BRIGHAM YOUNG UNIVERSITY
Managerial Economics 387
Economics of Strategy
Winter Semester, 2009
David J. Bryce, Ph.D.
Telephone:
422-2963
Strategy Group
Office:
571
TNRB
Department of Organizational Leadership and Strategy
email:
dbryce@byu.edu
Marriott School
Office Hours:
M, W, 11:00-12:00 p.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 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, production, 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.
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Learning Objectives
The ultimate objective of the course is for you to develop a solid foundation for competent strategic and
economic analysis. Developing good strategy for firms requires an analytical, problem-solving approach.
This course is designed to provide you with numerous economic tools in pursuit of this goal. As you
master the tools of economic analysis and how they apply to strategic problems, you will become skilled
at strategic reasoning and capable of assessing or developing good strategy in any business situation.
Following are specific learning objectives:
1. Acquire skill in applying the tools of economic analysis to management problems
2. Develop competent understanding of competitive environments, competitive rivalry, cost, entry,
and demand & supply
3. Develop strategic reasoning ability
4. Anticipate the likely effects of different strategies on company outcomes utilizing principles of
economic and strategic analysis
5. Communicate effectively, both orally and in writing, concerning economic concepts, models, and
analyses
6. Demonstrate team skills through active participation in group discussions and projects and the
assumption and exercise of responsibility in a collaborative mode
These learning objectives will be assessed through several different modes, including evaluations of class
participation, team member evaluations of team contribution, performance on midterm and final exams,
performance on group exercises and the group project, and demonstration of mastery of strategy
fundamentals and concepts.
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, BM498 (or BM 480), taken by all seniors at the Marriott School, formally introduces students to
the latter perspective, while touching lightly upon the former.
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 at least one of
the ways 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.
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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 that
will be available on blackboard. 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.
You are encouraged to work together in groups on class and case preparation. You must work together in
your groups on written group assignments (see below).
Course Materials
Required Text: Michael R. Baye, Managerial Economics and Business Strategy. Any optional readings
can be found on-line through the library website in the Business Source Premier database. To access these
articles, go to the library main website, select databases, and click on the Business Source Premier
database. Search by author and journal (usually Harvard Business Review).
Class presentations and select material: Available on Blackboard
Course Evaluation
1. Class Participation
2. Pop Quizzes
3. Mid-term Examination
5%
10%
20%
4. Group spreadsheet exercises (4)
10%
5. Group Project
25%
6. Final Examination
30%
Class Participation (5%)
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. To aid in skill development in this area, we will 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. Comments might 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.
Pop Quizzes (10%)
To assist in learning and to encourage preparation, I will administer “pop” quizzes at the beginning of
some class sessions. (There are usually 10-11 of these pop quizzes throughout the semester). Quizzes will
cover a problem or concept from a previous day’s material, or they may address material for the current
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day’s class (like chapter reading or homework). 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 will want to be certain that you can work correctly.
These problems will help you to assess whether you understand 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, the pop quiz offered in class may include a problem from the previous day’s
homework. You are encouraged to work on and discuss your homework with group members or other
classmates outside of class. Pop quizzes may be either individual or group based.
Group Spreadsheet Exercises (4) (10 %)
You will be responsible for completing four group exercises. These exercises are designed to provide you
with hands-on practice using tools and concepts from the course and are spreadsheet based. The Demand
Exercise asks you to plot a demand curve, compute elasticities, and make inferences from your findings.
The Economies of Scale exercise asks you to compute a scale-curve from a firm’s actual cost data. The
Profit Maximization exercise asks you to compute revenue and cost curves to find a firm’s profit
maximizing point. The Oligopoly exercise asks you to compute optimal pricing strategies for two local
rivals. You will submit a brief print-out (one per group) of the results of your analysis on the due dates for
the exercises.
Group Project (25%)
Each group will be responsible for preparing an analysis of a business situation using economic tools
from class. You will choose a strategic problem facing a firm (either actually or hypothetically) 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 Wednesday, February 11, in class. We will post-review the exam
on Wednesday, February 18. The mid-term exam will consist of multiple choice and short answer
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 in class 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 also include the application of economic
tools and thinking in the context of a case analysis.
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Detailed Course Outline and Contents
Session
Date
Module
MANEC 387
Topic
Case / Reading
Winter 2009
Suggested Homework
1
2
1/5
1/7
Intro
Course Overview
Strategy and Economics
Syllabus
Math Review (Blackboard)
(optional but encouraged) Michael
Porter, How Competitive Forces
Shape Strategy, Harvard Business
Review, 1979
3
1/12
Buyers &
Substitutes
Demand
Baye Ch. 2 (up to p. 45)
Ch 2 (4,5,15)
4
5
1/14
1/21
Elasticity
Case Analysis;
In-class spreadsheet exercise:
Demand
Baye Ch. 3 (up to p. 95)
Coca-Cola's New Vending Machine
(Blackboard); Bryce, Elasticity and
Revenue Maximization with
Exponents (Blackboard)
Ch 3 (1,2,3b,5,11)
6
1/26
Production and Cost
Baye Ch. 5
7
1/28
8
2/2
Ch 5 (4,5,10); Demand
exercise Due (1)
Draft Project Proposals
Due
Ch 2 (6,10)
Ch 6 (4,10);
9
2/4
10
2/9
11
12
Suppliers
In class spreadsheet exercise:
Economies of Scale
Supplier Power
Baye Ch. 2 (from p. 45)
Baye Ch. 6
Economies of Scale
exercise Due (2)
Bring examples to class to
turn in – 1 per group
2/11
Responding to Buyer, Supplier, and Read lecture notes prior to class
substitute Power
Responding to Buyer, Supplier, and
substitute Power; Midterm Preview
In-class Midterm Exam
Industry Structure I – Perfect
Competition
Midterm Post-Review
Industry Structure II – Monopoly
Baye Ch. 7
Baye Ch. 8 (to p. 278)
Ch 8 (2,9,10)
13
14
2/17
Rivalry
(Tues)
2/18
2/23
Baye Ch. 8 (from p. 278)
Ch 8 (4,5,12)
15
2/25
Simultaneous Games
Baye Ch. 10
16
17
18
19
3/2
3/4
3/9
3/11
Repeated Games
Sequential Games
Sequential Games continued
Industry Structure III - Oligopoly
Baye Ch. 10
Baye Ch. 10
Profit Maximization
Exercise due (3)
Ch 10 (2,10,15)
Ch 10 (6,7,17)
20
21
3/16
3/18
Entry
Industry Structure III - Oligopoly
Entry Barriers
22
23
24
25
26
27
3/23
3/25
3/30
4/1
4/6
4/8
---- No class - work on projects -------- No class - work on projects ----Group Project presentations
Group Project presentations
Group Project presentations
28
4/13
Review
Dynamics
Baye Ch. 9
Bryce, Rivalry in Oligopoly
(Blackboard)
Ch 9 (2,4,5,10)
Optional: Bryce and Dyer, Strategies Oligopoly Exercise due (4)
to Crack Well-Guarded Markets,
Harvard Business Review, 2007
Projects Due
Course and Final Exam Review
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