Midterm Tuna Game Week 6 Dynamic Pricing Week 7 Entry Deterrence and Exit

Midterm tuna game week 6 dynamic pricing week 7 entry

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Midterm; Tuna Game (Week 6) Dynamic Pricing (Week 7) Entry Deterrence and Exit Decisions (Week 8) Network Effects (Week 9) Platform Competition (Week 10)
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Course style Intuition in place of math (where possible) Layman’s terms instead of jargon. Goal is to: − Explain it to a boss − Argue with a colleague − Sell it to a client Boil the material down to directional effects and key tradeoffs Material is simple but not easy (and frequently quite hard) Each case is a puzzle—cracking them should be fun
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Strategic objectives
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A Framework for Analysis Demand for the Industry’s Good (Benefit) Opportunity Cost of Industry’s Resources Quantity Produced by the Industry $ the “pie”: Potential Industry Earnings Per-Unit Value Consumed by Customers
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Measuring the firm’s “benefits” Are the only objectives revenues, dollars, market share…? No. Think about the objectives of: − Governments (?) − Disaster relief organizations (?) − Educational institutions (?) For corporations, yes—what is one reason? Mostly focus on revenues in this class—but feel free to bring up other examples, e.g. not-for-profit work
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Measuring the firm’s “costs” (1/2) Crucial distinction between accounting and economic costs Accounting costs − What you paid your supplier for materials − Wages you pay to your employees − Interest on loans − Year-end discounts to big customers What you record on your accounting statements, tax filings
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Measuring the firm’s “costs” (2/2) Economic costs include opportunity costs − Example: the EC of using a machine you already own is not zero, since you could sell it or rent it out − Example: the EC of studying is not zero, since you give up socializing What is it exactly? Value of next best alternative use. What are they for the examples above? How do you figure them out?
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In-class Example: MBA Costs
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Accounting Cost of Full-Time MBA 2016-17 Estimated Cost of Attendance 3 Quarters (9 months) Tuition $66,540 (10 courses) Fees $60 + $1,128 + $2,500 = $3,688 Health Insurance $3,615 Books $1,200 Rent and Utilities $14,520 Food $5,400 Personal $3,000 Transportation $1,500 Computer Allowance $1,200 Total $100,663
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Questions Are all of these costs economic costs? Is anything missing? What opportunity costs do you face?
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Economic Cost of Full-Time MBA 2016-17 Estimated Cost of Attendance 3 Quarters (9 months) Tuition $66,540 (10 courses) Fees $60 + $1,128 + $2,500 = $3,688 Health Insurance $0 Books $1,200 Rent and Utilities $0 Food $0 Personal $0 Transportation $0 Computer Allowance $1,200 Foregone Earnings $100,000? Total $172,628
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Predictions Do prospective MBA students consider foregone salary as an important cost? How would we know? What would we look for in the data?
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MBA Applications & the Business Cycle 100000 150000 200000 250000 300000 82-83 83-84 84-85 85-86 86-87 87-88 88-89 89-90 90-91 91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 GMAT Takers Shaded areas are NBER recessions
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Profits, equilibrium, and “no arbitrage”
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Profits Accounting vs. economic profits Clearly, accounting profits can be greater than zero What about economic profits?
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