Business & Economics: Non-Market Environment, Policy Formation & Property Rights - Prof. S, Study notes of Introduction to Business Management

Download Business & Economics: Non-Market Environment, Policy Formation & Property Rights - Prof. S and more Study notes Introduction to Business Management in PDF only on Docsity! 02/20/2010
Topic 1: The Non-Market Business Environment:  A. Corporate Social Responsibility (CSR): 1) Firms are responsible for their ENTIRE value chain (beg. of production to end of product life) and 2) Firms should think about ALL stakeholders (Market & Non-Market). o i. Non-market versus market stakeholders:  Market – Customers, clients, employees, shareholders, etc.  Non-Market – Communities, Governments, socially-minded non- governmental organizations (NGOs), etc. o ii. Meaning of Strategic CSR:  Profit Enhancing.  Manage Non-Market threats and look for Non-Market opp. to exploit.  Evaluate current & proposed government regulation.  Monitor interest group activity and changing social demands. o iii. Non-market forces on the firm  B. Market Forces: Firm Managers, Public Policy Makers, and Socially-Minded NGOs o i. Demand – Value to Customers.  Consumer Surplus – Difference between Price customer is willing to pay and Price they have to pay. o ii. Supply – Cost to Producers.  Producer Surplus – Difference b/w selling price & min. to cover cost.  C. Market equilibrium and productive efficiency. o i. Laws governing the socially efficient output level (Qe):  1) Produce products when Customer Value is GREATER THAN the Costs to Produce.  2) DON’T Produce when Customer Value is LESS THAN Costs to Produce. o ii. Inefficiency below Qe:  You are giving up producing some units that are valued more than their productive costs.  Customer Value is GREATER THAN Productive Costs. o iii. Inefficiency beyond Qe:  You are producing in a range where the units are valued less than their productive costs.  Customer Values is LESS THAN Productive Costs. o iv. Efficiency and Public Policy:  Firms often take political action that results in market inefficiencies:  Inefficiency = Limited Competition, Increased Market Power.  NGOs (Non-Governmental Organization) usually take political action when market inefficiencies exist.  Lack of property rights, market power abuse, externalities such as pollution, quality concerns.  Policy change can correct inefficiency OR be the cause of inefficiency.  D. The effect of taxes. o i. Effects on Price, Output, CS, and PS.  Tax imposed on sellers cause inward shift of the supply curve (decreased supply). Also Raise the costs of production.  General Results of a Tax:  Government revenue is collected.  Reduced Quantity bought and sold.  Increased Prices to buyers: Consumer Surplus DECREASES.  Decreased Prices to sellers: Producer Surplus DECREASES. o ii. Efficiency implications:  Lowest cost in town comes from lowest Price in town.  Stakeholders?  Other competition: Costco, Mom and Pop Shops.  Customers, shareholders, environmental impact (interest groups), unions, labor activists.  Traditionally Open/Look to Open Where/Why?  Look for High Unemployment Rate (need a lot of employees quick), also minimum wage looks better than ZERO wage.  Relatively Low Income Areas b/c customers NEED Wal-Mart.  Close To Big City , distribution is easy.  Low Union Density – Unions were close to Cali (High).  Cali had $71 Billion annual grocery sales  Wal-Mart wanted 20% of share.  Govt. Responsive to Union Concerns:  50% Reduction in Earnings : Small groups are more likely to act (take political action). o ii. OPTIONAL: “The analysis of competitive markets” and “Tax Rates, Tax Revenues, and the Laffer Curve”

Topic 2: Public Policy Formation and Special Interests  A. Public Sector Participants. o i. Voter-Taxpayers:  Assumed to be Rationally Ignorant! – Because 1) Costly to become informed & 2) Not likely that your individual vote will make diff. o ii. Politicians (elected officials):  Assumed to be Vote Maximizers!  Regardless of ultimate motivation, ability of Politicians to achieve own goals depends on their election/re-election. THUS, try to provide info about self and rivals at no charge to voters. o iii. Bureaucrats (civil servants):  Assumed to be Budget Maximizers!  Not elected, but hired into office. Seek higher pay, promotions, prestige, job security, etc. which are all possible w/ bigger budget.  B. Possible Government Inefficiencies: o i. The Shortsightedness Effect:  Politicians support projects that have:  Clearly defined current benefits  Future costs that are difficult to identify.  Maximized influence on current voters, at the expense of future generations (politicians are biased towards such, even if inefficient). o ii. Operational Inefficiency:  The public sector has no profit motive.  Reduces the incentive of govt. to keep costs low.  Bureaucrats are seldom in a position to personally gain from reducing costs.  Since Bureaucrats spend other people’s money, they are less conscious of costs than if it were their own money. (Evolution of Police Car). o iii. Lobbying / Rent Seeking:  Devoting resources to influencing public policy formation in order to bring more income to your interests.  Cost of Lobbying can produce significant inefficiencies if its main affect is solely income redistribution.  a. Function of lobbyists:  1) Find Political Opportunities and Threats.  2) Inform Politicians and Influence Public Opinion.  3) Form Coalitions: Identify Groups w/ “Similar” Interests. o iv. The Special Interest Effect:  Small group of people receive benefits at the expense of a large group.  1) Large, widely dispersed groups rarely gain political power.  Individual costs of taking action EXCEED potential .  2) Small, concentrated groups can gain political power.  Individual benefits of taking action EXCEED potential . o v. For each government failure you should know the causes of the government failure and the implications for efficiency.  C. Types of political actions. Widely Dispersed Benefits Concentrated Benefits Widely Dispersed Costs Majoritarian Client Concentrated Costs Entrepreneurial Interest Group  o i. Majoritarian (Dispersed Benefits, Dispersed Costs):  No special interest groups take part on either side of the issue.  Example – Social Security  Lobbying: DOES NOT OCCUR o ii. Client (Concentrated Benefits, Dispersed Costs):  One special interest group is active in FAVOR of an issue.  Example – Subsidizing foreign advertisements.  Lobbying: Will LIKELY be Successful . o i. Communal:  Over-Utilization occurs , and no one has incentive to conserve for the future. o ii. Government:  Decisions made by a small group of elected political representatives. o iii. Secure Private Property Rights:  a. Secure Private Property give incentive to:  1) Create Value with property (benefit others), 2) Maintain property and Conserve for the future, 3) Innovate and Create new technologies, and 4) Engage in Voluntary Exchange.  b. Intellectual Property Rights:  Patents: Exclude all others from using, producing, or selling an invention. Ex) Medicine, home appliances, etc…  Copyrights: Exclude all others from reproducing, distributing, or performing a work. Ex) writings, music, software, art, movie  Trademarks: Word/name/symbol/device used in trade with goods to indicate their source. Distinguish from competitor.  B. Profits, revenues, and costs. o i. Explicit Costs:  When a monetary payment is made. Example – Wages paid to labor. o ii. Implicit Costs:  Involve the firm’s resources, but do not have a monetary payment.  When calculating economic profit, they are valued at Normal R.O.R.  Example – Opportunity cost of the owner’s investment. o iii. Normal Rate of Return:  What firm’s could get by investing in businesses w/ a similar risk. o iv. Economic profit versus accounting profit.  C. How Profit Motive gives owner’s incentives to: o Produce in accordance with customers. o Improve Cost Structures and Efficiency.  D. Role of Entrepreneurs and Intrepreneurs: o Entrepreneur:  Someone who tries to exploit opportunities that exist within markets.  Offer new products to open markets, create lower cost technology, find new resources. o Intrepreneur:  An Entrepreneurial individual that is employed by a firm.  Needed to keep ahead of rival firms, improve overall efficiency. An effort to keep the brightest minds within the corporation, incentive to incorporate more profitable projects.  E. Successful entrepreneurs and economic growth. o Successful Entrepreneurism – Growth by finding new resources or creating new technologies.  F. Concept of Economic freedom. o i. Economic Freedom:  Highest w/ low taxes, low regulation, secure property, and consistent legal structure. o Link Between Economic Growth and Economic Freedom:  Entrepreneurs .  Economic Freedom created an environment that is conducive to entrepreneurship.  G. Concept of creative destruction: o Creative Destruction:  New Industries, Technologies, and Products make older industries obsolete.  Less efficient technology and industries are left behind.  Dying industries free resources that can go to new, more efficient technologies.  Government cant act as impediment to the process:  Enacting policies to protect dying industries.  H. Readings: o i. REQUIRED: “The Napster Case”  Napster Business Model was Up-And-Coming.  Napster created a younger demographic (under 30), but also included 42% of users between the ages 30 and 49. Mainly college though.  Napster operated under a central server which allowed users to view and search the hard drives of all other users signed on for music, chat, and more. However, when music was transferred, the files would NOT pass through central server, rather they went from comp to comp (P2P)  RIAA claimed copyright infringement using revenues, sales, profits, blank CD sales as evidence.  Napster’s defense argued the Audio Home Recording Act. Also, Napster argued that they didn’t actually control or store the music in question on its central servers.  RIAA won – Courts shut Napster down.  NO legitimate Business Model if 90% of music traded was illegal to begin with.  2nd Generation Services:  File sharing is now a PURE P2P Exchange that does NOT require a central server to operate.  Services are based in Netherlands or the West Indies, places beyond the reach of the US Courts.  Recording Industry’s Fight:  Creating own Sites (Expensive, Restricted, Limited)  Legal Action  Make CDs with copy protection  Uploading corrupted / funny sounding files. o ii. OPTIONAL: “Private property, freedom, and the west”

Topic 4: Crime and Conflicts of Interest:  A. Criminal Incentives as modeled by Gary Becker o i. Cost benefit analysis to crime given an individual’s utility is dependent on their income level (Y0): the decision to commit a crime is dependent on the Payoff of Crime (G), the Probability of Getting Caught (π)), and if caught the Punishment (F).  Receiving Bribes or Non-Monetary Gifts. o Using Your Employer’s Property For Private Gain:  Personally gaining from employer’s property w/out consent. o Using Confidential Information:  Misuse of Inside Information. o Outside Employment or Moonlighting: **BIG PT. IN ENRON CASE**  Holding multiple employment positions at one time, which biases professional behavior. o Post-Employment: **BIG POINTS IN ENRON CASE**  Holding a sequence of employment positions where you carry a bias from one job to the next.  F. Enron – Why did conflicts of interest exist with following parties? o Andersen Accountants:  Provided internal/external auditing, financial consulting, would bill Enron $25 Mil for accounting and $27 Mil for consulting. Had Postemployment Bias (People would leave Enron/Andersen and go to the other company), Moonlighting as well. o Sell-Side Analysts:  Rate stocks on a scale of Sell  Strong Buy. Enron at their peak ($65), 19/22 rated it “Strong Buy.” Enron breaks after fraud to $0.75, at which 12/17 still said “Hold  Strong Buy” o Investment Bankers:  Provides loans for Enron, underwriting fees pressured sell-side analysts to say YES! Moonlighting. o Lawyers:  Enron had 250 in-house lawyers and 850 lawyers from outside law firms, Postemployment Bias, they did legal review for Enron and said they were good and there were no legal concerns. o Consultants:  McKinsey & Co. was Enron’s main consultant, of which Jeffrey Skilling was an employee of and provided consulting on behalf of the company to Enron. Skilling was eventually hired as Enron’s CEO.  Mixing of corporate cultures (giving national seminars about adopting their business model), they found ways to make personal success. o Credit Raters:  Did consulting based on risk management systems, only 3 credit raters (not as much competition).  Enron had all 3 credit rating firms, provided some consulting and risk management, did it more for consulting than anything.  G. Readings: o i. REQUIRED: “The Enron Case” o ii. OPTIONAL: “Customized Class Notes” and “Ethics and Conflict of Interest”
02/20/2010