978 1 259 29061 9

ISBN 978-1-259-29061-9 MHID 1-259-29061-1

www.mhhe.com 9 78 1 25 9 2906 1 9

9 0 0 0 0

Managerial Economics Business StrategyAND

NiNth EditioN

Michael R. Baye / JeffRey T. PRince

NiNth EditioN

M anagerialEconom

ics Business Strategy

A N

D B

a y

e / P

R in

c e

Learn Without Limits

Continually evolving, McGraw-Hill Connect® has been redesigned to provide the only true adaptive learning

experience delivered within a simple and easy-to-navigate environment, placing students at the very center. Discover

how you can improve performance through guided, personalized learning at

http://connect.mheducation.com

# 1

3 8

4 5

6 2

1 0

/ 2

0 / 1

6 P

H X M

A C P

D F

C Y A

N M

A G

Y E L B L K

bay90611_fm_i-xxviii.indd i 10/31/16 04:45 PM

Managerial Economics and Business Strategy

NINTH EDITION

Final PDF to printer

bay90611_fm_i-xxviii.indd ii 10/31/16 04:45 PM

The McGraw-Hill Series Economics

ESSENTIALS OF ECONOMICS

Brue, McConnell, and Flynn Essentials of Economics Third Edition

Mandel M: Economics: The Basics Third Edition

Schiller and Gebhardt Essentials of Economics Tenth Edition

PRINCIPLES OF ECONOMICS

Asarta and Butters Connect Master: Principles of Economics First Edition

Colander Economics, Microeconomics, and Macroeconomics Tenth Edition

Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Sixth Edition

Frank, Bernanke, Antonovics, and Heffetz A Streamlined Approach for: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition

Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second Edition

McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition

Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition

Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition

Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition

ECONOMICS OF SOCIAL ISSUES

Guell Issues in Economics Today Eighth Edition

Register and Grimes Economics of Social Issues Twenty-First Edition

ECONOMETRICS

Gujarati and Porter Basic Econometrics Fifth Edition

Hilmer and Hilmer Practical Econometrics First Edition

MANAGERIAL ECONOMICS

Baye and Prince Managerial Economics and Business Strategy Ninth Edition

Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition

Thomas and Maurice Managerial Economics Twelfth Edition

INTERMEDIATE ECONOMICS

Bernheim and Whinston Microeconomics Second Edition

Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition

Frank Microeconomics and Behavior Ninth Edition

ADVANCED ECONOMICS

Romer Advanced Macroeconomics Fourth Edition

MONEY AND BANKING

Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fifth Edition

URBAN ECONOMICS

O’Sullivan Urban Economics Eighth Edition

LABOR ECONOMICS

Borjas Labor Economics Seventh Edition

McConnell, Brue, and Macpherson Contemporary Labor Economics Eleventh Edition

PUBLIC FINANCE

Rosen and Gayer Public Finance Tenth Edition

Seidman Public Finance First Edition

ENVIRONMENTAL ECONOMICS

Field and Field Environmental Economics: An Introduction Seventh Edition

INTERNATIONAL ECONOMICS

Appleyard and Field International Economics Ninth Edition

Pugel International Economics Sixteenth Edition

Final PDF to printer

bay90611_fm_i-xxviii.indd iii 10/31/16 04:45 PM

Managerial Economics and Business Strategy

Michael R. Baye Bert Elwert Professor of Business Economics & Public Policy Kelley School of Business Indiana University

Jeffrey T. Prince Associate Professor of Business Economics & Public Policy Harold A. Poling Chair in Strategic Management Kelley School of Business Indiana University

NINTH EDITION

Final PDF to printer

bay90611_fm_i-xxviii.indd iv 11/07/16 03:10 PM

MANAGERIAL ECONOMICS AND BUSINESS STRATEGY, NINTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2017 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2014, 2010, 2008 and 2006. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LWI 21 20 19 18 17 16

ISBN 978-1-259-29061-9 MHID 1-259-29061-1

Chief Product Officer, SVP Products & Markets: G. Scott Virkler Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Betsy Whalen Managing Director: James Heine Brand Manager: Katie Hoenicke Director, Product Development: Rose Koos Lead Product Developer: Michele Janicek Product Developer: Christina Kouvelis Marketing Manager: Virgil Lloyd Marketing Specialist: Dave O’Donnell Director of Digital Content Development: Douglas Ruby Digital Product Developer: Tobi Philips Director, Content Design & Delivery: Linda Avenarius Program Manager: Mark Christianson Content Project Managers: Kathryn D. Wright, Kristin Bradley, and Karen Jozefowicz Buyer: Laura M. Fuller Design: Matt Diamond Content Licensing Specialist: Beth Thole Cover Image: © Pasieka/Getty Images Compositor: SPi Global Typyface: 10/12 STIX MathJax Main Printer: LSC Communications

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Control Number: 2016042214

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

mheducation.com/highered

Final PDF to printer

bay90611_fm_i-xxviii.indd v 10/31/16 04:45 PM

DEDICATION

To my former students. —Michael R. Baye

To Annie, Kate, and Elise. —Jeffrey T. Prince

Final PDF to printer

bay90611_fm_i-xxviii.indd vi 10/31/16 04:45 PM

vi

Michael R. Baye is the Bert Elwert Professor of Business Economics & Public Policy at Indiana University’s Kelley School of Business, and served as the Director of the Bureau of Economics at the Federal Trade Commission from July 2007 to December 2008. He received his BS in economics from Texas A&M University in 1980 and earned a PhD in economics from Purdue University in 1983. Prior to joining Indiana University, he taught graduate and undergraduate courses at The Pennsylvania State University, Texas A&M University, and the University of Kentucky. He has held a variety of editorial posts in economics, mar- keting, and business, and currently serves as a co-editor for the Journal of Economics and Management Strategy.

Professor Baye has won numerous awards for his outstanding teaching and research, and teaches courses in managerial economics and industrial organization at the undergrad- uate, MBA, and PhD levels. His research has been published in the American Economic Review, Journal of Political Economy, Econometrica, Review of Economic Studies, Economic Journal, and Management Science. It has also been featured in The Wall Street Journal, Forbes, the New York Times, and numerous other outlets. When he is not teaching or engaged in research, Mike enjoys activities ranging from camping to shopping for electronic gadgets.

Jeffrey T. Prince is Associate Professor of Business Economics & Public Policy at Indiana University’s Kelley School of Business. He is also the Harold A. Poling Chair in Strategic Management. He received his BA in economics and BS in mathematics and statistics from Miami University in 1998 and earned a PhD in economics from Northwestern University in 2004. Prior to joining Indiana University, he taught graduate and undergraduate courses at Cornell University.

Professor Prince has won top teaching honors as a faculty member at both Indiana University and Cornell, and as a graduate student at Northwestern. He has a broad research agenda within applied economics, having written and published on topics that include demand in technology markets, Internet diffusion, regulation in health care, risk aversion in insurance markets, and quality competition among airlines. He is one of a small number of economists to have published in both the top journal in economics (American Economic Review) and the top journal in management (Academy of Management Journal). He currently serves as a co-editor for the Journal of Economics and Management Strategy and on the editorial board for Information Economics and Policy. In his free time, Jeff enjoys activities ranging from poker and bridge to running and racquetball.

About the Authors

Final PDF to printer

bay90611_fm_i-xxviii.indd vii 10/31/16 04:45 PM

vii

Thanks to feedback from users around the world, Managerial Economics and Business Strategy remains the best-selling managerial text in the market. We are grateful to all of you for allowing us to provide this updated and improved edition. Before highlighting some of the new features of the ninth edition, we would like to stress that the fundamental goal of the book—providing students with the tools from intermediate microeconomics, game the- ory, and industrial organization that they need to make sound managerial decisions—has not changed. What has changed are the examples used to make managerial economics come to life for this generation of students and the utilization of new technologies (such as Connect) for enhancing the teaching and learning experiences of instructors and their students.

This book begins by teaching managers the practical utility of basic economic tools such as present value analysis, supply and demand, regression, indifference curves, isoquants, pro- duction, costs, and the basic models of perfect competition, monopoly, and monopolistic com- petition. Adopters and reviewers also praise the book for its real-world examples and because it includes modern topics not contained in any other single managerial economics textbook: oligopoly, penetration pricing, multistage and repeated games, foreclosure, contracting, ver- tical and horizontal integration, networks, bargaining, predatory pricing, principal–agent problems, raising rivals’ costs, adverse selection, auctions, screening and signaling, search, limit pricing, and a host of other pricing strategies for firms enjoying market power. This balanced coverage of traditional and modern microeconomic tools makes it appropriate for a wide variety of managerial economics classrooms. An increasing number of business schools are adopting this book to replace (or use alongside) managerial strategy texts laden with anec- dotes but lacking the microeconomic tools needed to identify and implement the business strategies that are optimal in a given situation.

This ninth edition of Managerial Economics and Business Strategy has been revised to include updated examples and problems, but it retains all of the basic content that made pre- vious editions a success. The basic structure of the textbook is unchanged to ensure a smooth transition to this edition.

KEY PEDAGOGICAL FEATURES

The ninth edition retains all of the class-tested features of previous editions that enhance students’ learning experiences and make it easy to teach from this book. But this edition includes a number of new features available to those using McGraw-Hill’s wonderful interac- tive learning products, Connect and SmartBook. McGraw-Hill Connect® offers hundreds of variations of end-of-chapter problems that may be electronically graded and provide students with immediate, detailed, feedback. SmartBook® provides an adaptive reading experience. Students and instructors can access these and other powerful resources directly from their laptops, tablets, and phones. We know how important quality and accuracy is for both instruc- tors and students when utilizing these enhanced features. For this reason, and unlike many

Preface

Final PDF to printer

bay90611_fm_i-xxviii.indd viii 10/31/16 04:45 PM

viii Preface

competing books, we are directly involved in the generation and editing of material offered through both Connect and SmartBook.

Headlines As in previous editions, each chapter begins with a Headline that is based on a real-world economic problem—a problem that students should be able to address after completing the chapter. These Headlines are essentially hand-picked “mini-cases” designed to motivate stu- dents to learn the material in the chapter. Each Headline is answered at the end of the relevant chapter—when the student is better prepared to deal with the complications of real-world prob- lems. Reviewers as well as users of previous editions praise the Headlines not only because they motivate students to learn the material in the chapter, but also because the answers at the end of each chapter help students learn how to use economics to make business decisions.

Learning Objectives Each chapter includes learning objectives designed to enhance the learning experience. End- of-chapter problems are denoted with the learning objective(s) to which they relate.

Demonstration Problems The best way to learn economics is to practice solving economic problems. So, in addition to the Headlines, each chapter contains many Demonstration Problems sprinkled throughout the text, along with detailed answers. This provides students with a mechanism to verify that they have mastered the material, and reduces the cost to students and instructors of having to meet during office hours to discuss answers to problems. Some of the more challenging demonstration problems have an accompanying video tutorial that walks through the solution step-by-step. These videos are available via Connect and at www.mhhe.com/baye9e.

Inside Business Applications Most chapters contain boxed material (called Inside Business applications) to illustrate how theories explained in the text relate to a host of different business situations. As in previous editions, we have tried to strike a balance between applications drawn from the current eco- nomic literature and the popular press.

Calculus and Non-Calculus Alternatives Users can easily include or exclude calculus-based material without losing content or con- tinuity. That’s because the basic principles and formulae needed to solve a particular class of economic problems (e.g., MR = MC) are first stated without appealing to the notation of calculus. Immediately following each stated principle or formula is a clearly marked Calculus Alternative. Each of these calculus alternatives states the preceding principle or formula in calculus notation, and explains the relation between the calculus-based and non- calculus- based formula. More detailed calculus derivations are relegated to chapter Appendices. Thus, the book is designed for use by instructors who want to integrate calculus into managerial economics and by those who do not require students to use calculus.

Variety of End-of-Chapter Problems Three types of problems are offered. Highly structured but nonetheless challenging Conceptual and Computational Questions stress fundamentals. These are followed by Problems and

Final PDF to printer

bay90611_fm_i-xxviii.indd ix 10/31/16 04:45 PM

Preface ix

Applications, which are far less structured and, like real-world decision environments, may contain more information than is actually needed to solve the problem. Many of these applied problems are based on actual business events.

Additionally, the Time Warner Cable case that follows Chapter 14 includes 13 problems called Memos that have a “real-world feel” and complement the text. All of these case-based problems may be assigned on a chapter-by-chapter basis as specific skills are introduced, or as part of a capstone experience.

Detailed answers to all problems can be found among the instructor resource material available via Connect.

Case Study A case study in business strategy—Time Warner Cable—follows Chapter 14 and was pre- pared especially for this text. It can be used either as a capstone case for the course or to supplement individual chapters. The case allows students to apply core elements from man- agerial economics to a remarkably rich business environment. Instructors can use the case as the basis for an “open-ended” discussion of business strategy, or they can assign specific “memos” (contained at the end of the case) that require students to apply specific tools from managerial economics to the case. Teaching notes, as well as solutions to all of the memos, are provided among the instructor resource material available via Connect.