ECONOMICS 3200A

1
ECONOMICS 3200A

• Fall 2007
• Professor Lazar
• N205J Schulich
• flazar_at_yorku.ca
• 416-736-5068

2
ECONOMICS 3200ALecture 1September 6, 2007
3
Course Requirements

• Three tests
• October 9 November 6 December exam period
• 30 30 40
• Format 3 questions of 6 short essays
• Open book No cell phones, no wireless
  communication devices
• No excuses for missing first two tests see
  Course Outline

4
Other Ground Rules

• No taping of lectures
• No cell phones in class, including text
  messaging!
• Responsible for all chapters in text except
  chapter 18
• Listen before you write Lecture notes for each
  week will be posted

5
Office Hours

• Wednesdays 1200-200
• N205J, Schulich
• Phone [phone]
• Email flazar_at_yorku.ca

6
Text

• D.W. Carlton and J.M. Perloff, Modern Industrial
  Organization, 4th Edition, Addison-Wesley, 2005

7
Objectives

• Focus of the course Examine real-world
  competitive behaviour, and highlight the
  theoretical limitations of traditional
  microeconomic theories
• Study different market structures
• Consider how these structures develop and evolve
  over time
• Implications for competitive behaviour

8
Disclosure Personal Bias

• Theoretical underpinnings of competition policy
  and competition law have not yet incorporated the
  work of Professor Michael Porter
• Porters work, which builds upon that of Joseph
  Schumpeter emphasizes that companies strive to
  create a competitive advantage
• Those that succeed outperform their competitors
  and are most likely to dominate their markets
• The laggards eventually exit the industry
• Competition policy tends to inhibit companies
  from freely developing competitive advantages
  because the successful companies are likely to be
  constrained in their ability to exploit their
  advantages
• The long-run consequences of this are much more
  significant than the supposed loses in consumer
  welfare resulting from a reduction in the number
  of unsuccessful competitors

9
Disclosure Personal Bias

• According to Schumpeter, the competitive gales of
  creative destruction, the product of
  entrepreneurs, drive the capitalist system
  forward and produce the dramatic improvements in
  standards of living.
• If one were to compare the top 25-100 companies
  on the Fortune 500 list in 1970 and the list in
  2007, one would find that there has been a
  dramatic turnover in the list
• And in 35 years time the list will be much
  different yet.
• All of these changes have taken place and will
  take place without the intervention of
  competition policy

10
Creative Destruction

• Schumpeter on capitalism
• This process of creative destruction is the
  essential fact about capitalism. It is what
  capitalism consists in and what every capitalist
  concern has got to live in.
• A process of industrial mutation incessantly
  revolutionizes the economic structure from
  within, incessantly destroying the old one,
  incessantly creating a new one.
• The function of entrepreneurs is to reform or
  revolutionize the pattern of production by
  exploiting an invention or more generally an
  untried technological possibility for producing a
  new commodity or producing an old one in a new
  way.
• The essential point to grasp is that in dealing
  with capitalism we are dealing with an
  evolutionary process.
• Every piece of business strategy must be seen in
  its role in the perennial gale of creative
  destruction.

11
Top 15 Fortune 500 Companies (Sales)

• 1970
• GM
• Exxon
• Ford
• GE
• IBM
• Chrysler
• Mobil
• Texaco
• ITT Industries
• Gulf Oil
• ATT
• US Steel
• Chevron
• LTV
• DuPont

• 2006
• Exxon-Mobil
• Wal-Mart
• GM
• Chevron
• Ford
• Conoco Phillips
• GE
• IBM
• HP
• Home Depot
• Valero Energy
• McKesson
• Verizon
• Cardinal Health
• Altria Group

12
Top 30 Global Companies (Market Value)

• 16. Johnson Johnson
• 17. Pfizer
• 18. Altria Group
• 19. ICBC (China)
• 20. AIG
• 21. JP Morgan Chase
• 22. Berkshire Hathaway
• 23. Glaxo Smith Kline (UK)
• 24. Cisco Systems
• 25. Roche Holdings (Switzerland)
• 26. Total (France)
• 27. Chevron
• 28. Vodafone (UK)
• 29. Bank of China (China)
• 30. Nestle (Switzerland)

• 2006
• Exxon-Mobil
• GE
• Microsoft
• Citigroup
• ATT
• Bank of America
• Toyota (Japan)
• Gazprom (Russia)
• Petro China (China)
• Royal Dutch Shell (Netherlands)
• HSBC (UK)
• Wal-Mart
• PG
• BP (UK)
• China Mobile (China)

13
Other Notable Companies among 1000 Largest Global
Companies

• Nintendo (236)
• Las Vegas Sands (270)
• Nike (325)
• Tata Consultancy (327)
• Infosys Technologies (328)
• Starbucks (369)
• Countrywide Financial (384)
• Christian Dior (405)
• MGM Mirage (427)
• GM (494)
• Coach (513)
• Harley Davidson (528)
• Electronic Arts (584)
• Ford (612)
• St. Jude Medical (650)

• IBM (31)
• Google (32)
• Coca Cola (47)
• Nokia (65)
• Time Warner (80)
• America Movil (83)
• Apple (93)
• Arcelor Mittal (97)
• LOreal Group (110)
• McDonalds (140)
• eBay (170)
• HM (175)
• Carnival (201)
• FedEx (228)
• Hon Hai Precision Industries (230)

14
Largest Canadian Companies (Market Value)

• Brookfield Asset Management
• BCE
• Rogers Communications
• Alcan
• Goldcorp
• Talisman Energy
• Petro Canada
• Potash of Saskatchewan
• Telus
• Trans Canada
• Teck Cominco
• Nexen
• Power Corp
• Cameco
• Nortel
• Enbridge (895)

• 2006
• Royal Bank (122)
• Manulife Financial
• Bank of Nova Scotia
• TD Bank
• EnCana
• Suncor Energy
• Bank of Montreal
• CIBC
• Husky Energy
• Canadian Natural Resources
• RIM
• Thomson
• Barrick Gold
• Sun Life Financial
• CNR

15
Introduction

• Decision making
• Forward looking Information requirements and
  uncertainty
• Time horizon short run vs. long run
• Adam Smith individuals pursuing their own self
  interest will collectively produce the greatest
  good ? Greed is good, Economics 101
• Importance of incentives individuals motivated
  by personal well-being
• Explain increasing concern with global warming?

16
Introduction

• Decision making
• Objectives constrained maximization
• Maximization of what?
• Nature of constraints
• Competitors strategies
• Company history core competencies, reputation,
  resources
• Resource constraints short-run/long run (i.e.
  availability of resources, quality)
• Financial capital constraints short-run/long
  run (are there capital constraints or investment
  opportunity constraints?)
• Laws, regulations

17
Introduction

• Markets and players
• What is a market?
• Rules and regulations role of governments
• Ex ante vs. ex post rule making political risk
• Market boundaries Whos in, whos out?
• Interaction between/among competitors
  interaction between competitors and suppliers
  interaction between competitors and customers
  interaction between markets