10/4
11
10/6
12
10/11
13
10/13
Responding to the Threat of
Substitute Power
Case Analysis
14
10/18
Midterm Examination
15
16
17
10/20
10/25
10/27
Entrants
18
11/1
Rivalry
19
20
11/3
11/8
Industry Structure II
Industry Structure III
21
11/10
Information Economics
22 11/15
23 11/17
24 11/22
Holiday 11/24
25 11/29
26 12/1
27
12/6
28
12/8
Buyers
MANEC 387
Fall 2004
Reading
Suggested Problems
How Competitive Forces Shape
Strategy (Porter);
Math Review
Sources of Demand
Elasticity
Consumer Behavior
Baye Ch. 2 (up to p. 43)
Baye Ch. 3 (up to p. 82)
Baye Ch. 4
Responding to Buyer Power
Case Analysis
Coca-Cola's New Vending Machine
Suppliers Production and Cost
Supplier Power
Ch 2 (4,5,15)
Ch 3 (1,2,11)
Ch 4 (2,3,15)
Demand Exercise 1Due
Baye Ch. 5
Baye Ch. 2 (from p. 43)
Baye Ch. 6
Ch 5 (4,5,10)
Ch 2 (6,10)
Ch 6 (4,10)
Baye Ch. 3 (p. 82 - cross-price
elasticity)
Baye Ch. 4 (pp. 112-116 - MRS)
Locked-in (Varian and Shapiro)
Ch 3 (3.b,5)
Ch 4 (12)
Demand Exercise 2 Due
Responding to Supplier Power
Substitutes Threat of Substitutes
Bitter Competition: Nutrasweet vs.
HSC
Entry Barriers
Midterm Review
Responding to the Threat of
Entry
Increasing Returns and the New
World of Business (Arthur)
Industry Structure I
Ch 8 (2,9,10)
Baye Ch. 10
Baye Ch. 10
Ch 10 (2,15)
Ch 10 (6,7,17)
Ch 8 (4,5,12)
Ch 9 (2,4,5,10)
Profit Maximization
Exercise Due
Strategy and the new Economics of Group Project Proposals
Information (Evans and Wurster)
Due
Dynamics Simultaneous Games
Sequential Games
Entry Games
Thanksgiving Break
Review and Group Meetings
Case Analysis; Group Project
presentations
Group Project presentations
Review
Baye Ch. 7
Baye Ch. 8 (to p. 273)
Baye Ch. 8 (from p. 274)
Baye Ch. 9
Course Review
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Airbus A3XX: Building the World's
Largest Jet
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