15.010 | Fall 2004 | Graduate

Economic Analysis for Business Decisions

Lecture Notes

ses # TOPICS Lecture notes handouts


Introduction to the Course

Types of Markets: Competitive, Monopoly/Monopsony and Oligopoly/Oligopsony

The Boundaries of a Market

Product Boundaries, Geographical Boundaries

Examples: Bicycles, Prescription Drugs, Airline Travel, Role of Internet

Course Overview Markets (PDF)

Extra Sources (PDF)

Questions for U.K. Credit Card Case Discussion (PDF)


Defining the Market

Discussion of Market Definition and Market Strategy

Case Study: Credit Cards in the U.K.

Market Definition (PDF)

Table: Profitability of Consumer Groups - Stuart, Harborne W., Jr. “Pricing for Profit: The U.K. Credit Card Industry in the Late 1980s (A).” Boston, MA: Harvard Business School, 1997. Case No. 9-897-168.

Tips for Homework Solutions and Exams (PDF)

Exhibit 2: UK Credit Card System - Stuart, Harborne W., Jr. “Pricing for Profit: The U.K. Credit Card Industry in the Late 1980s (A).” Boston, MA: Harvard Business School, 1997. Case No. 9-897-168.


Analysis of Competitive Markets

Supply-Demand Analysis of Government Intervention in Competitive Markets (Examples: Taxes, Subsidies, Tariffs, Import Quotas)

Detailed Analysis of the Sugar Quota and its Effects

Analysis of Competitive Markets (PDF)

Thurow, Roger and Geoff Winestock. A Global Journal Report — Bittersweet: How an Addiction To Sugar Subsidies Hurts Development –Politically Vital Farm Support, Especially in EU, Throttles Exports From Poor Nations — Negating $50 Billion in Aid." The Wall Street Journal, 16 September 2002.

Sugar Surplus (PDF)


Production and Cost

Brief Review of Production Economics and Cost Minimization

Cost Concepts: Fixed, Variable and Sunk

Total, Average, and Marginal Cost in the Short Run and Long Run

Accounting Cost vs. Economic Cost

Production and Cost I (PDF)  

Production and Cost (cont.)

Airline Cost Example: User Cost of Capital

Economies of Scale and Scope

The Learning Curve and Cost Reduction over Time

Production and Cost II (PDF)  

Consumer Demand

Introduction to Consumer Demand: Empirical Demand Analysis and Models of Consumer Choice

Consumer Demand Introduction (PDF)  

Consumer Demand (cont.)

Pricing, Product Characteristics and Quality

The Analysis of Network Externalities, and their Competitive and Strategic Implications

Example from the Software Industry

Consumer Demand and Product Characteristics (PDF)  

Time and Uncertainty

Intertemporal Prices and Net Present Value

Uncertainty and Risk Aversion

Waiting and Option Value

Time and Uncertainty (PDF)  

Market Power

Competition and Entry

Monopoly Power and Mark-up Pricing

Production across Multiple Plants

Pricing with Network Externalities

Market Power (PDF)  

Pricing with Market Power

Various Forms of Price Discrimination

Segmented Markets and Pricing Oriented toward Market Segmentation

Examples of Price Discrimination in Practice

Pricing with Market Power I (PDF) Maremont, Mark. “The Only Difference is When You Throw Them Away.” Business Week, 12 July 1993.

Pricing with Market Power (cont.)

The Use of Two-part Tariffs

Volume Pricing

Commodity Bundling

Pricing with Market Power II

Game Theory Cournot Questions (PDF)

Tran, Khanh T.L. “Fans of Web Games Pay to Play.” The Wall Street Journal, 9 November 2000.


Game Theory and Competitive Strategy

Thinking Strategically

Duopoly Exercise (in class) to Introduce Cournot

First-mover Advantage: Stackelberg

Repeated Cournot

Cournot-Nash in detail

Nash Equilibrium in Other Kinds of Games

Game Theory and Competitive Strategy I (PDF)  

Game Theory and Competitive Strategy (cont.)

Dominant Strategies

Nash Equilibrium again

Repeated Games

The Prisoners’ Dilemma

Sequential Games

Threats and Credibility

Pre-emptive Moves

Entry Deterrence

Game Theory and Competitive Strategy II (PDF)

Barnett, F. William. “Making Game Theory Work in Practice.” The Wall Street Journal, 13 February 1995.

Myerson, Allen R. “Philip Morris Cuts Cigarette Prices, Stunning Market – Stocks Plunge as Result – 40 cent-a-pack Reduction in No. 1 Marlboro Brand is Directed at Its Lower-Cost Rivals.” The New York Times, 3 April 1993.

Ortega, Bob. “Retail Combat – Warehouse-Club War Leaves Few Standing, And They Are Bruised – Wal-Mart and Price-Costco Survive Bitter U.S. Clash, Will Resume it in Mexico – An Intense Game of Chicken.” The Wall Street Journal, 18 November 1993.


Collusion and Competition in Oligopolistic Markets

Tacit Collusion

Examples: Electrical Equipment, Mineral Cartels

Collusion and Competition in Oligopolistic Markets (PDF)  

Limiting Market Power

Antitrust Laws

U.S. vs. Microsoft®

Common Property Resources

Limiting Market Power (PDF)

Antitrust and Monopolies (PDF)

Surowiecki, James. “Mixed Motives.” The Financial Page, The New Yorker, 8 November 2004.


Auctions and Bidding

Alternative Forms of Auctions and their Characteristics

The Winner’s Curse

Auctions and Bidding (PDF) Double Marginalization (PDF)

Transfer Pricing and Vertical Integration

Transfer Pricing in the Vertically Integrated Firm

Transfer Pricing with Outside Markets

Double Marginalization

Costs and Benefits of Vertical Integration

Transfer Pricing and Vertical Integration (PDF)

Outsourcing Sales (PDF)

Phillips, Michael M. “Taking Shelter – As Congress Ponders New Tax Breaks, Firms Already Find Plenty – Using Tactics Such as Shifting Profit to Havens Abroad, Some Pare Bills to Zero – GM Keeps the Tab Down.” The Wall Street Journal, 9 August 1999.


Incentives and Information

Principal-agent Problem and Incentives

Moral Hazard


Promotion Tournaments and Up-or-out Policies

Team Incentives

Back-loaded Wages

Incentives and Employment (PDF)  

Information and Market Structure

Markets with Asymmetric Information

Quality Uncertainty and the Market for “Lemons”

Adverse Selection


Asymmetric Information and Market Structure (PDF)  

Externalities and Market Structure

Positive and Negative Externalities

Market Failure and Forms of Government Intervention

Property Rights

Externalities and Market Structure (PDF) Other Economics Courses (PDF)
L21 Final Examination    

Learning Resource Types
Problem Sets with Solutions
Exams with Solutions
Lecture Notes