The solution is in the problems The ability to recognize patterns, trends, and significant data is second nature to economists -- but you need to be trained to see these patterns through careful explanation, real-world examples, and a lot of problems. If you want to really understand microeconomics and to be able to interpret real-life markets, the solution lies in the process of working through problems and making discoveries. That's why hands-on problem solving plays such an essential role in Besanko and Braeutigam's Microeconomics, 2nd Edition. Learning-by-Doing problems show you how it's done. Each chapter features a number of worked examples that provide a step-by-step roadmap for setting up and solving numerical problems. Each Learning-by-Doing problem correlates to similar practice problems at the end of the chapter. End-of-chapter problems provide many opportunities to practice.

This Second Edition features many new problems (for a total of 20-25 problems per chapter). The problems range in level from easy to challenging and allow you to see the same topic from multiple angles. Fully worked solutions to a selection of these problems are included at the end of the text. Extensive real-world applications make microeconomics relevant. This edition features more than 100 applications throughout the book. These contemporary applications are all drawn from current events or recent microeconomics research, and make the abstract theory come alive. INTRODUCTION TO MICROECONOMICS.

ANALYZING ECONOMIC PROBLEMS. Is the New Economy Really New? 1.1 Why Study Microeconomics? 1.2 Three Key Analytical Tools. Constrained Optimization.

Microeconomics / Edition 5. And how they are applied in the field rely on Microeconomics. The 5th edition makes the material accessible.

Equilibrium Analysis. Comparative Statics. 1.3 Positive and Normative Analysis. LEARNING-BY-DOING EXERCISES. 1.1 Constrained Optimization: The Farmer's Fence. 1.2 Constrained Optimization: Consumer Choice. 1.3 Comparative Statics with Market Equilibrium in the U.S.

Market for Corn. 1.4 Comparative Statics with Constrained Optimization. DEMAND AND SUPPLY ANALYSIS. What Gives with the Price of Corn? 2.1 Demand, Supply, and Market Equilibrium. Demand Curves.

Supply Curves. Market Equilibrium. Shifts in Supply and Demand. 2.2 Price Elasticity of Demand. Elasticities along Specific Demand Curves. Price Elasticity of Demand and Total Revenue.

Determinants of the Price Elasticity of Demand. Market-Level versus Brand-Level Price Elasticities of Demand. 2.3 Other Elasticities. Income Elasticity of Demand. Cross-Price Elasticity of Demand. Price Elasticity of Supply.

2.4 Elasticity in the Long Run versus the Short Run. Greater Elasticity in the Long Run Than in the Short Run. Greater Elasticity in the Short Run Than in the Long Run.

2.5 Back-of-the-Envelope Calculations. Fitting Linear Demand Curves Using Quantity, Price, and Elasticity Information. Identifying Supply and Demand Curves on the Back of an Envelope. Identifying the Price Elasticity of Demand from Shifts in Supply. APPENDIX Price Elasticity of Demand along a Constant Elasticity Demand Curve. LEARNING-BY-DOING EXERCISES. 2.1 Sketching a Demand Curve.

2.2 Sketching a Supply Curve. 2.3 Calculating Equilibrium Price and Quantity.

2.4 Comparative Statics on the Market Equilibrium. 2.5 Price Elasticity of Demand. 2.6 Elasticities along Special Demand Curves. CONSUMER THEORY. CONSUMER PREFERENCES AND THE CONCEPT OF UTILITY. Why Do You Like What You Like? 3.1 Representations of Preferences.

Assumptions about Consumer Preferences. Ordinal and Cardinal Ranking. 3.2 Utility Functions. Preferences with a Single Good: The Concept of Marginal Utility. Preferences with Multiple Goods: Marginal Utility, Indifference Curves, and the Marginal Rate of Substitution.

Special Utility Functions. LEARNING-BY-DOING EXERCISES. 3.1 Marginal Utility.

3.2 Marginal Utility That Is Not Diminishing. 3.3 Indifference Curves with Diminishing MRSx,y. 3.4 Indifference Curves with Increasing MRSx,y. CONSUMER CHOICE. How Much of What You Like Should You Buy? 4.1 The Budget Constraint. How Does a Change in Income Affect the Budget Line?

How Does a Change in Price Affect the Budget Line? 4.2 Optimal Choice.

Using the Tangency Condition to Understand When a Basket Is Not Optimal. Finding an Optimal Consumption Basket. Two Ways of Thinking About Optimality. Corner Points. 4.3 Consumer Choice with Composite Goods.

Application: Coupons and Cash Subsidies. Application: Joining a Club. Application: Borrowing and Lending. Application: Quantity Discounts. 4.4 Revealed Preference.

Are Observed Choices Consistent with Utility Maximization? The Mathematics of Consumer Choice. LEARNING-BY-DOING EXERCISES. 4.1 Good News/Bad News and the Budget Line. 4.2 Finding an Interior Optimum. 4.3 Finding a Corner Point Solution. 4.4 Corner Point Solution with Perfect Substitutes.

4.5 Consumer Choice That Fails to Maximize Utility. 4.6 Other Uses of Revealed Preference.

THE THEORY OF DEMAND. Does It Pay To Raise Prices? 5.1 Optimal Choice and Demand. The Effects of a Change in Price. The Effects of a Change in Income. The Effects of a Change in Price or Income: An Algebraic Approach.

5.2 Change in the Price of a Good: Substitution Effect and Income Effect. The Substitution Effect.

The Income Effect. Income and Substitution Effects When Goods Are Not Normal. 5.3 Change in the Price of a Good: The Concept of Consumer Surplus. Understanding Consumer Surplus from the Demand Curve. Understanding Consumer Surplus from the Optimal Choice Diagram: Compensating Variation and Equivalent Variation. 5.4 Market Demand.

5.5 Network Externalities. 5.6 The Choice of Labor and Leisure. As Wages Rise, Leisure First Decreases, Then Increases. The Backward-Bending Supply of Labor. 5.7 Consumer Price Indices. LEARNING-BY-DOING EXERCISES.

5.1 A Normal Good Has a Positive Income Elasticity of Demand. 5.2 Finding a Demand Curve (No Corner Points). 5.3 Finding a Demand Curve (with a Corner Point Solution).

5.4 Finding Income and Substitution Effects Algebraically. 5.5 Income and Substitution Effects with a Price Increase. 5.6 Income and Substitution Effects with a Quasi-Linear Utility Function. 5.7 Consumer Surplus: Looking at the Demand Curve. 5.8 Compensating and Equivalent Variations with No Income Effect. 5.9 Compensating and Equivalent Variations with an Income Effect.

PRODUCTION AND COST THEORY. INPUTS AND PRODUCTION FUNCTIONS. Can They Make It Better And Cheaper? 6.1 Introduction to Inputs and Production Functions. 6.2 Production Functions with a Single Input. Total Product Functions.

Marginal and Average Product. Relationship Between Marginal and Average Product. 6.3 Production Functions with More Than One Input. Total Product and Marginal Product with Two Inputs. Economic and Uneconomic Regions of Production. Marginal Rate of Technical Substitution.

6.4 Substitutability among Inputs. Describing a Firm's Input Substitution Opportunities Graphically.

Elasticity of Substitution. Special Production Functions. 6.5 Returns to Scale. Returns to Scale versus Diminishing Marginal Returns. 6.6 Technological Progress. The Elasticity of Substitution for a Cobb--Douglas Production Function.

LEARNING-BY-DOING EXERCISES. 6.1 Deriving the Equation of an Isoquant.

6.2 Relating the Marginal Rate of Technical Substitution to Marginal Products. 6.3 Returns to Scale for a Cobb--Douglas Production Function. 6.4 Technological Progress. COSTS AND COST MINIMIZATION. What's Behind the Self-Service Revolution?

7.1 Cost Concepts for Decision Making. Opportunity Cost. Economic versus Accounting Costs. Sunk (Unavoidable) versus Nonsunk (Avoidable) Costs. 7.2 The Cost-Minimization Problem. Long Run Versus Short Run.

The Long-Run Cost-Minimization Problem. Isocost Lines. Graphical Characterization of the Solution to the Long-Run Cost-Minimization Problem.

Corner Point Solutions. 7.3 Comparative Statics Analysis of the Cost-Minimization Problem.

Comparative Statics Analysis of Changes in Input Prices. Comparative Statics Analysis of Changes in Output. Summarizing the Comparative Statics Analysis: The Input Demand Curves. The Price Elasticity of Demand for Inputs.

7.4 Short-Run Cost Minimization. Characterizing Costs in the Short Run. Cost Minimization in the Short Run. Comparative Statics: Short-Run Input Demand versus Long-Run Input Demand.

More Than One Variable Input with One Fixed Input. Advanced Topics in Cost Minimization. LEARNING-BY-DOING EXERCISES.

7.1 Using the Cost Concepts for a College Campus Business. 7.2 Finding an Interior Cost-Minimization Optimum. 7.3 Finding a Corner Point Solution with Perfect Substitutes. 7.4 Deriving the Input Demand Curve from a Production Function. 7.5 Short-Run Cost Minimization with One Fixed Input. 7.6 Short-Run Cost Minimization with Two Variable Inputs.

How Can HiSense Get a Handle on Costs? 8.1 Long-Run Cost Curves. Long-Run Total Cost Curve. How Does the Long-Run Total Cost Curve Shift When Input Prices Change?

Long-Run Average and Marginal Cost Curves. 8.2 Short-Run Cost Curves. Short-Run Total Cost Curve. Relationship Between the Long-Run and the Short-Run Total Cost Curves. Short-Run Average and Marginal Cost Curves. Relationships Between the Long-Run and the Short-Run Average and Marginal Cost Curves. 8.3 Special Topics in Cost.

Economies of Scope. Economies of Experience: The Experience Curve.

8.4 Estimating Cost Functions. Constant Elasticity Cost Function. Translog Cost Function. Shephard's Lemma and Duality.

LEARNING-BY-DOING EXERCISES. 8.1 Finding the Long-Run Total Cost Curve from a Production Function. 8.2 Deriving Long-Run Average and Marginal Cost Curves from a Long-Run Total Cost Curve.

8.3 Deriving a Short-Run Total Cost Curve. 8.4 The Relationship Between Short-Run and Long-Run Average Cost Curves. PERFECT COMPETITION.

PERFECTLY COMPETITIVE MARKETS. How Many Roses Should a Rose Grower Grow? 9.1 What Is Perfect Competition? 9.2 Profit Maximization by a Price-Taking Firm. Economic Profit versus Accounting Profit. The Profit-Maximizing Output Choice for a Price-Taking Firm.

9.3 How the Market Price Is Determined: Short-Run Equilibrium. The Price-Taking Firm's Short-Run Cost Structure. Short-Run Supply Curve for a Price-Taking Firm When All Fixed Costs Are Sunk. Short-Run Supply Curve for a Price-Taking Firm When Some Fixed Costs Are Sunk and Some Are Nonsunk. Short-Run Market Supply Curve.

Short-Run Perfectly Competitive Equilibrium. Comparative Statics Analysis of the Short-Run Equilibrium. 9.4 How the Market Price Is Determined: Long-Run Equilibrium. Long-Run Output and Plant-Size Adjustments by Established Firms. The Firm's Long-Run Supply Curve. Free Entry and Long-Run Perfectly Competitive Equilibrium.

Long-Run Market Supply Curve. Constant-Cost, Increasing-Cost, and Decreasing-Cost Industries. What Does Perfect Competition Teach Us? 9.5 Economic Rent and Producer Surplus. Economic Rent. Producer Surplus. Economic Profit, Producer Surplus, Economic Rent.

Profit Maximization Implies Cost. LEARNING-BY-DOING EXERCISES. 9.1 Deriving the Short-Run Supply Curve for a Price-Taking Firm.

9.2 Deriving the Short-Run Supply Curve for a Price-Taking Firm with Some Nonsunk Fixed Costs. 9.3 Short-Run Market Equilibrium.

9.4 Calculating a Long-Run Equilibrium. 9.5 Calculating Producer Surplus. CHAPTER 10 COMPETITIVE MARKETS: APPLICATIONS. Is Support a Good Thing? 10.1 Introduction. 10.2 The Invisible Hand. 10.3 Excise Taxes.

Incidence of a Tax. 10.4 Subsidies. 10.5 Price Ceilings (Maximum Price Regulation). 10.6 Price Floors (Minimum Price Regulation). 10.7 Production Quotas. 10.8 Price Supports in the Agricultural Sector.

Acreage Limitation Programs. Government Purchase Programs.

10.9 Import Quotas and Tariffs. LEARNING-BY-DOING EXERCISES. 10.1 Impact of an Excise Tax.

10.2 Impact of a Subsidy. 10.3 Impact of a Price Ceiling. 10.4 Impact of a Price Floor. 10.5 Comparing the Impact of an Excise Tax, a Price Floor, and a Production Quota. 10.6 Effects of an Import Tariff. MARKET POWER.

MONOPOLY AND MONOPSONY. How Do Firms Play Monopoly? 11.1 Profit Maximization by a Monopolist.

The Profit-Maximization Condition. A Closer Look at Marginal Revenue: Marginal Units and Inframarginal Units. Average Revenue and Marginal Revenue.

The Profit-Maximization Condition Shown Graphically. A Monopolist Does Not Have a Supply Curve. 11.2 The Importance of Price Elasticity of Demand.

Price Elasticity of Demand and the Profit-Maximizing Price. Marginal Revenue and Price Elasticity of Demand.

Marginal Cost and Price Elasticity of Demand: The Inverse Elasticity Pricing Rule. The Monopolist Always Produces on the Elastic Region of the Market Demand Curve. The IEPR Applies Not Only to Monopolists. Quantifying Market Power: The Lerner Index. 11.3 Comparative Statics for Monopolists. Shifts in Market Demand. Shifts in Marginal Cost.

11.4 Multiplant Monopoly. Output Choice with Two Plants. Profit Maximization by a Cartel. 11.5 The Welfare Economics of Monopoly. The Monopoly Equilibrium Differs from the Perfectly Competitive Equilibrium. Monopoly Deadweight Loss. Rent-Seeking Activities.

11.6 Why Do Monopoly Markets Exist? Natural Monopoly. Barriers to Entry. 11.7 Monopsony. The Monopsonist's Profit-Maximization Condition.

An Inverse Elasticity Pricing Rule for Monopsony. Monopsony Deadweight Loss. LEARNING-BY-DOING EXERCISES. 11.1 Marginal and Average Revenue for a Linear Demand Curve. 11.2 Applying the Monopolist's Profit-Maximization Condition.

11.3 Computing the Optimal Monopoly Price for a Constant Elasticity Demand Curve. 11.4 Computing the Optimal Monopoly Price for a Linear Demand Curve. 11.5 Computing the Optimal Price Using the Monopoly Midpoint Rule. 11.6 Determining the Optimal Output, Price, and Division of Production for a Multiplant Monopolist. 11.7 Applying the Monopsonist's Profit-Maximization Condition. CAPTURING SURPLUS.

Why Did Your Ticket Cost So Much Less Than Mine? 12.1 Capturing Surplus. 12.2 First-Degree Price Discrimination: Making the Most from Each Consumer. 12.3 Second-Degree Price Discrimination: Quantity Discounts. Block Pricing.

Subscription and Usage Charges. 12.4 Third-Degree Price Discrimination: Different Prices for Different Market Segments.

Two Different Segments, Two Different Prices. 12.5 Tying (Tie-In Sales). Mixed Bundling. 12.6 Advertising.

LEARNING-BY-DOING EXERCISES. 12.1 Capturing Surplus: Uniform Pricing versus First-Degree Price Discrimination. 12.2 Where Is the Marginal Revenue Curve with First-Degree Price Discrimination?

12.3 Increasing Profits with a Block Tariff. 12.4 Third-Degree Price Discrimination in Railroad Transport. 12.5 Third-Degree Price Discrimination for Airline Tickets. 12.6 Markup and Advertising-to-Sales Ratio. IMPERFECT COMPETITION AND STRATEGIC BEHAVIOR CHAPTER 13.

MARKET STRUCTURE AND COMPETITION. Is Competition Always the Same? If Not, Why Not? 13.1 Types of Market Structures. 13.2 Oligopoly with Homogeneous Products.

The Cournot Model of Oligopoly. The Bertrand Model of Oligopoly. Why Are the Cournot and Bertrand Equilibria Different?

The Stackelberg Model of Oligopoly. 13.3 Dominant Firm Markets. 13.4 Oligopoly with Horizontally Differentiated Products. What Is Product Differentiation? Bertrand Price Competition with Horizontally Differentiated Products. 13.5 Monopolistic Competition.

Short-Run and Long-Run Equilibrium in Monopolistically Competitive Markets. Price Elasticity of Demand, Margins, and Number of Firms in the Market. Do Prices Fall When More Firms Enter? APPENDIX The Cournot Equilibrium and the Inverse Elasticity Pricing Rule.

LEARNING-BY-DOING EXERCISES. 13.1 Computing a Cournot Equilibrium.

13.2 Computing the Cournot Equilibrium for Two or More Firms with Linear Demand. 13.3 Computing a Bertrand Equilibrium with Horizontally Differentiated Products. CHAPTER 14 GAME THEORY AND STRATEGIC BEHAVIOR. What's in a Game? 14.1 The Concept of Nash Equilibrium.

A Simple Game. The Nash Equilibrium. The Prisoners' Dilemma. Dominant and Dominated Strategies. Games with More Than One Nash Equilibrium. Mixed Strategies.

Summary: How to Find All the Nash Equilibria in a Simultaneous-Move Game with Two Players. 14.2 The Repeated Prisoners' Dilemma. 14.3 Sequential-Move Games and Strategic Moves. Analyzing Sequential-Move Games. The Strategic Value of Limiting One's Options.

LEARNING-BY-DOING EXERCISES. Expired Drivers License Army Counseling For Being Late more. 14.1 Finding the Nash Equilibrium: Coke versus Pepsi. 14.2 Finding All of the Nash Equilibria in a Game. 14.3 An Entry Game.

SPECIAL TOPICS. RISK AND INFORMATION. What Are My Chances of Winning? 15.1 Describing Risky Outcomes. Lotteries and Probabilities.

Expected Value. 15.2 Evaluating Risky Outcomes. Utility Functions and Risk Preferences.

Risk-Neutral and Risk-Loving Preferences. 15.3 Bearing and Eliminating Risk. Risk Premium. When Would a Risk-Averse Person Choose to Eliminate Risk? The Demand for Insurance. Asymmetric Information in Insurance Markets: Moral Hazard and Adverse Selection. 15.4 Analyzing Risky Decisions.

Decision Tree Basics. Decision Trees with a Sequence of Decisions. The Value of Information. 15.5 Auctions. Types of Auctions and Bidding Environments. Auctions When Bidders Have Private Values. Auctions When Bidders Have Common Values: The Winner's Curse.

LEARNING-BY-DOING EXERCISES. 15.1 Computing the Expected Utility for Two Lotteries for a Risk-Averse Decision Maker. 15.2 Computing the Expected Utility for Two Lotteries: Risk-Neutral and Risk-Loving Decision Makers. 15.3 Computing the Risk Premium from a Utility Function. 15.4 The Willingness to Pay for Insurance. 15.5 Verifying the Nash Equilibrium in a First-Price Sealed-Bid Auction with Private Values.

GENERAL EQUILIBRIUM THEORY. How Do Things Balance Out? 16.1 General Equilibrium Analysis: Two Markets. 16.2 General Equilibrium Analysis: Many Markets. The Origins of Supply and Demand in a Simple Economy. The General Equilibrium in Our Simple Economy.

16.3 General Equilibrium Analysis: Comparative Statics. 16.4 The Efficiency of Competitive Markets. What Is Economic Efficiency?

Exchange Efficiency. Input Efficiency. Substitution Efficiency. Pulling the Analysis Together: The Fundamental Theorems of Welfare Economics. 16.5 Gains from Free Trade. Free Trade Is Mutually Beneficial.

Comparative Advantage. Deriving the Demand and Supply Curves for General Equilibrium in Figure 16.9 and Learning-By-Doing Exercise 16.2. LEARNING-BY-DOING EXERCISES. 16.1 Finding the Prices at a General Equilibrium with Two Markets. 16.2 Finding the Conditions for a General Equilibrium with Four Markets.

EXTERNALITIES AND PUBLIC GOODS. When Does the Invisible Hand Fail? 17.1 Introduction. 17.2 Externalities. Negative Externalities and Economic Efficiency. Positive Externalities and Economic Efficiency. Property Rights and the Coase Theorem.

17.3 Public Goods. Efficient Provision of a Public Good. The Free Rider Problem.

LEARNING-BY-DOING EXERCISES. 17.1 The Efficient Amount of Pollution. 17.2 Emissions Fee.

17.3 The Coase Theorem. 17.4 Optimal Provision of a Public Good.

Mathematical Appendix. Solutions to Selected Problems. Photo Credits. Ps3 Emulator Download No Survey.

Professor David Besanko is IBM Professor of Regulation & Competitive Practices at the Kellogg School of Management at Northwestern University. Besanko is a Kellogg graduate, having received his Ph.D. In Managerial Economics and Decision Sciences in 1981. He received his AB in Political Science from Ohio University in 1977.

Before joining the Kellogg faculty in 1991, Professor Besanko was a member of the faculty of the School of Business at Indiana University from 1982 to 1991. In addition, in 1985, he held a post-doctorate position on the Economics Staff at Bell Communications Research.

Professor Besanko teaches courses in Microeconomics and Competitive Strategy. In 1995, 2010, and 2016, the graduating class at Kellogg awarded Professor Besanko the L.G. Lavengood Professor of the Year, the highest teaching honor a faculty member at Kellogg can receive. In 2015 Professor Besanko received the Faculty Pioneer Award from the Aspen Institute's Business and Society Program (dubbed the 'Oscar of the business school world' by the Financial Times).

He was a finalist for that award in 2013. At the Kellogg School, Professor Besanko has received the Sidney J. Levy Teaching Award (1998, 2000, 2011, 2013), the Chair's Core Teaching Award (1999, 2001, 2003, 2005), and the Faculty Certificate of Impact (2009, 2010, 2011, 2012, 2013, 2015, 2016, 2017). End Professor Besanko research covers topics relating to industry dynamics, competitive strategy, industrial organization, the theory of the firm, and economics of regulation. He has received grants from the National Science Foundation and from the Citicorp Behavioral Science Research Council to support this research. He is a member of the editorial boards of The Journal of Regulatory Economics, Business and Politics and Quantitative Marketing and Economics. He has over 50 articles published and forthcoming in leading professional journals in economics and business.

Among other places, his work has appeared in the American Economic Review, the Quarterly Journal of Economics, the RAND Journal of Economics, the Review of Economic Studies, The Journal of Law and Economics, and Management Science. Along with David Dranove, Mark Shanley and Scott Schaefer, Professor Besanko is a co-author of Economics of Strategy, a widely used textbook in MBA courses on strategic management and competitive strategy. His textbook Microeconomics with Ron Braeutigam is now in its fifth edition. Professor Besanko served as the chair of the Department of Management and Strategy from 1992 through 1996. During the academic year 2000-2001, he chaired the search committee to identify the new Kellogg dean.

From 2001 to 2003, he served as Kellogg's Senior Associate Dean for Curriculum and Teaching, and from 2007 to 2009 he served as Senior Associate Dean for Strategy and Planning. This paper compares alternative ways of structuring competition in a railway system: vertical separation (VS) and horizontal separation (HS). We compare each structure in terms of its impact on network quality, consumer surplus and social welfare. To do so, we use a two-stage game under HS and a three-stage game under VS to derive Nash equilibrium network qualities, consumer surplus and social welfare, respectively. We highlight four distinct incentive effects that shape network quality under each structure, and we point out that, on balance, they tend to favor higher network quality under HS. However, intensity of transport service competition under each system also plays a critical role in shaping consumer surplus and social welfare.

The best case for HS occurs when there is a moderate amount of price competition between the vertically integrated systems, while the best case for VS occurs when there is intense price competition between transport operators. Using computational analysis, we show that it is more likely that HS dominates VS on all three performance metrics. This paper analyzes the relationship between network quality and organizational structure in railway systems. We consider two options: vertical separation and horizontal separation. We derive the Nash equilibrium network qualities in a two-stage game.

In general, the comparison of network quality between the two organizational structures is ambiguous. However, unless the regulated access fee under vertical separation is sufficiently large, horizontal separation is likely to dominate vertical separation. This is reinforced if horizontal separation enables service complementarities.

Learning-by-doing and organizational forgetting have been shown to be important in a variety of industrial settings. This paper provides a general model of dynamic competition that accounts for these economic fundamentals and shows how they shape industry structure and dynamics. Previously obtained results regarding the dominance properties of firms' pricing behavior no longer hold in this more general setting. We show that organizational forgetting does not simply negate learning-by-doing.

Rather, learning-by-doing and organizational forgetting are distinct economic forces. In particular, a model with both learning-by-doing and organizational forgetting can give rise to aggressive pricing behavior, market dominance, and multiple equilibria, whereas a model with learning-by-doing alone cannot. Even mature industries seldom settle down into a long-run steady state. Fluctuations in demand disrupt the status quo and call for firms to adjust their capacities on an ongoing basis.

We construct a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment decisions. In addition to uncertainty about the evolution of demand, a firm faces strategic uncertainty concerning the decisions of its rivals. We numerically solve the model for its Markov-perfect equilibria. For one set of parameter values, three equilibria exist, and while all of them have simple, intuitive structures, they exhibit widely varying patterns of response to demand shocks. At one extreme, one firm dominates the industry almost as a monopolist and changes its capacity to accommodate demand. At the other extreme, the larger firm keeps its capacity nearly constant while the smaller firm acts as the swing producer.

Capacity addition and withdrawal decisions are among the most important strategic decisions made by firms in oligopolistic industries. In this paper, we develop and analyze a fully dynamic model of an oligopolistic industry with lumpy capacity and lumpy investment/disinvestment. We use our model to answer two questions. First, what economic factors facilitate preemption races? Second, what economic factors facilitate capacity coordination? We show that low product differentiation, low investment sunkness, and high depreciation promote preemption races.

We also show that low product differentiation and low investment sunkness promote capacity coordination. Although depreciation removes capacity, it may impede capacity coordination.

Finally, we show that, at least over some range of parameter values, firms' expectation plays a key role in determining whether or not industry dynamics are characterized by preemption races and capacity coordination. Taken together, our results suggest that preemption races and excess capacity in the short run often go hand-in-hand with capacity coordination in the long run. Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk and variable costs, leading to distorted pricing decisions. This paper investigates the extent to which market forces and learning eventually eliminate these distortions.

We envision firms that experiment with cost methodologies that are consistent with real-world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk costs to pricing decisions. Firms follow 'naive' adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies.

Costing and pricing practices that increase profits are reinforced. In some market structures, but not in others, this process of reinforcement causes pricing practices of all firms to systematically depart from standard equilibrium predictions. In this paper we describe the pass-through behavior of a major U.S. Supermarket chain for 78 products across 11 categories. Our data set includes retail prices and wholesale prices for stores in 15 retail price zones for a one-year period. For the empirical model, we use a reduced-form approach that focuses directly on equilibrium prices as a function of exogenous supply- and demand-shifting variables.

The reduced-form approach enables us to identify the theoretical pass-through rate without specific assumptions about the form of consumer demand or the conduct of a category-pricing manager. Thus, our measurements of pass-through are not constrained by specific structure on the underlying economic model.

The empirical pricing model includes costs of all competing products in the category on the right-hand side (not only the cost of the focal brand) and yields estimates of both own-brand and cross-brand pass-through rates. Our results provide a rich picture of the retailer's pass-through behavior. We find that pass-through varies substantially across products and across categories. Own-brand pass-through rates are, on average, more than 60% for 9 of 11 categories, a finding that is at odds with the claims of manufacturers about retailers in general. Importantly, we find substantial evidence of cross-brand pass-through effects, indicating that retail prices of competing products are adjusted in response to a change in the wholesale price of any given product in the category. We find that cross-brand pass-through rates are both positive and negative.

We explore determinants of own-brand and cross-brand pass-through rates and find strong evidence in multiple categories of asymmetric retailer response to trade promotions on large versus small brands. For example, brands with larger market shares, and brands that contribute more to retailer profits in the category, receive higher pass-through. We also find that trade promotions on large brands are less likely than small brands to generate positive cross-brand pass-through, i.e., induce the retailer to reduce the retail price of competing smaller products. On the other hand, small share brands are disadvantaged along three dimensions. Trade promotions on small brands receive low own-brand pass-through and generate positive cross-brand pass-through for larger competing brands. Moreover, small share brands do not receive positive cross pass-through from trade promotions on these larger competitors. We also find that store brands are similarly disadvantaged with respect to national brands.

Empirical evidence suggests that there are substantial and persistent differences in the sizes of firms in most industries. We propose a dynamic model of capacity accumulation that is consistent with the observed facts. The model highlights the mode of product market competition and the extent of investment reversibility as key determinants of the size distribution of firms in an industry. In particular, if firms compete in prices and the rate of depreciation is large, then the industry moves toward an outcome with one dominant firm and one small firm. Industry dynamics in this case resemble a preemption race.

Contrary to the usual intuition, this preemption race becomes more brutal as investment becomes more reversible. This paper studies organizational structure and incentives within a company, Citibank, that has an explicit and evolving global business strategy. The paper focuses on Citibank's corporate banking business, which in the mid-1990's underwent major changes in its strategy that, in turn, were accompanied by two major reorganizations and implementations of a new incentive compensation system. Citibank's corporate banking business in OECD markets moved froma geography-based organization to one that was multi-dimensional, with the customer dimension given first priority, the product dimension given second priority, and the geography dimension significantly de-emphasized. Citibank thus represents an excellent setting for examining the interplay among strategy and organizational structure in a complex, global company. This paper analyzes electric utility stock price reactions to events preceding the passage of the Energy Policy Act of 1992, a development that precipitated the onset of competition in the wholesale sector of the electric utility industry and accelerated the pace toward state-level deregulation of the retail sector. For the industry as a whole, we find that, at worst, investors had neutral reactions to events preceding wholesale deregulation.

However, stock price reactions vary systematically with differences in incumbent utilities' marginal costs, though not with differences in fixed costs or purchased power costs. These results are consistent with the notino that new technologies have substantially reduced barriers to entry into the electric power generation industry, rendering capital cost advantages of incumbent utilities vulnerable to being neutralized by new entrants. However, marginal cost advantages are more likely to be sustainable because they are likely to be driven by inimitable locational advantages. This paper provides an empirical investigation of how firms with cost advantages (cost disadvantages) exploit (cope with) their advantages (disadvantages) through their pricing behavior. Guided by microeconomic theory and insights from the industrial organization literature, we develop testable implications about the effect of industry structure and firm-specific characteristics on the pass-through elasticity: The rate at which changes in a firm's cost relative to competitors translates into changes in the firm's price relative to competitors. We test these implications using data from the PIMS Competitive Strategy database. The results indicate that a firm's pass-through elasticity systematically depends on whether the firm operates in a commodity or noncommodity industry, the firm's capacity utilization, and its cost and quality position in its industry.

The pass-through elasticity is also shown to depend in a nonlinear way on market concentration. An informational alliance involves the consolidation of the private information of independent suppliers in anticipation of a contracting opportunity with a principal.

An informational alliance is an intermediate form of organization between the consolidation of information as in a merger and the suppliers remining separate entities. It can Pareto dominate a merger, independent contracting, and hierarchical contracting, so a principal can benefit by allowing suppliers to organize the supply network. An informational alliance forms at the nexus of internally-verifiable private information. The principal's contracting problem then involves a participation condition with a reservation value that is a function of type. Discrete choice models of demand have typically been estimated assuming that prices are exogenous. Since unobservable (to the researcher) product attributes, such as coupon availability, may impact consumer utility as well as price setting by firms, we treat prices as endogenous. Specifically, prices are assumed to be the equilibrium outcomes of Nash competition among manufacturers and retailers.

To empirically validate the assumptions, we estimate logit demand systems jointly with equilibrium pricing equations for two product categories using retail scanner data and cost data on factor prices. In each category, we find statistical evidence of price endogeneity. We also find that the estimates of the price response parameter and the brand-specific constants are generally biased downward when the endogeneity of prices is ignored. Our framework provides explicit estimates of the value created by a brand, i.e., the difference between consumers' willingness to pay for a brand and its cost of production. We develop theoretical propositions about the relationship between value creations and competitive advantage for logit demand systems and use our empirical results to illustrate how firms use alternative value creation strategies to accomplish competitive advantage. We show that in an imperfect information environment the equity value of an impaired bank may increase or decrease when it is required to meet a capital standard. Regardless of the change in the bank's equity value, however, its stock price will fall in response to a forced recapitalization, consistent with recent empirical evidence.

Simulations of our model suggest that this stock price decline is likely to be larger the smaller is the share of ownership held by the managers of the bank, also consistent with recent empirical evidence in the literature. Our model further predicts a rise in bank's non-interest expenses following a required recapitalization. Given the increase in the regulator's exposure that would accompany a reduction in the bank's market value of equity, the regulator may choosenotto enforce the regulation. Hence, capital regulation may be time-inconsistent in this situation and consequently not have its intended risk-mitigating incentives. This paper analyzes exclusive dealing in a model with band differentiation by manufacturers and spatial differentiation by retailers.

Exclusive dealing is shown to generate higher profits for manufacturers, who thus have an incentive to insist on exclusive dealing. Exclusive dealing also results in higher prices and higher transportation costs for consumers. However, exclusive dealing may still increase total surplus because it reduces the fixed costs of retailing. If so, the comparision with non-exclusive dealing becomes difficult because these lower fixed costs induce entry of additional retailers, reducing the retail margin and consumer's transportation costs. Numerical analysis suggests that total surplus is likely to increase with exclusive dealing when there are substantial reduction in the fixed costs of retailing. We conside the incentives for oligopolistic manfacturers to adopt exclusive dealing.

Manufacturers producing differentiated brands can choose to distribute through exclusive retail dealerships or nonexclusive dealerships. With nonexclusive dealing, manufacturers face an interbrand externality because brand-enhancing investments made by one manufacturer may benefit the brands of other manufacturers. Although exclusive dealing eliminates this externality, oligopolistic manufacturers may not choose exclusive dealing. Exclusive dealing eliminates this externality, oligopolistic manfacturers may not choose exclusive dealing.

Exclusive dealing enhances the incentive to invest, but the promotional investments are a form of competition between manufacturers. Thus, manufacturers might earn higher profits with nonexclusive dealing making lower promotional investments. We find cases in which nonexclusive dealing is a dominant strategy. We also find cases in which some, but not all, manufacturers adopt exclusive dealing.

Moreover, even if adoption of exclusive dealing by all manufacturers is the equilibrium, it can arise from a prisoner's dilemna in that each manufacturer would prefer nonexclusive dealing. This paper analyzes the economics of contemporaneous most-favored customer clauses (MFCC) in a non-cooperative n-firm oligopoly. In the first stage of a two-stage game, each firm indepedently decided whether to adopt MFCC; in the second stage, firms set prices non-cooperatively, given the first stage choices. In contrast to work on retroactive MFCC by Cooper [The RAND Journal of Economics (1986, 17, 37-388)], our analysis shows that not adopting MFCC can be a dominant strategy. The difference between our results and Cooper's highlights important differences between retroactive and contemporaneous MFCC and suggests that MFCC are a less powerful facilitating practice than retroactive MFCC. Our analysis also sheds new light on Grether and Plott's [Economic Inquiry (1984, 22, 497-507)] experimental results regarding the effects of MFCC on average industry prices. Although the Guidelines should improve the predictability of the Agency's merger enforcement policy, it is not possible to remove the exercise of judgement from the evaluation of mergers under the antitrust laws.

Because the specific standards set forth in the Guidelines must be applied to a broad range of possible factual circumstances, mechanical application of those standards may provide misleading answers to the economic questions raised under the antitrust laws. Moreover, information is often incomplete and the picture of competitive conditions that develops from historical evidence may provide an incomplete answer to the forward-looking inquiry of the Guidelines. Therefore, the Agency will apply the standards of the Guidelines reasonably and flexibly to the particular facts and circumstances of each proposed merger.

This paper investigates how a designer of an organization (referred to as the regulator) should organize a production activity in which two different units produce components and where each unit has private information about its costs. Three organizational structures are analyzed. In the first (informational consolidation), the regulator contracts with a consolidated unit that produces both components. In the second (informational decentralization) the regulator independently contracts with the producer of each component. In the third (informational delegation), the regulator contracts with one of the units, which in turn subcontracts with the other.

In each case, the regulator's optimal mechanism consisting of payment and output schedules is fully characterized. Informational consolidation and informational decentralization yield different output schedules. Under informational decentralization, the optimal output schedule may not depend on the sum of the marginal costs of each component, but when it does, the regulator strictly prefers informational consolidation to informational decentralization.

Informational delegation is shown to be equivalent to informational decentralization when the regulator can observe the contracting between the units. We examine the investment decisions of regulated firms in a sequential-equilibrium model under asymmetric information.

The regulator is unable to commit to a pricing policy, unlike meachanism-design models, but sets rates after observing the firm's investment. The information conveyed by the firm's investment level alleviates the underinvestment observed under full information with limited regulatory commitment. The equilibrium regulatory strategy can be characterized by a nonlinear rate-of-return schedule. A regulator announcing such a schedule would be able to make a credible commitment. We present an equilibrium analysis to predict the long-run allocational consequences and risk implications of banking deregulation. Loan demand and deposit supply functions are derived from primitive assumptions about the preferences of individuals, and banks are viewed as (differentiated) competitors in a spatial context. We find that a relaxation of entry barriers into banking improves the welfare of borrowers and savers at the expense of bank stockholders.

Equilibrium loan interest rates fall and equilibrium deposit interest rates rise as banking becomes more competitive. Despite this, the equilibrium debt-equity ratios of banks increase as entry barriers are relaxed.

We also examine the implications of capital standards and find that an increase in the minimum capital requirement benefits borrowers but hurts depositors. Consider a company whose customers may purchase annual (or periodic) updates of the product (the book of the year for an encyclopedia, for example).

We determine how the profitability of the update affects the price of the company's main product (the encyclopedia). Our major result is that the product's price should be more than the myopic price if and only if the profitability of the update is less than the profitability per potential customer. We also show that an increase in the profitability of the update decreases the price of the product, and we derive several other sensitivity results. Two manufacturers distribute their brands through exclusive retail dealers, and must compete for consumers indirectly by inducing retailers to carry their brands. We compare equilibrium outcomes with and without resale price maintenance. Maximum RPM lowers the retail price if manufacturers cannot employ franchise fees. Minimum RPM raises the retail price if manufacturers cannot set a wholesale price above marginal cost and must employ only a franchise fee.

However, these traditional insights are reversed if manufacturers can set both a wholesale price and a franchise fee in the equilibrium without RPM. This paper studies transfer prices and compensation mechanisms in a principal-agent model with moral hazard and private information by the agent.

Production requires unobservable effort by the agent and a purchased input. In general it is optimal for the principal to create an internal market for the input and charge the agent a tax or subsidy which differs from the market price. Conditions are found under which the optimal compensation function is given by the difference between a nonlinear 'revenue' function depending only on output and a nonlinear transfer pricing function which depends only on the amount of the purchased input. A sequential equilibrium model of private antitrust enforcement is presented. Consumers have incomplete information about cartel costs and cannot accurately estimate a priori the damage recovery from an antitrust action. Consumers are able to infer cartel costs from the equilibrium pricing strategy of firms.

The universal divinity criterion is used to characterize the sequential equilibrium. It is shown that for a sufficiently large damage multiple, antitrust enforcement effectively increases social welfare.

This paper considers the intertemporal pricing problem for a monopolist marketing a new product. The key feature differentiating this paper from the extant management science literature on intertemporal pricing is the assumption that consumers are intertemporal utility maximizers.

A subgame perfect Nash equilibrium pricing policy is characterized and shown to involve intertemporal price discrimination. We compare this policy to the optimal policy for a monopolist facing myopic consumers and find that for any given state, prices are always lower with rational consumers than with myopic consumers. For plausible parameter values the assumption of consumer rationality can be shown to lead to large differences in optimal prices. Moreover, if a monopolist facing rational consumers implements the optimal myopic consumer pricing policy, profits can be significantly less than if the monopolist follows the equilibrium pricing policy for rational consumers.

One of the important issues in the literature on monopolistic competition concerns whether the free entry equilibrium will provide sufficient variety of differentiated brands. This paper examines variety issue using the logit choice model to capture brand differentiation. The consumption value of each brand is drawn from the extreme value distribution, and the consumer then purchases the brand with the highest value. With the resulting demand structure, we find that monopolistic competition results in too few firms and thus too few brands from the viewpoint of consumers. This result supports the findings of other models with symmetrically differentiated brands.

This paper examines the effect of rate of regulation on a monopolist that faces a market of observationally identical but heterogeneous consumers. Under plausible technological conditions, rate of return regulation increases the quality offered to any consumer and expands the variety of products it offers.

Some consumers receive a quality that is greater than the socially optimal quality. Rate of return regulation unambiguously increases consumers' surplus. If the allowed rate of return is close to the monopoly rate of return, social welfare increases as well. This paper contains an agency-theoretic analysis of procurement contracts in which the government designs optimal linear contracts for a risk-averse supplier in the presence of moral hazard, private information, and imperfect monitoring. Optimal contracts deviate from first-best risk sharing. The direction of the deviation depends on t he relative severity of the moral hazard and private information problem s and on the precision of the monitor. In contrast to the usual result in the moral hazard literature, the government may, in some cases, prefer that the effort of the supplier be taxed.

Choice of the precision of the monitor and the categories of costs covered by the monitor are also studied. A monopolist facing a market of heterogeneous consumers will distort the quality array.

This paper explores three regulatory remedies--minimum quality standards (MQS), maximum price regulation (MPR), and rate of return regulation (RORR)--that counteract this distortion. MQS and MPR raise the quality offered to consumers with a low willingness-to-pay for quality. While MQS have no effect on the quality offered to consumers with a high willingness-to-pay, MPR decreases the quality offered to this group. If production of high- (low-)quality goods is capital-intensive, RORR increases (decreases) the quality offered to both groups.

This article characterizes the optimal procurement contract for a monopsonistic purchaser who contracts with a risk-averse supplier with private information about his costs and who contributes an unobservable effort. The costs incurred by the supplier may be uncertain, and the purchaser has access to a monitor of costs that may be subject to noise that complicates risk sharing. The purchaser prefers to respond to the observability problem with a fixed-price contract and to respond to the private information problem with a cost-plus contract. With uncertain costs and a perfect monitor the optimal contract relieves the supplier of some risk, and the purchaser prefers that the effort of the supplier be subsidized. With deterministic costs and a noisy monitor the optimal contract places risk on the supplier, and the purchaser may prefer that the effort of the supplier be taxed.

A monopolist that sells in a market in which consumers differ in their willingness to pay for quality will distort and enlarge the range of products offered for sale. We examine the positive and normative impacts of remedies used to counteract such distortions. For the case of a price ceiling, the monopolist improves quality at the low quality end of the market, offsetting the distortion induced by the unregulated exercise of monopoly power.

Social welfare can be shown to increase for a sufficiently slight degree of price regulation. For minimum quality standards, the social welfare implications are ambiguous because the standards may exclude some consumers from the market. Lenders usually know less than borrowers about payoff-relevant borrower attributes.

These attributes may be a personal characteristic as in Jaffee-Russell [1976] or some parameter of an earnings distribution as in Stiglitz-Weiss (S-W) [1981]. In either case, the informational asymmetry is likely to affect the credit market equilibrium. The principal objective of this paper is to explore the role of market structure in credit allocation when there is such an informational asymmetry. The questions to which we seek answers are: Why do lenders sometimes ration credit even when deposit availability is relatively unconstrained?

What is the economic function of collateral and how is its usefulness affected by credit market structure? What is the impact of collateral on credit rationing? Why do we observe cosigners?

These issues are analyzed under two market structures. In Section 2, we assume that a bank acts as a price-setting monopolist in the loan market. Two principal results are obtained. First, collateral will not be used unless it is sufficiently valuable to the bank to make the loan riskless.

Second, in some cases, the bank's credit policy discourages high-risk borrowers from applying for credit. The bank need not explicitly reject these applicants; it simply raises the loan interest rate to induce them to exit the market. This paper considers a multiperiod model of a regulated firm that has (stationary) private reformation which may be revealed through performance. If it cannot make commitments to future policies, the regulator has an incentive to exploit any information the firm reveals, and Laffont and Tirole show that there is no regulatory policy that is separating over any closed interval. A 'fairness' arrangement is proposed in which the firm agrees not to quit if in future periods the regulator allows it to earn a nonnegative profit given the type it revealed in earlier periods, The properties of such arrangements are studied, and an example is presented in which both the firm and the regulator prefer a fairness arrangement to a policy feasible without commitment. We study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers' default probabilities. Admissible credit contracts are characterized by the credit granting probability, the loan quantity, the loan interest rate and the collateral required.

The principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers; moreover, the lower risk borrowers get more credit in equilibrium than they would with full information. No credit is rationed and collateral requirements are higher for the lower risk borrowers. This article analyzes a model of a regulated firm that is better informed about its cost function than is the regulator. By auditing at a cost, however, the regulator is assumed to be able to observe the realized cost of the firm.

If the regulator 'finds' that the firm had misrepresented its costs at the time at which prices were set, he can order a refund to consumers. In the optimal policy the regulator audits when the firm reports for pricing purposes that its costs will be high and orders a refund when the audit finds that realized costs are lower than anticipated, given the original report. A separation result that obtains for an important case indicates that the initial pricing decision is independent of the auditing decision. The auditing decision, however, depends on the price that was initially set. The optimal auditing strategy is characterized and the nature of the welfare gains are identified. The methodology used in the analysis involves the characterization of an equilibrium of a revelation game with an ex post observable. Regulation typically involves a continuing relationship between a regulator and a firm, and that relationship is often complicated by asymmetric information.

A multiperiod model of this relationship is analyzed in which a regulated firm has private information about its costs which may changed over time in a manner observable only to the firm. The regulator is assumed to be able to commit to a policy for the entire regulatory horizon, and the optimal pricing policy is shown to depend on an informativeness measure that indicates how information by the firm in one period will be used in future periods. In this paper we describe the pass-through behavior of a major U.S. Supermarket chain for 78 products across 11 categories. Our data set includes retail prices and wholesale prices for stores in 15 retail price zones for a one-year period.

For the empirical model, we use a reduced-form approach that focuses directly on equilibrium prices as a function of exogenous supply- and demand-shifting variables. The reduced-form approach enables us to identify the theoretical pass-through rate without specific assumptions about the form of consumer demand or the conduct of a category-pricing manager. Thus, our measurements of pass-through are not constrained by specific structure on the underlying economic model. The empirical pricing model includes costs of all competing products in the category on the right-hand side (not only the cost of the focal brand) and yields estimates of both own-brand and cross-brand pass-through rates. Our results provide a rich picture of the retailer's pass-through behavior. We find that pass-through varies substantially across products and across categories. Own-brand pass-through rates are, on average, more than 60% for 9 of 11 categories, a finding that is at odds with the claims of manufacturers about retailers in general.

Importantly, we find substantial evidence of cross-brand pass-through effects, indicating that retail prices of competing products are adjusted in response to a change in the wholesale price of any given product in the category. We find that cross-brand pass-through rates are both positive and negative. We explore determinants of own-brand and cross-brand pass-through rates and find strong evidence in multiple categories of asymmetric retailer response to trade promotions on large versus small brands. For example, brands with larger market shares, and brands that contribute more to retailer profits in the category, receive higher pass-through. We also find that trade promotions on large brands are less likely than small brands to generate positive cross-brand pass-through, i.e., induce the retailer to reduce the retail price of competing smaller products. On the other hand, small share brands are disadvantaged along three dimensions. Trade promotions on small brands receive low own-brand pass-through and generate positive cross-brand pass-through for larger competing brands.

Moreover, small share brands do not receive positive cross pass-through from trade promotions on these larger competitors. We also find that store brands are similarly disadvantaged with respect to national brands.

We model the interaction between a profit-maximizing firm and an activist using an infinite-horizon dynamic stochastic game. The firm enhances its reputation through 'self-regulation': voluntary provision of an abatement activity that reduces a negative externality. We show that in equilibrium the externality-reducing activity is subject to decreasing marginal returns, which can cause the firm to 'coast on its reputation,' that is, decrease the level of externality-reducing activity as its reputation grows.

The activist, which benefits from increases in the externality-reducing activity, can take two types of action that can harm the firm's reputation: criticism, which can impair the firm's reputation on the margin, and confrontation, which can trigger a crisis that may severely damage the firm's reputation. The activist changes the reputational dynamics of the game by tending to keep the firm in reputational states in which it is highly motivated to invest in externality-reducing activity. Criticism and confrontational activity are shown to be imperfect substitutes. The more patient the activist or the more passionate it is about externality reduction, the more likely it is to rely on confrontation. The more patient the firm and the more important corporate citizenship is to firm's brand equity, the more likely that it will be targeted by an activist that relies on confrontation. In December 2010, one U.S.

Legislative action was largely overlooked in the popular press: the one-year extension of the 45-cent-per-gallon Volumetric Ethanol Excise Tax Credit (VEETC), commonly known as the “blender’s credit.” Both proponents and opponents of the blender’s credit liked to cite data to support their positions. Proponents pointed out the number of jobs created by new ethanol plants, while opponents cited unfavorable energy balances from the use of ethanol and the overall budgetary impact of the blender’s credit. What was less clear—but potentially much more important than the selective data cited by advocates and critics of ethanol—was the overall impact of the blender’s credit on the U.S. In particular, to what extent did the ethanol subsidy—by influencing the allocation of resources to the ethanol market—act as a drag on efficiency in the U.S. This case presents a history of ethanol in the U.S.

And an overview of the market for ethanol-based motor fuel, including data on demand and supply fundamentals. It also discusses the broader U.S.

Energy market, as well as the U.S. Market for corn.

The case reviews other policy interventions besides the ethanol tax credit that have an impact on the market for ethanol-based motor fuel, such as tariffs and mandates. Finally, it surveys the ways other countries around the world, such as Brazil, have supported the use of ethanol-based fuel. In 1999 the market for optical fiber was white hot. Several large manufacturers of optical fiber, including Corning, Inc., were considering significant expansions in their production capacity.

This case presents the capacity expansion problem from the perspective of Corning, Inc. Students can explore how market fundamentals and strategic considerations shape a firm’s incentives to undertake a major expansion of capacity. Note: the use of this case is restricted to classes at the Kellogg School of Management. Rede Alta Velocidade, SA (RAVE), the state-owned company responsible for planning and developing a major high-speed rail project in Portugal, must persuade both public officials and lenders that the project is worth undertaking. It must also make a recommendation on the appropriate organizational form for the enterprise. Specifically, it must determine the role of the Portuguese government in financing and operating the high-speed rail network, with options ranging from full development and management of the project by the public sector to completely private development and management. Lying in between these two polar cases were a variety of hybrid models, often referred to as public-private partnerships (PPPs).

Using data in the case, students have the opportunity to perform a benefit-cost analysis of the project. They also must think carefully about the optimal role of the government in a major new infrastructure project. The case describes market experiments conducted by a major credit card issuer. In a typical experiment, the issuer sends out hundreds of thousands of solicitations based on information received from credit reporting agencies (e.g.

Credit score, past delinquencies, etc.). Selection bias is striking: the average risk profile of those responding to higher interest rates is significantly worse than that of respondents to lower rates. Tracking respondents for 27 months after the experiment, respondents to higher rates displayed significantly higher delinquency and bankruptcy rates. This short case is based on an excellent research paper by Larry Ausubel who obtained proprietary data on the condition of not revealing the name of the issuer. Contact Professor Al-Najjar for teaching methods, slides, and classroom exhibits. In 1996 the St. Louis-based manufacturer Zoltek launched a massive expansion of capacity to produce commercial-grade carbon fiber, a composite material used to produce a wide variety of end products ranging from sporting goods to windmill blades.

Zoltek’s goal was to become the dominant firm in a market whose growth was expected to be spectacular starting in the late 1990s. This case describes Zoltek’s major strategic moves in the mid-1990s and can be used to explore the economic logic of a major capacity commitment. The case provides a possible example of the Stackelberg leadership model from oligopoly theory. In early 2000, Asahi’s senior management was under considerable pressure to launch its own brand of happoshu, a low-end form of beer that enjoyed certain tax benefits under Japanese law. Unlike its major rivals, all of whom had launched happoshu brands in the previous few years, Asahi steadfastly refused to enter the happoshu category.

The case allows students to explore the economic logic of Asahi’s strategy. The case can be used to study how the entry of a new product affects price competition across two closely related product categories (beer and happoshu) and how an anticipation of changes in price competition might affect the economics of the launch decision.

Between May, 2000 and January, 2001 the recently deregulated electricity market in the state of California experienced what many commentators have characterized as a meltdown. Over that period wholesale electricity prices increased over 500 percent, power emergencies and the threat of rolling blackouts became daily occurrences, and the state’s largest investor-owned utility was thrust into bankruptcy. This case details California’s attempt to deregulate its wholesale and retail electricity markets and gives students the opportunity to diagnose the causes of California’s crisis. The case contains data that enables students to identify the drivers of increases in the wholesale price of electricity in California. In May 2009 the Office of the Chief Actuary for the U.S.

Social Security Administration projected that by 2016 the Social Security Trust Fund would begin to spend more money than it took in through tax revenue. Further, by 2037 the balance in the Trust Fund would be down to zero, necessitating cuts in benefits to retirees. Social Security system thus faced a long-term financial problem that needed to be addressed sooner rather than later.

The experience of other countries in reforming their own systems of old-age insurance might provide some guidance for U.S. Policymakers as they attempt to deal with the long-run fiscal challenges facing the U.S. Social Security system. This case focuses on reforms of old-age insurance systems in three countries: Australia, Mexico, and Sweden. In the 1950s, the United States government created the Small Business Administration to fill a gap in equity and debt financing available to small businesses.

By 2004, the program designed to provide equity financing suffered from poor performance and irrelevance. A team of consultants engaged by the SBA will analyze the economic rationales that prompted the creation of the program and recommend appropriate action to maintain, terminate, or alter the program to match contemporary circumstances. The case illustrates the effects of government intervention in equity and debt markets over several decades with varying economic conditions. Arguments for and against the creation of the programs are given, along with historical developments that affect the program’s merits. The case provides a narrative history of venture capital in the United States. The modern venture capital investing process is compared to the government equity finance program.

Although the federal gasoline tax played multiple roles in financing surface transportation infrastructure in the United States, experts did not agree on the tax’s purpose. Some argued that it was essentially a fee for users of the nation’s federally supported highways. Others suggested that it should play a more prominent role in environmental, energy, and transportation policy by correcting for driving-related externalities. Still others suggested that it should be used to reduce the federal budget deficit. Finally, the tax itself had remained at the same level since 1993, and with the Highway Trust Fund virtually insolvent, many experts believed it was time for an increase.

The case presents a background on the U.S. Federal gasoline tax, an overview of the market for gasoline in the United States, and survey of gasoline taxes in U.S. States as well as several other countries around the world. Motorola invented mobile telephones and by the end of the 1980s came to dominate the mobile handset market with more than 80 percent market share. A few years later, Motorola faced a key strategic choice of whether to focus its considerable resources on consolidating its dominance of the analogue handset market, or to shift these resources to the emerging digital handset technologies.

This decision shaped the handset industry and the role Motorola played in it for the next decade. The case provides a vivid illustration of incumbents’ puzzling inertia towards initiating and participating in disruptive technologies. This case considers the competitive strategy of the Channel Tunnel just prior to the time it opened for business in 1994. Focusing specifically on the tunnel's Le Shuttle service for freight and passenger traffic, the case gives students an opportunity to explore whether Le Shuttle should follow a premium pricing strategy relative to the cross-channel ferries, match the ferries' prices, or undercut the ferries' prices. Following a section on the history of the tunnel's construction, the case provides an in-depth discussion of the cross-channel ferry business and the Le Shuttle services. The case concludes by posing the question: What pricing strategy should Le Shuttle follow?

The case can be used in a managerial economics course to illustrate the key drivers of price competition in a differentiated products industry: differences in marginal cost, vertical differentiation among competitors, and the degree of horizontal differentiation in the market. The case can also be used in a competitive strategy class to illustrate the sources and sustainability of competitive advantage. The case describes the events leading up to the imposition of the London congestion charge. Views about the congestion charge, both pro and con, are presented. The case also discusses, in general terms, the economics of traffic congestion, pointing out that an unregulated market for driving will not reach the social optimum. The case contains sufficient data for students to estimate the deadweight loss in an unregulated market. Students can also estimate the reduction of the deadweight loss due to the imposition of the congestion charge in 2003.

The case provides a good illustration of how an unregulated market with negative externalities can lead to an overprovision of a good (in this case driving). It also shows how an externality tax (in this case, London’s congestion charge) can lead to an improvement in social welfare. The years 2011, 2012, and 2013 witnessed both significant developments and setbacks in global polio eradication efforts. On the positive side, January 13, 2012, marked a full year since India had detected a case of wild poliovirus.

On the negative side, polio continued to be endemic in three countries—Pakistan, Afghanistan, and Nigeria—and in those countries the goal of eliminating polio seemed more challenging than ever. Between December 2012 and January 2013, sixteen polio workers were killed in Pakistan, and in February 2013, nine women vaccinating children against polio in Kano, Nigeria, were shot dead by gunmen suspected of belonging to a radical Islamist sect. In addition, after a 95 percent decline in polio cases in 2010, the number of cases in Nigeria rebounded in 2011.

Recognizing that polio was unlikely to be eliminated in these countries in the near term, the Global Polio Eradication Initiative moved its target date for eradication from 2013 to 2018. These setbacks sparked a debate about the appropriate strategy for global eradication of polio. Indeed, some experts believed that recent setbacks were not caused by poor management but were instead the result of epidemiological characteristics and preconditions that might render polio eradication unachievable. These experts argued that global health efforts should focus on the control or elimination of polio rather than on the eradication of the disease. This case presents an overview of polio and the Global Polio Eradication Initiative and recounts the successful effort to eradicate smallpox. The case enables a rich discussion of the current global strategy to eradicate polio, as well as the issue of whether eradication is the appropriate global public health objective.

More generally, the case provides a concrete example of a particular type of global public good, namely infectious disease eradication. The case describes the competitive advantages that U.S.

Farmers enjoy in the global cotton industry and the subsidies they receive from the U.S. Federal government. Arguments for and against the subsidies are presented in the context of global competition. The case includes the data needed to estimate a supply curve for 2004 cotton production and predict the average 2004 cotton price using total cotton consumption for 2004. Students can also estimate the result of eliminating the U.S. Cotton subsidies on the average 2004 cotton price.

The learning objective of the case is for students to have the opportunity to learn about the history and structure of U.S. Cotton subsidies as well as their impact on global cotton prices. Students also are able to practice building and interpreting an industry supply curve. Full-Time / Evening & Weekend MBA Public Economics for Business Leaders: Federal Policy (KPPI-470-0) To be an effective business leader in today's complex world requires an understanding of the important public policy issues facing society. Managers need to understand society's problems and the range of possible public solutions and policies in order to know how to influence, incorporate and respond to public actions. This class will enable students to understand, analyze and take the perspective of government and non-government organizations as they attempt to alleviate societal problems.

Topics include the interface of government and business, the justification for and principle methods of government intervention in the market place, the primary means of paying for government, measuring the costs and benefits of government policies, and current policy applications such as social security reform, education policy, health insurance and tax reform.