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Given this situation, Alcoa’s preference would have been to increase prices to iron/steel and aircraftconsumers while generally reducing price to the other three markets. The potential for arbitrage,however, created a barrier to implementing this scheme. With wide price differences, nothing wouldprevent a cookware purchaser from undercutting Alcoa and reselling aluminum to an aircraft partsconsumer. To successfully implement its price discrimination scheme, Alcoa was forced to forward integrate into thethree relatively elastic markets. By moving into the cookware, electric cable, and automotive partsmarkets, Alcoa gained control over potential resales of aluminum ingot and was able to maintain highprices to the iron/steel and aircraft parts markets.TICKETMASTER/LIVENATION;Representative Conyers is holding hearings on the Ticketmaster/Live Nation proposed merger. Anobscure Vanderbilt professor is scheduled to testify:Ticketmaster and Live Nation are both part of the vertical supply chain that delivers liveperformances to fans.The “price” of this service is the difference or “wedge” between whatconsumers pay and what performers receive. At one end of this chain are firms that interact directlywith artists, such as Live Nation. At the other end are firms that interact directly with fans, such asticketing firms like Ticketmaster who sell tickets on behalf of venues. The merger is interesting because it raises both horizontal (Live Nation has begun ticketing its ownevents) and vertical (Live Nation is Ticketmaster's largest customer) issues. The potential horizontal costsof the merger will have to be weighed against the potential vertical benefits, including increasedcoordination across the supply chain.93
SECTION VII – WRAPPING UP24. YOU BE THE CONSULTANTExcess Inventory of Prosthetic Heart ValvesHigh Transportation Costs at a Coal-Burning UtilityOverpaying for Acquired HospitalsLarge E&O Claims at an Insurance CompanyLosing Money on Homeowner’s InsuranceQuantity Discounts on Hip ReplacementsWhat You Should Have LearnedSupplementary MaterialEpilog to the textTeaching NoteI go through an overview of the material: where have we been; what have we learned and preview theexam. Also give a summary of the final exam—I give them the formulas in advance, and give them adescription of the test.Summary of things they should now be able to do:Use the rational-actor paradigm, identify problems, and then fix them;Use benefit–cost analysis to evaluate decisions;Use marginal analysis to make extent (how much) decisions;Compute break-even quantities to make investment decisions;Compute break-even price to make shut-down and pricing decisions;Set optimal prices and price-discriminate’Predict industry-level changes using demand/supply analysis;Understand the long-run forces that erode profitabilityDevelop long-run strategies to increase firm value;Predict how your own actions will influence others’ actions;Bargain effectively;