November 26, 2015

Management Quotations - 2015 Collection

MBA Core Management Knowledge - One Year Revision Schedule

What is Management? - Management is getting things done along with people. - Narayana Rao

4 Ps of Management - Providing Value to Customers - Purchasing or Procuring Input Resources - Processing the Inputs into Outputs - People Relations - Narayana Rao

Interactive Marketing becoming more and more prominent in marketing as it is capable of two way communications in product conceptualization, communication regarding final product, order taking, communicating order delivery and even payment (and payment confirmation) and post purchase communication.

Business teams want leaders who are going to support them and make the team better and not leaders who sit in the corner office and demand answers without any personal involvement - John Rice, Vice Chairman of GE and CEO of GE Global Growth and Operations

Be with someone who brings out some good in you, not with the one who generates stress in you. - Modified quote (Nrao)

November 24, 2015

Organizing for Innovation

Innovation is first planned in organizations. An organization plan  is developed next. Resources are are acquired next as per the organization plan. Innovation culture is a part of the organization plan but it is exhibited during the directing process. The authors say, the innovation organization, can be inhibited or it can be supported. One of the critical support elements that is responsible  is infrastructure, which consists primarily of the processes people use to do their work, and a work place that itself helps people to work effectively to meet the challenges of rapid learning and high
creativity that’s required for innovation to thrive. Work place is a part of the organization plan.

Work Process, Collaboration and Work Design

The concept of a “work process” is that to accomplish the tasks at hand in any activity that involves creative thinking, collaboration, or what is often referred to as “knowledge work,” people have to choose how to get the work done. Is this an individual task or a group task? Is it a meeting, a
brainstorming session, a workshop, or a conference? While many time  these decisions are easily made, but some require deeper thought.

Productivity of capital is achieved by productive operations. Making and selling of products and services create customer experiences, and internal functions like marketing strongly affect differentiation. Can your company provide a superior experience for your customers?

And what supports productive operations? Given rapid change as well as structural shifts across the economy, organizational effectiveness is supported by the constant application of creativity and the development of innovations that make a difference.

The key capabilities that enable creativity and innovation are learning and leadership. Through learning we recognize when and why new information and knowledge are important to the present and future of the organization. And as we have discussed, support for knowledge-creation,
learning, creativity, and innovation are very much a function of an organization’s leadership.

At the base of this productivity tree there is a single quality which supports everything else that distinguishes outstanding companies from the mediocre ones, and that is the ability of the people inside the organization to work well together with others inside and outside, to learn together, to create together. Thus, collaboration is in a fundamental way the very foundation of business success. It is also a key foundation of innovation, because success at innovation requires massive amounts of effective collaboration.
Collaboration means that there is a spirit of openness that leads people to ask probing questions, to
come up with innovative solutions by sharing knowledge between departmental, to look deeply even though it might be easier to look only superficially. There are teams working effectively, problems grasped and solved quickly, and pervasive networks through which many problems are dissolved before they ever manifest. In other words, the prevailing work process in the company favors collaboration, and the means are at hand to ensure that such collaboration is effective.

Could it really be true that companies in which people collaborate more effectively generate better returns on capital?

Toyota is  renowned for its innovation system and for its collaborative culture, is now one of the most admired companies in the world

The Work Place: Social Design and the Innovation Milieu

While it’s quite possible to create and enhance the conditions that support creativity by supporting effective collaboration, the actual arrival of creative ideas is entirely unpredictable. Innovation, on the other hand, is a social and managerial process because it requires that people with complementary expertise and viewpoints work together. Hence, most people working as innovation professionals,
particularly those in R&D, firmly believe that successful social interaction is critical to the success of the innovation process.

Innovation is undoubtedly a social art, and although it can occasionally be the province of a unique
or exceptionally talented individual, it’s more commonly a group effort. In modern organizations it is commonly the fruit of people who work together effectively, applying their diverse talents and experiences to complement one another and provide the depth of experience and capability that
enables them to transform ideas into useful products, services, and business models.

All of these issues come together in a compelling way in the physical setting that is designed specifically to support the work of innovation, namely the research laboratory. A few years ago I had the opportunity to
study nine new R&D labs built by pharmaceutical and high companies, and this process illuminated a number of principles that, taken together, describe many key aspects of the ideal physical infrastructure for innovation. Each of these companies had invested heavily in facilities that encouraged and even forced researchers to interact with one another, and this led me to
understand that these facilities represent a new dimension of architecture that I now refer to as “social design,” the application of architectural principles to promote social interaction and effective innovation.

Social Design Theory in Practice: The Design of R&D Labs

The term “social design” refers to that aspect of architecture which takes as a priority the creation of environments for effective and positive human interaction.

Since the design of both facilities and organizations are entirely complementary to one another, these two aspects of design can literally define and reinforce collaboration in this age of “intellectual capital.”

One of the underlying reasons has to do with the nature of creativity. As Mihaly Csikszentmihalyi points out, “An idea or product that deserves the label ‘creative’ arises from the synergy of many sources and not only from the mind of a single person. It is easier to enhance creativity by changing
conditions in the environment than by trying to make people think more creatively.”

In a typical laboratory, scientists, engineers, and technicians design and conduct experiments whose purpose is to create useful new knowledge that may pertain to the uncharted physical world of chemistry or biology, to the behavior of man-made products, or to how people interact with each other and with physical artifacts.

For example, Glaxo Wellcome chemist Dan Sternbach had this to say about collaboration in the corridor that runs through his building. “The ‘people corridor’ that connects all the offices actually forces everyone to walk by every office. That's good for communication. You know when people are in and you can stop by their offices. The whole argument about proximity means a lot when you're collaborating with people.”

MacArthur Fellow J. Kirk Varnedoe, former Director of Painting and Sculpture at New York’s Museum of Modern Art puts it this way: “Creativity is not solely a brain function, but a social function as well.”

Genentech believes that informal communication improves the possibility of doing something new and innovative, and this belief has significant influence on the design of Genentech's facilities. For example, the location of offices, toilets, mail rooms, copiers, coffee machines, and stairways within individual buildings is intended to force interactions by bringing people to these shared spaces and functions. In addition, special “interaction spaces” have been included in many facilities, with varying degrees of success. Subsequent observations at Genentech (and confirmed at Sun Microsystems) revealed that the psychology of these spaces can be complex.


1. Organize for Interaction
It’s universally accepted that organizational hierarchies suppress important and desirable qualities such as innovativeness, creativity, adaptiveness, etc.Many companies are attempting to reduce the influence of the hierarchy and shift to network based organizations, as we discussed in the
last chapter.

2. Design for Interaction
Facilities are designed to increase the frequency and quality of interactions, to support meaningful dialog, not just bumping shoulders in the hallway or the elevator.

3. Design for Flexibility
Many of the features that are intended to increase interaction also serve
to reduce cost by increasing the flexibility of the work environment while
simultaneously reducing square footage requirements.

4. Design for Aesthetics
Features that address aesthetics are difficult to value, but managers at
many facilities cited competition for talented individuals as one reason for
the continuing effort to bring beauty to the workplace.

Collaboration Centers

In addition to facilities that support spontaneous collaboration and small gatherings, there is also a need for larger spaces to accommodate larger groups. We call these facilities Collaboration Centers, and over the years we’ve seen many great examples.

How can we assess the effectiveness of interaction? Here are four critical dimensions.

1. Cycle time: Great infrastructure enables firms to reduce the cycle time from initial insight to application in new ideas and new products. High-performance facilities contribute significantly to the productivity of knowledge.
2. Quantity: Great collaboration centers result in an increased quantity of raw ideas and products, and of refined ideas and products.
3. Quality: They also support an increase in the quality of raw ideas and products, as well as refined ones.
4. Staff retention and recruiting: Staff retention and an increase in the ability to recruit top level staff is often a consequence of great facilities, where people can interact easily and effectively with one another.

First draft. To be revised

From Permanent Innovation - Langdon Morris

Permanent Innovation
The Definitive Guide to the Principles, Strategies, and Methods of
Successful Innovators
Langdon Morris

Langdon Morris is a co-founder and principal of InnovationLabs LLC and Senior Practice Scholar at the Ackoff Center of the University of Pennsylvania and Senior Fellow of the Economic Opportunities Program of the Aspen Institute.

Space 10 - Ikea funding an Independent Innovation Lab

MBA Core Management Knowledge - One Year Revision Schedule

Updated 24 Nov  2015, 27 Nov 2014

November 16, 2015

Ch. 22: COST CURVES - Summary - Intermediate Microeconomics - Varian


Topics in the chapter

22.1 Average Costs
22.2 Marginal Costs
22.3 Marginal Costs and Variable Costs
22.4 Cost Curves for Online Auctions

22.5 Long-Run Costs
22.6 Discrete Levels of Plant Size
22.7 Long-Run Marginal Costs

The cost curve is an important geometric construction in economics.  Cost curves can be used to depict graphically the cost function of a firm and  to study the determination of optimal output choices.

Different types of cost curves

(1) Total cost: c(y) = cv(y) + F

cv(y)= variable costs

F= Fixed costs

(2) Average costs: c(y)/y

 =                 +

AC        AVC AFC

Average Average Average

costs variabel fixed

costs costs

Example: c(y) = y3- y2 + 4y + 12

(3) Marginal costs: the derivative of the cost curve

dc(y)/dy = dcv(y)/dy


MC is the change in cost due to change in output

MC equals AVC at zero output

MC goes through minimum point of AC and AVC

(4) Area under MC-curve gives the total Variable Costs


example: MC=y2

Intuitively: MC-curve measures the cost of each

additional unit,

so adding up MCs gives the variable costs.

Long run and short run

(1) Average costs

(2) Marginal costs

Important Points

22.1 Average Costs

1. Average costs are composed of average variable costs plus average fixed
costs. Average fixed costs always decline with output, while average variable
costs tend to increase. The net result is a U-shaped average cost

22.2 Marginal Costs

2. The marginal cost curve lies below the average cost curve when average
costs are decreasing, and above when they are increasing. Thus marginal
costs must equal average costs at the point of minimum average costs.

3. The area under the marginal cost curve measures the variable costs.

4. The long-run average cost curve is the lower envelope of the short-run
average cost curves

November 15, 2015

Ch. 1. The Market - Summary - Intermediate Microeconomics - Varian

The Market

1.1 Constructing a Model

Example of an economic model — The market for rented apartments is discussed in this book.

1. Models are simplifications of reality. From the real situation many complicated issues are ignored and only few important issues are considered for analysis using models.
2. For example, we assume all apartments are identical (In reality they are not)
3. Some are close to the university, others are far away
4. Rental price of outer-ring apartments is exogenous — determined outside the model (we are not analyzing)
5. price of inner-ring apartments is endogenous — determined within the model (We want to analyze and find out.)

1.2 Optimization and Equilibrium

 Two principles of economics

1. Optimization principle — people choose actions that are in their interest. They want to buy a specific quantity of goods at various prices to increase benefit to them
2. Equilibrium principle — Market prices adjust so that people who want to buy can buy and people who want to sell can sell the quantities of their choice. Thus the intentions of buyers and sellers become consistent with each other with varying prices and quantities.

1.3 The Demand Curve
Constructing the demand curve

1. Find the rent each person is willing to pay and draw a graph in descending order with rent on the y axis.

2. If there are large numbers of people, this curve can become a smooth curve. Otherwise it will be a step curve.

Reserve Price: Economists call a person’s maximum willingness to pay for something that person’s reservation price. The reservation price is the highest price that a given person will accept and still purchase the good.

1.4 The Supply Curve

Supply curve

1. depends on time frame
2. but we’ll look at the short run—when supply of apartments
is fixed.

1.5 Market Equilibrium
1. when demand equals supply
2. price that clears the market

1.6 Comparative Statics
Comparative statics
1. how does equilibrium adjust when economic conditions change?
2. “comparative” — compare two equilibria
3. “statics” — only look at equilibria, not at adjustment
4. example — increase in supply lowers price;
5. Complicated example — convert somee rental apartments into  condos which can be  purchased by renters; no effect on price;

1.7 Other Ways to Allocate Apartments
 Other ways to allocate apartments
1. discriminating monopolist
2. ordinary monopolist
3. rent control

1.8 Which Way Is Best?
Comparing different institutions

1. need a criterion to compare how efficient these different
allocation methods are.

1.9 Pareto Efficiency

an allocation is Pareto efficient if there is no way to make
some group of people better off without making someone else
worse off.
if something is not Pareto efficient, then there is some way
to make some people better off without making someone else
worse off.
if something is not Pareto efficient, then there is some kind
of “waste” in the system.

1.10 Comparing Ways to Allocate Apartments

Checking Pareto efficiency of different methods
1. free market — efficient
2. discriminating monopolist — efficient
3. ordinary monopolist — not efficient
4. rent control — not efficient

1.11 Equilibrium in the Long Run
In long run supply will change
We have to  examine efficiency in this context as well.

Important Points

1. Economics proceeds by making models of phenomena of interest. Models are simplified representations of reality and using these models our questions of interest can be answered.

2. Economists are guided by  two important principles. The optimization principle, which
states that people typically try to choose what’s best for them, and by the equilibrium principle, which says that prices will adjust until demand (quantity demanded at the price) and supply (quantity sellers are willing to sell at that price) are equal.

3. The demand curve measures how much people wish to demand at each price, and the supply curve measures how much people wish to supply at each price.

4. An equilibrium price is one where the amount demanded equals the amount supplied.

5. The study of how the equilibrium price and quantity change when the underlying conditions (conditions that change demand curves and supply curves) change is known as comparative statics.

6. Markets  and plans are analyzed on the basis of Pareto efficiency. An economic situation is Pareto efficient if there is no way to make some group of people better off without making some other group of people worse off. The concept of Pareto efficiency can be used to evaluate different ways of allocating resources either based on markets or central planning.

Ch. 26. Monopoly Behavior - Summary - Intermediate Microeconomics - Varian

26. Monopoly Behavior

If a firm has some degree of monopoly power, it can use  complicated pricing and marketing strategies to earn profits higher than that of firms in competitive market. It can try to differentiate its product from the products sold by its competitors to create extra preference for its product in the market thus enhance its market power even further than that allowed by technology alone.
In this chapter the topic of  how firms can enhance and exploit their market power is explained.

26.1 Price Discrimination

Selling different units of output at different prices is called price discrimination. Three kinds of price discrimination are recognized.

First-degree price discrimination means that the monopolist sells different units of output for different prices and these prices may differ from person to person. This is also termed as the case of perfect
price discrimination.

In second-degree price discrimination,  the monopolist sells different units of output for different prices, but every individual who buys the same amount or quantity of the good pays the same price. The prices differ across the units of the good bought, and not across people. A  simple  example
of this is bulk discounts or discount for higher quantity.

In third-degree price discrimination,  the monopolist sells output to different people for different prices, but every unit of output sold to a given person sells for the same price. This means he quotes the same price to a buyer irrespective of the quantity bought. Also this can occur across categories of persons, For example,  senior citizens’ discounts, student discounts come under this type of discrimination. .

26.2 First-Degree Price Discrimination

A producer who is able to perfectly price discriminate will sell each unit of the good at the highest price it will command, that is, at each consumer’s reservation price. Since each unit is sold to each consumer at his or her reservation price for that unit, there is no consumers’ surplus generated in
this market; all the surplus goes to the producer.

26.3 Second-Degree Price Discrimination

Second-degree price discrimination is also known as the case of nonlinear pricing, since it means that the price per unit of output is not constant but depends on how much you buy.

26.4 Third-Degree Price Discrimination

Two different consumer groups or markets are offered different prices.

The market with the lower elasticity of demand will have higher price. This is because, an elastic demand provide more profit as price is decreased.  A firm that price discriminates will therefore set a low price for the price-sensitive group and a high price for the group that is relatively price insensitive. In this way it maximizes its overall profits.

26.5 Bundling
26.6 Two-Part Tariffs
26.7 Monopolistic Competition
26.8 A Location Model of Product Differentiation
26.9 Product Differentiation
26.10 More Vendors

Important Points

1. A monopolist has  an incentive  to engage in price discrimination of some sort.

2. Perfect price discrimination involves charging each customer a different take-it-or-leave-it price. This is a Pareto efficient allocation. (But consumer surplus will be low in this allocation)

3. If a firm can charge different prices in two different markets, it will tend to charge the lower price in the market with the more elastic demand (because elastic demand gives more profit on reducing price).

4. If a firm can set a two-part tariff, and consumers are identical, then it will generally want to set price equal to marginal cost and make all of its profits from the entry fee.

5. The industry structure known as monopolistic competition refers to a situation in which there is product differentiation, so each firm has some degree of monopoly power, but there is also free entry so that profits are driven to zero.

6. Monopolistic competition can result in too much or too little product differentiation in general.


max         p1(y1)y1 + p2(y2)y2 − c(y1 + y2).

The optimal solution must have
MR1(y1) = MC(y1 + y2)
MR2(y2) = MC(y1 + y2).

That is, the marginal cost of producing an extra unit of output must be equal to the marginal revenue in each market.



Ch. 25. Monopoly - Summary - Intermediate Microeconomics - Varian

25. Monopoly

In this chapter we  consider an industry structure when there is only one firm in the industry—a monopoly.

A monopoly would recognize that it can influence the market price by its choice of supply quantity and choose that level of price and output that maximized its overall profits.

The difference

Perfect competition: All firms are price takers

Monopoly: The monopolist decides market output and price

24.1 Maximizing Profits

B. Profit maximization

(1) =TR(y)-TC(y)

max  when =0

MR-MC=0  MR = MC

Marginal revenue Marginal cost

(2) TR(y) = p(y)*y

MR(y)= p(y)*1+ y


Perfect competition: MR=price

For a monopolist: MR  price. Why?

(3) Examples

24.4 Inefficiency of Monopoly

 Ineffiency of monopoly

24.6 Natural Monopoly

Natural monopoly - theory of regulation

(1) Definition: Decreasing AC

MC < AC Why?

(2) Examples of natural monopolies

Railroad tracks

Utilities etc

(3) No regulation: MC=MR


MR  price  MC  price

Efficient ressource use when MC=price.


(4) Regulation regimes

(a) Price=MC

 Price< AC

 Need to subsidise the monopolist

 Note: Efficiency loss by taxation

(b) Price=AC


 Efficiency loss?

24.7 What Causes Monopolies?

Important Points

1. When there is only a single firm in an industry, we say the market is a monopoly market and the firm is a monopolist.

2. A monopolist operates at a point where marginal revenue equals marginal cost to get maximum profit for him.. Hence a monopolist charges a price (average price) that is a markup on marginal
cost.  The price or  the size of the markup depends on the elasticity of demand.

3. The monopoly market will produce an inefficient amount of output. The size of the inefficiency can
be measured by the deadweight loss—the net loss of consumers’ and the producer’s surplus.

4. A natural monopoly occurs when a firm cannot operate at an efficient level of output  as per the with marginal cost analysis without losing money. Hence they are to be allowed to operate in a market that has monopoly features and hence allows it to fix price to get profit.  Many public utilities come under the category of  natural monopolies  and are therefore regulated by the government.

5. Whether an industry is competitive or monopolized depends in part on the nature of technology. If the minimum efficient scale is large relative to demand, then the market is likely to be monopolized because only limited number of firms can be in the market and operate at the efficient scale. But if the minimum efficient scale is small relative to demand, there is room for many firms in
the industry, and  a competitive market structure may emerge.

Ch. 16. Equilibrium - Summary - Intermediate Microeconomics - Varian

16. Equilibrium

In this chapter we will describe how to use these market demand curves to determine the equilibrium market price (Refer 1.5 Market Equilibrium).

We will not study in detail, but give some examples of equilibrium analysis—how the prices adjust
so as to make the demand and supply decisions of economic agents compatible. In order to do so, we need to introduce  briefly the other side of the market—the supply side.

16.1 Supply

A. Supply curves -

Measures amount suppliers want to supply at each price

How do we derive supply curves:


Minimize costs - producing y units

Factor demand

Cost function

Firms supply when marginal cost =price

Aggregate supply fn.: S(p)

Inverse supply fun: Ps(q)

B. Demand curves

Measures amount consumers want to buy at each price

How do we derive demand curves:


Max. utility - budget restriction

Individual demand

Aggregate individuals demand function: D(p)

Inverse demand function: Pd (q)

16.2  Equilibrium

(1) Competitive market - each agent price taker

(a) Many small agents

(b) A few agents who think that the others keep fixed prices

(2) Example:

Demand: q= 5-p Supply: q = -2 + p

Inverse d.: p=5-q Inverse s.: p=2+q

16.3  Two special cases of Market Equilibrium

(1) Vertical supply

Perfectly inelastic supply


Short run supply of apartments

(2) Horizontal supply

Perfectly elastic supply


When a small country imports goods from the

world market, the country won’t influence the market

price. Supply is horizontal.

16.4 Inverse Demand and Supply Curves

16.5. Comparative statics (Refer 1.6 Comparative Statics)

(1) What happens with (q*, p*) when Supply (or Demand) changes?

Shift the Supply curve (or Demand), and get a new

(2) Example: tax per unit: t.

New supply curve: Ps + t

New equilibrium when Pd = Ps+ t

Ch. 15. Market Demand - Summary - Intermediate Microeconomics - Varian

15. Market Demand

Analysis of Elasticity

In this chapter, we see how to add up individual choices to get total market demand.
Once the market demand curve is obtained, we examine some of its properties, such as the relationship between demand and revenue (elasticity).

15.1 From Individual to Market Demand

To get M.D. - add up individual demands

Add horizontally

X1(p1, p2, m1, m2 ... mn) =

Often think of market behaving like a single individual

(1) The "representative consumer model"

(2) Not true in general, but a reasonable assumption for this course

15.5 Elasticity


(1) Measures responsiveness of demand to price

(2)  E =  (the own price elasticity)

(a) E < 0: Normal goods

(b) E> 0: Giffen goods

(c)  > 1 Elastic

(d)  < 1 Inelastic

(c) (d)


(a) (b)

(3) Example: Linear demand

q= a-bp


Note: Elasticity is in the linear case a function of p and q

(4) Demand curve with constant elastisticity

q= Apa (e<0. Why?)

E= a

(5) "Tendency":

Goods with many close substitutes - elastic demand

Goods without close substitutes - inelastic demand

15.7 Elasticity and Revenue

How does revenue change when you change price?

(1) Revenue= quantity x price


dR/dp = q + p(dq/dp)

dR/dp > 0 when  < 1. Why?

Inelastic demand - 1 % price increase leads to less than 1% reduction in quantity sold.

dR/dp < 0 when  > 1.

Monopolist: Maximizes R when

  = 1

(2) Example: q(p) = 30 - 2q

G. Some other elasticities

15.11 Income Elasticity

(1) Income elasticity

Eq,m =

Eq,m > 0 Normal good

Eq,m < 0 Inferior good

(2) Cross price elasticity

E q,p2 =

Good 1 and 2 are substitutes if

E q,p2 > 0

Good 1 and 2 are complementary goods if

E q,p2 < 0

Important Points


1. The market demand curve is simply the sum of the individual demand

2. The reservation price measures the price at which a consumer is just
indifferent between purchasing or not purchasing a good.


3. The demand function measures quantity demanded as a function of
price. The inverse demand function measures price as a function of quantity.
A given demand curve can be described in either way.

15.5 Elasticity

4. The elasticity of demand measures the responsiveness of the quantity
demanded to price. It is formally defined as the percent change in quantity
divided by the percent change in price.


5. If the absolute value of the elasticity of demand is less than 1 at some
point, we say that demand is inelastic at that point. If the absolute value
of elasticity is greater than 1 at some point, we say demand is elastic at
that point. If the absolute value of the elasticity of demand at some point
is exactly 1, we say that the demand has unitary elasticity at that point.


6. If demand is inelastic at some point, then an increase in quantity will
result in a reduction in revenue. If demand is elastic, then an increase in
quantity will result in an increase in revenue.


7. The marginal revenue is the extra revenue one gets from increasing
the quantity sold. The formula relating marginal revenue and elasticity
is MR = p[1 + 1/ ] = p[1 − 1/| |].


8. If the inverse demand curve is a linear function p(q) = a − bq, then the
marginal revenue is given by MR = a − 2bq.

9. Income elasticity measures the responsiveness of the quantity demanded
to income. It is formally defined as the percent change in quantity divided
by the percent change in income.

Top Management Thinkers 50 - 2015 Rankings

1. Michael Porter

2. Clayton Christensen

29. Game Theory - Summary - Intermediate Microeconomics - Varian

29. Game Theory

29.1 The Payoff Matrix of a Game
29.2 Nash Equilibrium
29.3 Mixed Strategies
29.4 The Prisoner’s Dilemma
29.5 Repeated Games
29.6 Enforcing a Cartel
29.7 Sequential Games
29.8 A Game of Entry Deterrence

Game theory is concerned with the general analysis of strategic interaction.

In this chapter we discuss the basics of the subject and explore how it works and how it can be used to study economic behavior in oligopolistic markets.

Game Theory
Game theory studies strategic interaction, developed by von Neu-
mann and Morgenstern around 1950

How to depict payoffs of game from different strategies
1. two players
2. two strategies
3. example

Dominant strategy
Each person has a strategy that is best no matter what the
other person does
Nice when it happens, but doesn’t happen that often

Nash equilibrium
1. what if there is no dominant strategy?
2. in this case, look for strategy that is best if the other player
plays his best strategy
3. note the “circularity” of definition
4. appropriate when you are playing against a “rational” oppo-
5. each person is playing the best given his expectations about
the other person’s play and expectations are actually con-
6. example

7. Nash equilibrium in pure strategies may not exist.

8. but if allow mixed strategies (and people only care about
expected payoff), then Nash equilibrium will always exist

Prisoner’s dilemma
1. 2 prisoners, each may confess (and implicate other) or deny
2. gives payoff matrix

3. note that (confess, confess) is unique dominant strategy
equilibrium, but (deny, deny) is Pareto efficient
4. example: cheating in a cartel
5. example: agreeing to get rid of spies
6. problem — no way to communicate and make binding agree-

Repeated games
1. if game is repeated with same players, then there may be
ways to enforce a better solution to prisoner’s dilemma
2. suppose PD is repeated 10 times and people know it
a) then backward induction says it is a dominant strategy to
cheat every round
3. suppose that PD is repeated an indefinite number of times
a) then may pay to cooperate
4. Axelrod’s experiment: tit-for-tat

Example – enforcing cartel and price wars

Sequential game — time of choices matters

I. Example: entry deterrence
1. stay out and fight
2. excess capacity to prevent entry — change payoffs
3. see Figure 29.7.
4. strategic inefficiency

29.1 The Payoff Matrix of a Game

1. A game can be described by indicating the payoffs to each of the players
for each configuration of strategic choices they make.

2. A dominant strategy equilibrium is a set of choices for which each
player’s choices are optimal regardless of what the other players choose.

29.2 Nash Equilibrium

3. A Nash equilibrium is a set of choices for which each player’s choice is
optimal, given the choices of the other players.

29.4 The Prisoner’s Dilemma

4. The prisoner’s dilemma is a particular game in which the Pareto efficient
outcome is strategically dominated by an inefficient outcome.

5. If a prisoner’s dilemma is repeated an indefinite number of times, then
it is possible that the Pareto efficient outcome may result from rational

6. In a sequential game, the time pattern of choices is important. In these
games, it can often be advantageous to find a way to precommit to a
particular line of play.

Ch. 28. Oligopoly - Summary - Intermediate Microeconomics - Varian

28. Oligopoly

A. Oligopoly is the study of the interaction of a small number of
1. duopoly is simplest case
2. unlikely to have a general solution; depends on market struc-
ture and specific details of how firms interact

28.1 Choosing a Strategy
B. Classification of theories
1. non-collusive
a) sequential moves
1) quantity setting — Stackelberg
2) price setting — price leader
b) simultaneous moves
1) quantity setting — Cournot
2) price setting — Bertrand
2. collusive

28.2 Quantity Leadership

C. Stackelberg behavior
1. asymmetry — one firm, quantity leader, gets to set quantity
2. maximize profits, given the reaction behavior of the other
3. take into response that the other firm will follow my lead
4. analyze in reverse
5. firm 2
a) maxy2 P(y1 + y2)y2 − c(y2)
b) FOC: P(y1 + y2) + P′(y1 + y2)y2 = c′(y2)
c) solution gives reaction function, f2(y1)
6. firm 1
a) maxy1 P(y1 + f2(y1))y1 − c(y1)
b) FOC: P(y1 + f2(y1)) + P′(y1 + f2(y1))y1 = c′(y1)
c) see Figure 26.2.
7. graphical solution in Figure 28.4.
D. Price-setting behavior
1. leader sets price, follower takes it as given
2. given p1, firm 2 supplies S2(p1)
3. if demand is D(p), this leaves D(p1) − S2(p1) for leader
4. hence leader wants to maximize p1y1 − c(y1) such that y1 =
D(p1) − S2(p1)
5. leader faces “residual demand curve”

28.5 Simultaneous Quantity Setting

E. Cournot equilibrium — simultaneous quantity setting
1. each firm makes a choice of output, given its forecast of the
other firm’s output
2. let y1 be the output choice of firm 1 and ye
2 be firm 1’s beliefs
about firm 2’s output choice
3. maximization problem maxy1 p(y1 + ye
2)y1 − c(y1)
4. let Y = y1 + ye
5. first-order condition is
p(Y ) + p′(Y )y1 = c′(y1)
6. this gives firm 1’s reaction curve — how it chooses output
given its beliefs about firm 2’s output
8. look for Cournot equilibrium — where each firm finds its
expectations confirmed in equilibrium
9. so y1 = ye
1 and y2 = ye

28.6. Example of Cournot
1. assume zero costs
2. linear demand function p(Y ) = a − bY
3. profit function: [a − b(y1 + y2)]y1 = ay1 − by2
1 − by1y2
4. derive reaction curve
a) maximize profits
b) a − 2by1 − by2 = 0
c) calculate to get y1 = (a − by2)/2b
d) do same sort of thing to get reaction curve for other firm
5. look for intersection of reaction curves

28.9 . Bertrand – simultaneous price setting
1. consider case with constant identical marginal cost
2. if firm 1 thinks that other firm will set p2, what should it set?
3. if I think p2 is greater than my MC, set p1 slightly smaller
than p2
4. I get all the customers and make positive profits
5. only consistent (equilibrium) beliefs are p1 = p2 = MC

28.10 . Collusion
1. firms get together to maximize joint profits
2. marginal impact on joint profits from selling output of either
firm must be the same
3. max p(y1 + y2)[y1 + y2] − c(y1) − c(y2)
4. P(y1 + y2) + P′(y1 + y2)[y1 + y2] = c′(y1) = c′(y2)
5. note instability — if firm 1 believes firm 2 will keep its output
fixed, it will always pay it to increase its own output
6. problems with OPEC
7. if it doesn’t believe other firm will keep its output fixed, it
will cheat first!

Ch. 24: INDUSTRY SUPPLY - Summary - Intermediate Microeconomics - Varian


In Ch. 23, We have seen how to derive a firm’s supply curve from its marginal cost curve. In a market,  there will typically be many firms. So the supply curve the industry presents to the market will be the sum of the supplies of all the individual firms. In this chapter,  we learn how develop the
industry supply curve and make decisions based on it.

23.1 Short Run Industry Supply

A. Industry supply: Sum of the MC curves

(1) S(p) =

(2) Example:

Firm 1:            Firm 2:

c(y)= 2y2 +3          c(y)= 3y2 +3

MC= 4y                 MC=6y

P=4y                 P=6y

S1(p)= p/4         S2(p)= p/6

Market Supply: S(p) = S1+ S2= p/4 + p/6 = (10/24)p

B. Equilibrium in the short run

(1) Look for point where D(p) = S(p)

(2) can then measure profits ()of firms

C. Short run and long run supply

(1) If profits > 0, entry of new firms in the long run

(2) If any firm have identical cost structure, then

      Price in long run = minimum of AC-curve

D. Economic rent

(1) If no factors are scarce: Long run supply curve: Horisontal

P= minAC

All firms have Zero Profits

(no factors of production are "paid" more than its value,

i.e. the opportunity cost of the factor)

(2) What if some factors (of identical quality) are scarce in the long run? Because:

(a) licences/patents

(b) raw materials, land

(3) Entrants (new firms) will have higher costs

(4) "Old" firms will still have economic rents, because price won’t be as low as their minimum AC.

Ch. 23: FIRM SUPPLY - Summary - Intermediate Microeconomics - Varian


 In this chapter we derive the supply curve of a competitive firm from its cost function using the model of profit maximization.

We first  describe the alternative market environments in which a firm has to operate. But in this chapter we concentrate on pure competitive market only.

23.1 Market Environments

A. Firms face two sorts of constraints

(1) Technological - summarized in cost function

(2) Market constraints - how will

consumers and
other firms
react to a given firm’s choice

B. Assumption: Pure/perfect competition

(1) Price takers - takes market prices as given,

i.e. outside of any particular firms control

Example - if many "relatively" small firms

Demand curve facing a competitive firm

C. Supply decision of competitive firm

(1) maxy py- c(y)

(2) first order condition: Price = MC

p = c’(y)

(3) second order condition: c’’(y)  0

i.e. only upward-sloping part of MC-curve matters

(4) check that it is profitable to operate at all

revenue > Variabel Costs

py > cv(y)

p > cv(y)/y

price > Average Variable Costs

D. Example

c(y) = 2y2 + 3

cv(y) + F

[ Supply: Si(p) = 0.25p ]

E. Producer’s Surplus (PS)

(1) PS is defined to be Revenue - Variabel costs

py - cv(y)

(2) Since cv(y) = area under MC-curve

(3) PS = area above MC-curve

F. Long run supply

(1) L= Long Run

(2) LAVC = LAC Why?

No costs are fixed in the long run

i.e.  All costs are variable in the long run

(3) Long Run Supply more elastic than Short Run Supply

Demand Supply

ED =  ES =

[ES,L > ES,S]

Hal R. Varian - Intermediate Microeconomics A MODERN APPROACH - 9th Edition - Book Information and Chapter Summaries


1. The Market - Summary

2. Budget Constraint

3. Preferences

4. Utility

5. Choice

6. Demand

7. Revealed Preference

8. Slutsky Equation

9. Buying and Selling

10. Intertemporal Choice

11. Asset Markets

12. Uncertainty

13. Risky Assets

14. Consumer’s Surplus

15. Market Demand - Summary

16. Equilibrium

17. Econometrics

18. Auctions

19. Technology - Summary

20. Profit Maximization

21. Cost Minimization

22. Cost Curves

23. Firm Supply

24. Industry Supply

25. Monopoly

26. Monopoly Behavior

27. Factor Markets

28. Oligopoly

29. Game Theory

30. Game Applications

31. Behavioral Economics

32. Exchange

33. Production

34. Welfare

35. Externalities

36. Information Technology

37. Public Goods

38. Asymmetric Information

Mathematical Appendix

Ch. 21. COST MINIMIZATION - Summary - Intermediate Microeconomics - Varian


The profit-maximization problem can be split into two pieces.

First step in the problem is how to minimize the costs of producing any given level of output.
Second step is to choose the most profitable level of output.

In this chapter the first step—minimizing the costs of producing any given level of output is discussed.

A. Max profits require minimize costs

1. Minimize w1x1 +w2x2 s.t. f(x1, x2)=y

2. Geometric solution

    Isocost curves and isoquant for f(x1, x2)=y


3. Optimal choice (X1*) is the conditional factor demand function

Function of input-prices

Conditional of level of production (y)

4. Examples

Perfect susbstitutes
Fixed proportions

B. Returns to scale and the cost function

(1) Increasing returns (to scale) - decreasing AC

(2) Constant returns - constant AC

(3) Decreasng returns - increasing AC

C. Long run and short run costs

(1) Long run: all inputs variable

(2) Short run: some inputs fixed

D. Fixed and quasi-fixed costs

(1) Fixed: must be paid, whatever the output level

(2) Quasi-fixed: only paid when output is positive

November 14, 2015

Ch. 20 Profit Maximization - Summary - Intermediate Microeconomics - Varian


In this chapter,  a model of how the firm chooses the amount to produce and the method of production to employ based on the criterion of profit maximization is described.

We  assume that the firm faces fixed prices for its inputs and outputs. Where the individual purchasers have no effect on the prices is a competitive market. Hence we are studying the profit-maximization problem of a firm that faces competitive markets for the factors of production
it uses and the output goods it produces.

20.1 Profits

A. Profit: Revenues - costs

Each output and input valued at its market price: Opportunity cost
Measure in terms of flows

B. Short-run and long run maximization

Fixed factors
Quasi-fixed factors - eliminated at zero output

C. Short-run profit maximization

(1) max pf(x)-wx

(2) optimum when value of marginal product = price of (variable) input

D. Long run profit maximization

All factors are variable

E. Profit max and returns to scale

(1) Constant returns implies profits are zero

        But - all factors are rewarded at opportunity cost

(2) Increasing returns to scale:

        Competitive model doesn't make sense

Ch. 19 Technology Summary - Intermediate Microeconomics - Varian


19.1 Inputs and Outputs

 Inputs to production are called factors of production. Factors of production are often classified into broad categories such as land, labor, capital, and raw materials. The input capital may require some more explanation.  Capital goods are those inputs to production that are themselves produced goods. Basically capital goods are machines of one sort or another: tractors, boiler, computer etc. that do certain jobs more efficiently than men.

Inputs and outputs of a production process are measured in flow units: a certain amount of labor per week and a certain number of machine hours per week will produce a certain amount of output a week.

19.2 Technological Constraints

A. Technology: What patterns of inputs and outputs are feasible

C. Technological constraints

(1) Production set - combinations of inputs and outputs that are feasible

(2) Production function: Upper bondary

(3) Isoquants: All possible combinations of inputs which yield the same level of output

D. Examples of isoquants

(1) Fixed proportions - Leontieff

(2) Perfect substitutes

(3) Cobb-Douglas

(4) Can't take monotonic transformations

E. Well-behaved technologies

(1) Montonic - more inputs produce more output

(2) Convex - averages produce more than extremes

 F. Marginal product

(1)  MP1: How much extra output you get from increasing input 1 - holding input 2 fixed

(2) MP1= d f(x1, x2)/ d x1

G. Technical rate of substitution (TRS)

(1)  Like MRS

(2) TRS= dx2/dx1= - = ¶ f/¶ x1/ ¶ f /¶ x1

H. Diminishing marginal product

(1) Law of diminishing return

I. Diminishing technical rate of substitution

(1) Equivalent to convexity

(2) Diminishing TRS is not the same as diminishing MP

J. Long run and short run

(1) Some factors fixed: Short run

(2) All factors varied: Long run

H. Returns to scale

(1) Constant returns

(2) Increasing returns

(3) Decreasing returns