Module leader

Kimberley Scharf

Information on Restrictions and Pre- and co-requisites, Teaching Format, Academic Aims, and Learning Objectives can be found in the module thumbprint.

Context

This module is only open to WBS students.

The proposed module is an extension of EC131 Economics for Business and EC229 Economics of Strategy which are prerequisites. In these modules, students are introduced to a diverse set of microeconomic and macroeconomic concepts (e.g. cost curves, perfect competition, short and long run macroeconomic changes, introduction to utility maximization). It will provide business students with a more advanced understanding of these and other economic theories and their application in business.

Students who take this module must not be taking or have previously taken EC208 Industrial Economics 1.

Teaching format

2 lectures a week during the Spring term plus 5 additional lectures.

Assessment methods

12 CATS: 2–hour final exam (100%). 15 CATS: One 1500 word case study (10%) AND 2–hour final exam (90%).

Academic aims

The main aim of the module is for business students of Economics to develop an understanding of practical issues such as why governments intervene in markets, why firms outsource activities and why prices are sticky in recession.

Syllabus

1.Review: Supply and Demand

The first lectures provide a review of the most basic concepts the students will have been exposed to in EC131 and EC229. This will serve as a brief refresher course and to get them back into the mindset of economists.

2.Market Structures

a. Brief Recap , Review and Extension of theory and evidence relating to Perfect Competition, Monopoly and Natural Monopoly

b. Oligopoly

i. Extension of EC 229 including examples and empirical evidence :

1. Bertrand Equilibrium

2. Cournot Equilibrium

3. Stackleberg Equilibrium

ii. Regulation of Oligopolies

iii. Do we ever want firms to collude?: The case of Non-Profits

3.Game Theory: Theory and Applications

This part of the module introduces students to some of the key concepts in Game Theory to ensure students understand the power of even the simplest games to inform decisions while also acknowledging the limitations of microeconomics in the analysis of business and management.

a. Introduction to Game Theory

i. Development of Game Theory

ii. Why is Game Theory different from Microeconomics?

iii. What are games? Players, payoffs and rules

iv. Applications. When is Game Theory useful?

b. Types of Games

i. Static or Simultaneous Games

ii. Sequential Games

c. Classic games & Applications

The idea of this section is to introduce students to some of the classic (and simpler) games with a focus, on how these games inform real managerial decisions the students might face, providing examples drawn from this list.

i. Nuclear Arms Race ; The Prisoner’s Dilemma

ii. We need each other! The Battle of the Sexes

iii. Co-operation ; The Deer Hunt

iv. Deterring Competitors ; The Lock Out Game

v. Two Firms, One Market ; The Chicken Game

vi. Mixed strategy Nash Equilibria

vii. Games of incomplete information

d. Auctions

4.Internal Organization

This part of the module will introduce students to the Principal/Agent problem and the issues surrounding incentive based pay and contracts with a strong focus on the manager/employee relationship.

a. The Principal/Agent Problem

b. Incentives

i. A fundamental “law” of Economics: People respond to incentives

ii. How incentives work

iii. Risk Aversion and Incentives

1. Preferences and Risk

2. Certainty Equivalence

c. Incomplete Contracts

i. Sub-optimal outcomes

Information

This part of the module will focus on issues surrounding the availability of information. It will introduce students to the concept of asymmetric information and issues such as moral hazard, adverse selection and signaling.

a. Asymmetric Information

i. Assumption of perfect information

ii. Why asymmetric information is troublesome

1. Private Information

2. Classic Lemons model

iii. Solutions

1. Signaling and Credible Signals

2. Self-Selection and Screening

Illustrative reading

Basic text:

Besanko, D., Dranove, D., Shanley, M. and Schaeffer, S., (2007) “Economics of Strategy,” (4th edition) Wiley ( Primary core text )

Samuelson, W. & Marks, S., (2009): “Managerial Economics (6th Ed.),” Wiley Baye, M.R., (2008): “Managerial Economics & Business Strategy (6th Ed.),” Irwin McGraw-Hill, 2008