Semester II, 2022-2023 Jo Seung-gyu

NUS Business School

BMA5001 MANAGERIAL ECONOMICS

Lecture Notes 1

Introduction, Motivation and Course Overview

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Lecturer: Jo, Seung-Gyu
Department of Strategy and Policy, NUS
Office: Room 06-05, BIZ1
Tel: 6516-6469
Email: [email protected]

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 About Me…
 PhD (Economics) University of Pennsylvania
Philadelphia, PA, USA
(Major Interest: Game Theory, Industrial Economics,
Strategic Trade Policy & Behavioral Economics)

 2000-2007 Department of Business Policy

NUS Business School, NUS, Singapore
 2008- June 2009 Department of Economics
Faculty of Economics and Business Administration
Vrije Universiteit Amsterdam, The Netherlands
 July 2009 – July 2010 Department of Economics
School of Economics, SMU, Singapore
 August 2010 – present Department of Strategy and Policy
NUS Business School, NUS, Singapore

 Family of four: Kathy, Jay, Eunah

 Golf (8.6), Judo (2nd dan black belt), Taekwondo (1st dan black belt)
 Craft Beer, Traveling, Rock Climbing, Cooking
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 References for Lecture Notes 1

 Textbook Chapters:
 PR Ch1

 Readings
 Why do people make fun of economists
 Economists vs Economics
 Staples-Office Depot-OfficeMax Merger Deals and Antitrust
 Market Definition in Grab-Uber Merger Case
 Tragedy of the Commons and the Role of Incentives
 NUS’ new grade policy for freshmen

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 Economics/Economists – worth celebrating or to be joked about?

 Your favorite economist joke?

 Harry Truman:
“Give me a one-handed economist, please”

1884-1972
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 How the public and economists view differently?

 Cash vs Credit Card Payments

 Should different prices be allowed or not?

 Cash Payment Discount vs Credit Card Payment Surcharge
─ If only one, which option would a vendor prefer? Why?
─ Ever wondered why only ‘cash discount’ was allowed in the States?
(We will discuss in detail later.)

 (from the reading, ‘NUS New Grade Policy for Freshmen’)

NUS’ New Grade Policy: S/U option at the semester end:
─ Would it help NUS graduates’ overall GPA to improve?
─ Would it help NUS graduates beat those from other schools in job market?

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 Disciplinary Scope of Economics
(microeconomics vs macroeconomics)

 Microeconomics – individual economic behavior (interest rates vs consumption)

Macroeconomics – aggregate economic variables (interest rates vs consumption)

 Example:

OPEC reduces oil export. We might be interested in the following issues:

• micro – gas stations, drivers, non-OPEC exporters?

• macro – corporate investment, inflation, unemployment?

 Our ‘Managerial Economics’ is mostly based on microeconomics

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 Microeconomics… what is it about?

● Textbook definition
 The study of how society uses its scarce resources efficiently.
 Or, more snappily, economics is the science of choices – and it
conforms to what we do here in Managerial Economics.

● In economics academia - “Economics is what economists do”

 Steven Levitt (‘Freakonomics’):
Sudden drop in metropolitan cities’ crime rates in 1990s - why?

 Robert Frank’s (‘Economic Naturalist’) and my own experience:

Why do almost all Russian ladies wear high heels?

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 What do we do in our economics here then?

Managerial Economics is a part of microeconomic theory focusing

mostly on managerial issues.

• We will analyze the microeconomic behavior of consumers,

firms and governments under various market structures.

• We will keep a good balance between the conventional

microeconomic theory and practical applications.

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 Lecture Topics & Schedule at a Glance (The details are subject to change.)
Topics Textbook Chapters
Lecture Notes Textbook Chapters
(For the detailed topics to be covered, From Pindyck & Rubinfeld’s
Numbers From Ivan Png’s Textbook
please refer to the course outline.) Textbook

Introduction, Motivation and Course Overview

• What do we do in economics Ch 1 Ch 1
Lecture Notes 1 • Motivating examples
• Preliminary Concepts
Basics of Market Forces – Demand and Supply Ch 2 Ch 2-5
• Demand, Supply and Market Mechanism Ch 4 (Sec. 4.3 - 4.4)
Lecture Notes 2 • Elasticities and Applications
Ch 8 (pp. 305-308)
• Welfare measures and Applications
Ch 9
Understanding Consumer Behavior and Demand Analysis
• Consumer Behavior Ch 3 Ch 2
Lecture Notes 3
• Deriving Individual Consumer’s and Market Demands Ch 4 (Sec. 4.1 - 4.4)
Economics of Uncertainty/Risk
● Expected Value vs Expected Utility
● Preferences toward Risk
Ch 5 (Sec. 5.1 – 5.3)
Lecture Notes 4
● Insurance Example
A Snapshot into Behavioral Economics
• Motivations and Introduction
Lecture Notes 5
• Fundamentals of Prospect Theory and Birth of Behavioral Ch19
Economics
• Applications 10
 Lecture Schedules – cont.

Costs and Firm Behavior in Competitive Markets

• Costs of Production Ch 7 (Sec. 7.1 – 7.4)
Lecture Notes 6 • Profit Maximization
Ch 8 Ch 6
• Competitive Markets
• Deriving Individual Firm’s and Market’s Supply
Monopoly Under Uniform Pricing Strategies
• Sources and Measurement of Market Power Ch 10 (Sec. 10.1 –
Lecture Notes 7 • (Uniform) Monopoly Pricing
10.4 and 10.7) Ch 7
• Economic Effects of Monopoly
• Regulating Monopoly: Electricity Case
Monopoly Under Sophisticated Pricing Strategies I
• First-, Second-, and Third-Degree Price Discriminations
Lecture Notes 8
• Direct and Indirect Price Discriminations
• Applications Ch 8
Monopoly Under Sophisticated Pricing Strategies II
Ch 11 (Sec. 11.1-11.3)
• Two Part Pricing
Lecture Notes 9
• Bundling
• Applications
Game Theory and Competitive Strategy I – Introduction and Pre-
Nash Game Theory in Static Setting
Lecture Notes 10 • Introduction, Motivation and Fundamentals of Game Theory Ch 13 (Sec. 13.1-13.7) Ch 9
• Strategic Thinking in Static Games
• Pre-Nash Game Theory
• Applications

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 Lecture Schedules – cont.

Game Theory and Competitive Strategy II – Nash Equilibrium

and Applications of Static Games
• Nash Equilibrium Concept
Lecture Notes 11 • ‘A Beautiful Mind’
• Multiplicity of Nash equilibriums and Refinements
• Randomization and Mixed Strategy Nash Equilibrium
• Applications of Static Games
Ch 13
(Sec. 13.1-13.7) Ch 9
Game Theory and Competitive Strategy III – Game Theory in
Dynamic Settings and Strategic Moves
• Introduction: Sequential Games
• Backwad Induction/Subgame Perfection
Lecture Notes 12 • Bargaining
• Strategic Moves and Applications
• To Commit or Not
• Managerial Implications” How to Apply Game Theory

Market Failure:
• Externalities
• Public Goods
• Economics of Asymmetric Information Ch 10
Lecture Notes 13 ‒ Hidden Information/Adverse Selection/Signaling and Screening Ch 17 (Sec. 17.1-17.4)
Ch 11
‒ Hidden action/Moral Hazard/Principal-Agent Problem and Ch 18
Incentive Scheme
• Applications

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SOME PRELIMINARY CONCEPTS

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1. Markets and Prices

 What is a market?

• Markets facilitate the process of multilateral bargaining and

transactions.
• We are interested in the underlying motivations of all parties that
enter into this economic exchanges, their decision makings and
economic implications.

 Naturally, price-determining/setting mechanism is important in

microeconomics.

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2. Market/Industry, Market Structure and Market Power

 Market vs Industry
Markets can be physical like the “Wet Market” in Jurong West or virtual like e-
commerce. But here we define them simply as a collection of buyers and sellers
that interact resulting in the possibility of exchange/transactions.

An industry is a collection of firms that sell the same or related products.

 Market Power
• A consumer (group) or a firm (group) with market power can influence market
outcomes to their own advantage.
• We only focus on firm-side market power.

 Markets have various structures

• Perfect Competition (or simply ‘competitive markets’ in layman’s term)
• Imperfect Competition
- monopoly
- monopolistic competition
- oligopoly
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  Market Definition Matters

1) (Mini Case 1 from the reading)

‘Merger Deals among Staples-Office Depot-OfficeMax and Antitrust’

• ‘Staples-Office Depot Antitrust Case’

Staples/Office Depot merger trial was rejected by FTC.

(The FTC changed the definition of the relevant market from the total market for
office supplies to the market served only by the office-supply superstores.
Staples and Office Depot together sell about 75 percent of office supplies sold
by superstores, but only about 5 percent of total office supplies.)

 Updates
• Office Depot’s purchase of OfficeMax won approval in 2013. Background
story?
• How about the more recent Staples-Office Depot Merger deal in 2015?

• Implication: Market boundary matters and it keeps evolving.

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2) (Mini Case 2 from the reading)
‘Market Definition in Grab-Uber Merger Case’

2018 Grab-Uber Merger Case in SEA:

Ride-Hailing vs Street-Hailing?

 CCCS (Competition and Consumer Commission of Singapore):

“Grab now has an overwhelming market share of 80 to 90 per
cent, while ComfortDelGro has 10 to 20 per cent, and all other
players 0 to 5 per cent, according to June data by CCCS.”
(25 Sept 2018, Business Times)

 Grab Singapore Head (Lim Kell Jay):

“CCCS had taken a ‘very narrow’ definition of the market by
not including street-hail taxis. Note the intense competition
between private-hire car drivers and taxis.”
(25 Sept 2018, Strait Times)

 Any analogy to the on-going potential Grab-Gojek

Merger Issue ?
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3. Competitive Markets vs Non-competitive Markets

 A market is (perfectly) competitive if there are many buyers and sellers so that
no single buyer or seller has a market power. Otherwise, non-competitive or
imperfectly competitive.

 Why care so much about competition?

‘Welfare Theorem’
Competitive markets lead to efficiency, while non-competitive market is
a source of economic inefficiency.

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4. Pick one single word embedded in the following three observations.

a) Singapore drivers vs Dutch drivers on the highway passing lane

b) Helmets and seat belts are mandated. Would you expect the road
accidental death to increase or decrease?
c) Why are cows never endangered while rhinos are?
(from the reading, ‘The Tragedy of the commons ‘)

In microeconomics, __________ rules!!

After all, microeconomic behavior is about the optimal decision makings

of each economic agent given her objectives and constraints.

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Motivating Stories

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 Motivating Story I

Why coupons or rebates?

 Have you used a coupon over the last month?

─ You know it is everywhere. It comes with your newspaper or it is easily
downloadable. You can even find them at the supermarket entrance. May of
you, however, rarely or never bothered to use them then?

 Why would the firm not just mark down the prices?
─ Running an ad on sale would be a lot simpler. Plus, it creates extra work with
extra cost for financial officers, cashiers and store managers.

 What coupon value should a firm recommend for its $15 shampoo?

 Some products/companies are heavily relying on coupons and some are

not. Why?

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Similar Observations:

 Hair Salon ‘Next’ at Holland Village, Singapore

 HP Printers:
 10 ppm and 20 ppm at different prices.
 How about the production cost?

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 Motivating Story II

 Students hate exams and professors hate marking them. So, here
goes the deal for your choice:

‘Take exam and get A or C’

or
‘No exam and settle with B’

Which option would you choose?

 A new shop has opened right next to you and started a price war.
Would you follow suit? What is the likely result? How can you get
out of a cut-throat price competition?

 We all need to think strategically and ‘game theory’ is everywhere!

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 Motivating Story III

 You want to sell your 3 year old green Mustang.

• What’s the buyers’ concern? What’s your concern?

• How would you get out of the dilemma?

 Have you encountered any free-riding case in your team project?

 ‘Information asymmetry’ is an important part of modern

economics.

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 Motivating Story IV
All right. We all agree that ‘rationality’ matters in economics.
But… are you rational? Or, how rational is rational enough?

 You are heading for a concert.

 (Event A) You paid $100 to buy a non-refundable ticket. At the entrance, you realize
you’ve lost the ticket. Would you buy the ticket again?
 (Event B) You are about to buy a ticket at the box office. You open your wallet to
find that your $100 was gone. Would you still buy the ticket?

 ‘The Economist’ magazine subscription plans. Which option would you select?
 If the following two options were offered:
A. Digital Access Only: $56
B. Digital Access + Print Copy: $125

 What if the following third option is added?:

C. Print Copy Only: $125 (or $126)

Examples never end…… and behavioral economics is getting hot!

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 Three Mottos in Doing Managerial Economics

 Managerial Econ is not a magic problem-solving kit. We are

more concerned about enlarging our thinking horizon. I want
you to ….
“Think like an economist!”

 We are studying ‘managerial’ economics but we do not want to

sacrifice the rigor and formality of economic reasoning and
logics. Our motto is….
“Knowledge is nothing without a scientific rigor’

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Motivated enough?
Now we go over course logistics and policies.

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 Teaching/Learning Vehicles

 Lecture Notes

 Textbooks: strongly recommended, although not required.

─ Microeconomics (Global Edition), 9th ed., 2018
Robert S. Pindyck & Daniel L. Rubinfeld, Pearson/Prentice Hall

 Readings
 Problem Sets
 Case Presentations/Discussions
 Canvas Discussions

 Prerequisites: working knowledge of basic algebra and calculus skills

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 Informal Economics Books Recommended for the Serious Econ Lovers:

 Charles Wheelan, Naked Economics - Undressing the Dismal Science, Norton

 Tim Harford, The Undercover Economist, Abacus
 Robert Frank, The Economic Naturalist, Basic Books
 Steven E. Landsburg, Armchair Economist, Free Press
 Steven Levitt and Stephen Dubner, Freakonomics, Harper Perennial
 Steven Levitt and Stephen Dubner, Super Freakonomics, William Morrow
 David Kreps, Game Theory and Economic Modelling, Oxford University Press
 Avinash Dixit and Barry Nalebuff, The Art of Strategy, Norton
 Dan Ariely, Predictably Irrational, Harper Perennial
 Daniel Kahneman, Thinking Fast and Slow, Farrar Straus and Giroux
 Richard Thaler, Nudge, Penguin Books
 William Poundstone, Priceless – The Myth of Fair Value and How To Take Advantage
Of It, Hill & Wang

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 On the Assessment & Team-Work

 Team-based
1) Problem Sets: 20%
2) Case Presentation: 20%

 Individual-based
3) Participation/Attendance: 10 %
4) Midterm Test: 20 %
5) Final Test: 30 %

 The assessment categories 1) and 2) are team assignments.

 Team groupings will be based on a Google Sheet Exercise, and detailed guidelines
will be briefed in due course, after add/drop period is over. Basic idea is:

 10 ‘Small’ teams for Problem Sets Assignments

 Two ‘Small’ teams are to be paired to make a Big team – five Big teams in
total – for Case Presentations
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More On the Assessment
1) Problem Sets
• Multiple comprehensive problem sets (likely three or possibly four)
• Work cooperatively within your ‘Small’ team but submit one common typed
or written work

2) Case Presentation (In Week 13’s Class)

• Cases created by the lecturer will be posted later. Each ‘Big’ team selects
one and gives a 20-25 min presentation in Week 13’s class.
• Written submission is not required but PPT slides are to be uploaded to
LumiNUS.
• All are expected to actively participate in discussions for other teams’ cases.
• Evaluation criteria:
• How rigorous, disciplined and creative the presentation is.
• How much it conforms to the subjects in issue.
• How effectively the team leads the discussion including Q&A.
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3) Class Participation
 Active participation in discussing, questioning, making comments, sharing opinions,
challenging is expected.
 Both quantity and quality count.

4) Midterm Test and Final Test

 Cumulative. Everything covered in class will be testable.

 Test Schedules and Venue:

 Midterm Test: 10am – 12noon, Sunday, 5 March

 Final Test: 10am – 12noon, Sunday, 16 April

(Important!) Personal excuses for a time conflict with the test schedules
will not be honored. By the University policy, no make-up test is to be
given for any circumstances.

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 Please Mark Your Calendar:

 No Classes on 23 January (Monday) and 24 January (Tuesday)

 We will run a make-up class, with both SP1 & SP2 sections combined.
Tentative schedule for this make-up class is as follows.

 29 January, Sunday (Time and Venue will be announced in due course.)

 Test Schedules
 Midterm Test: 5 March, 10am – 12noon
 Final Test: 16 April, 10am – 12noon

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 ‘Projected’ Weekly Schedules

Week Dates Topics

1 9 Jan – 13 Jan Introduction and Course Overview
2 16 Jan –20 Jan The Basics of Market Forces and Applications
3 23 Jan – 27 Jan Consumer Behavior and Economics of Uncertainty
4 30 Jan – 3 Feb A Snapshot into Behavioral Economics
5 6 Feb – 10 Feb Costs, Profit Maximization and Competitive Supply
6 13 Feb – 17 Feb Market Power and Uniform Pricing Monopoly
Recess Week (18 Feb – 26 Feb)
Sophisticated Pricing with Market Power I:
7 27 Feb – 3 Mar
Price Discriminations
Midterm Test: 10am-12noon, Sunday, 5 Mar
Sophisticated Pricing with Market Power II:
8 6 Mar – 19 Mar
Two Part Pricing and Bundling.
Game Theory and Competitive Strategy I:
9 13 Mar – 17 Mar
Introduction and Pre-Nash Game Theory in Static Settings
Game Theory and Competitive Strategy II:
10 20 Mar – 24 Mar
Nash Game Theory and Applications of Static Games.
Game Theory and Competitive Strategy III:
11 27 Mar – 31 Mar
Dynamic Games, Strategic Moves and Applications
Market Failure: Externality, Public Goods, Information Asymmetry
12 3 Ap – 7 Apr
and Applications
13 10 Apr– 14 Apr Case Presentations
Final Test: 10am-12noon, Sunday, 16 April 34
 Questions, Doubts, and Consultations

 Ask questions, at the moment you feel lost or doubtful. It is only your loss to
be fearful of looking dull-brained and rather choose not to ask.

You want to share your doubts/thoughts with others

just like you want others to share theirs.

 Office Hours and Q&A Sessions

• By appointments. Feel free to contact me to set up appointments.

 Email Consultations
I will do our best to reply swiftly, unless
• requiring long answers
• unprofessional

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 Unprofessional Emails?

Please don’t get mad even if we do not reply to your emails like…..

 “I came 30 minutes late yesterday because I woke up late. Can

you please email me about what I missed?”

 “I might have to skip tomorrow’s class because I have got to work

on the marketing project. Would you be kind to email me and
summarize what you will be covering so that I can decide if I can
skip?

 “I didn’t do well in the test because I broke up with my girl friend

last week…... “ And he asked for a make-up test.

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 Good Way of Learning (and Getting a Good Grade)

 Be an active thinker and an engaging participant in lectures and discussions.

─ It’s your own loss if you stay calm when in doubt.

 Focus on understanding the concepts from each lecture notes before you apply
to the cases and problem set questions.

 Take the case and reading materials seriously.

 Problem sets are the best exercise aids.

─ Many of the questions in problem sets would require calculations.
(Economics is a rigorous science.) Yet, the questions are all about what
we touch upon in lectures. So, make sure you digest the concepts first,
rather than following some “routines” blindly.
─ It is a team-based assignment but you are recommended to try all
questions by yourself before the team discussions.

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Quote of the Module

“Economics is fun!”
- Jo –
So, let us….…

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This is it for the day.
Thank you!

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