Tài liệu Microeconomics for MBAs 11 ppt

The keiretsu might also be seen as a highly efficient means by which Japanese firms are able to make use of new technologies, quickly incorporating them into products.. The employees ca

Scott Cook, who in 1983 developed the widely used home-finance software

package called “Quicken,” the major product of Cook’s firm, Intuit, Inc., which was

courted for a buyout in 1994 by Microsoft Cook eventually agreed to sell Intuit to

Microsoft for $1.5 billion in Microsoft stock, 40 percent above Intuit’s market price at the time Microsoft agreed to pay a premium price for a couple of reasons First, Bill Gates,

CEO of Microsoft, saw a need to have a dominant personal finance program that could be integrated into his Microsoft Office line and that would allow him to pursue his goal of

transforming the way people manage their money The value of Intuit was greater as an

integrated part of Microsoft than by itself Second, and more importantly for the

purposes of this chapter, Cook agreed to become a vice president of Microsoft and to

retain an interest in the future development and use of Quicken, if Microsoft bought

Intuit This way Cook could minimize the impact of the last-period problem, and the sale

of Intuit would mean that Quicken might continue to develop The proposed buyout of

Intuit eventually was terminated by the Justice Department, which threatened to sue

Microsoft for antitrust violation However, the example is still a good one not only

because it involves prominent business personalities and their successful firms, but also

because of the moral it illuminates: Sometimes, by selling only a part of the company, an

owner can increase the value of the part that is sold, enhancing the combined value of the

part that is sold and the part that is retained

The last-period problem also helps to explain why fathers (or mothers) are so

anxious for one of their sons (or daughters) to go into their business as retirement age

approaches This not only extends the life of the business, but it also increases the

amount of business that can be done as the retirement age is approached, given that with

the elevation of the son or daughter, the last period is then put off until some time in the

future

Why do signs on business establishments sometimes read, for example, “Sampson

& Sons” or “Delilah & Daughter”? The usual answer is that the parent is proud to

announce that a daughter (or son) has joined the business That is probably often the

case, but we also think it has a lot to do with the parent seeking to assure customers and

suppliers that the original owner, the parent, will not soon begin to take advantage of

them

Economists David Laband and Bernard Lentz have found that the rate of

occupational following within families with a self employed proprietor is three times

greater than within other families, which suggests that proprietors have good reason

measured in continuing the value of their companies to bring their children into the

business that other people don’t have.8 Caterpillar, the manufacturer of farm equipment

and heavy machinery, depends on its dealers to maintain customer trust and goodwill

One way Caterpillar has attempted to enhance customer trust is to set up a school to help

children of dealers learn about and pursue careers in Caterpillar dealerships.9

8

David N Laband and Bernard F Lentz, “Entrepreneurial Success and Occupational Inheritance Among Proprietors,” Canadian Journal of Economics, Vol 23, No 3 (August 1990), pp 101 117

9

William Davidow and Michael Malone, The Virtual Corporation, (New York: Harper Collins Publishers, 1992), p 234

Firms commonly complain that goods delivered in the last days of the supplier’s

operation are of inferior quality The problem? It may be one of the incentives, or lack

thereof, that people have to deliver goods of waning quality during their last days

Bankruptcy laws can be explained in part as a means of reducing these end period

problems.10 They extend the potential end of the firm, and can give the firm a new lease

on life and set back the last-period problem indefinitely

Also, a firm in financial trouble can be pressed into liquidation by nervous

bondholders, a fact that can exacerbate the last-period problem, given that suppliers

would have to worry that nervous bondholders will encourage firms to deliver shoddy

merchandise, which can make customers more nervous about dealing with the financially

strapped firm By allowing firms in financial trouble to continue operating, bankruptcy

laws make it more likely that the bankrupt firms will keep up the quality of the products,

and provide more motivation for suppliers to keep up honest dealing

The Keiretsu As a Solution to the Last-period Problem

Japanese firms are renown for organizing themselves into groups of firms called

keiretsus Keiretsu members buy from one another, share information, and organize

joint ventures to produce goods and services in concert with one another The largest and

best-known keiretsu is Mitsubishi, which has 28 core member firms and hundreds of

other firms that are loosely tied to the core firms They integrate their activities in a

number of ways, not the least of which is having their headquarters close together, having

the CEOs of the various firms meet regularly to exchange information, and organizing

social and business clubs that are open to employees of the keiretsu member firms The

members often own stock in one another

In the United States, many of the activities of any keiretsu would likely worry the

antitrust authorities because the organization would be construed as monopolistic No

doubt, some keiretsu activities might indeed restrain competition in some markets,

causing prices of Japanese goods to be higher than they otherwise would be (especially in

the domestic market where competition from other producers from around the world

might be impaired by import restrictions) The keiretsu might also be seen as a highly

efficient means by which Japanese firms are able to make use of new technologies,

quickly incorporating them into products The Japanese have demonstrated a knack for

bringing new products to market quickly

However, we mention the keiretsu organizational form here only because of one

of its more unheralded benefits: it is a form of business organization that seeks to solve

the last-period problem The integration of the member firms’ purchases and sales and

strategic plans for the future is a means by which members can assure one another that

their business relationship will be enduring or that the member employees have

minimum incentive to behave opportunistically in the short run and have maximum

10

Gibbons and Murphy, “Optimal Incentive Contracts in the Presence of Career Concerns.”

incentive to work with their joint future income stream in mind.11 Being ousted from the

keiretsu can inflict substantial costs on the opportunistic firms and their employees Even

the social gatherings of keiretsu employees can be construed as a means by which the

employees can “bond.” Here, we are not so much concerned with the “warm and fuzzy”

feelings people might have from integrating their lives Instead, we mean that by

integrating their lives at the social level, employees can provide each other mutual

assurance that they will live up to expectations in their business dealings, that they will

not act opportunistically The employees can lose the long term benefits of their social

and business relationships.12

In short, the keiretsu is a clever means by which opportunistic behavior is made

more costly It seeks to reduce some of the shirking and monitoring costs of doing

business, when business is done at arm’s length

Indeed, one of the more unrecognized benefits of the firm in general is that it

does, under one “roof,” what is attempted under a keiretsu The firm seeks to bring

people together and have them associate and work together on a continuing basis for the

purpose of minimizing the last-period problem As we noted early in the book, it’s quite

possible for all departments within a firm and all stages of an assembly line to be

operated on a market basis, with every department and every stage of the assembly line

buying from one another However, you can imagine that such an organization of

economic activity would give rise to a multitude of last-period problems, especially if

there were no attempt to ensure that everyone “worked together” as something

approximating a keiretsu

The Japanese relatively greater use of formal and informal long term buyer

supplier relationships – sometimes cited as “strategic industrial sourcing” combined with

so called “relational contracting” may be partially explained by the fact that the

Japanese, as commonly argued, have the required business culture, one grounded in a

long term, future oriented business perspective that prescribes long term contracts The Japanese may, to a greater degree than Americans and Europeans, have a pervasive

sense of duty that insures that the parties will abide by any contracts that have been

consummated, and the Japanese may have a greater aversion than others to ongoing

contentious bargaining relationships that would be required if contracts were always up

for grab by the low cost bidders.13 The long term business relationships may also be

a consequence of the growing affluence in Japan, which has elevated the importance of

quality over price that, in turn, has induced large Japanese firms to work with their

suppliers in an effort to enhance product quality.14 The long term contracting can also

be explained partially by the encouragement the Japanese government gave to the

11

For an interesting discussion of the keiretsu , see Clyde V Prestowitz, Jr., Trading Places: How We

Allowed Japan to Take the Lead (New York: Basic Books, Inc., 1988), pp 156 166

12

As Clyde Prestowitz notes, “Thus the Keiretsu system reduces risks for the Nippon Electric Company

and the other Japanese companies through the accumulation of relationships that can be counted upon to cushion shock in time and trouble” (ibid., p 164)

13

This explanation for long term contracting has been argued at length by Ronald P Dore, Taking Japan Seriously (Stanford, Calif.: Stanford University Press, 1987)

14

Ibid., p 188

creation of long term buyer supplier relationships in the past (especially during

World War II) and the existing laws and legal sanctions against abusive treatment of

subcontractors by their customers.15

But it seems to us altogether reasonable that long term contracting must be

grounded in factors other than culture and affluence One economic explanation may

start with a recognition of the extent to which firms are integrated in Japan The fact of

the matter is that in some industries Japanese production is far less integrated into

identified “firms” than, say, in the United States and other countries In the United States

and Western Europe, for example, 50 to 60 percent of the automobile manufacturing

costs are incurred “in house.” In Japanese firms, on the other hand, only 25 to 30

percent of the automobile production costs are typically incurred “in house,” or inside

Japanese firms. 16 Only 20 percent of Honda’s production costs are incurred inside, which means it buys 80 percent, or $6 billion, of its inputs from outside suppliers.17 Because of

the lack of integration, Japanese firms may need to develop long term buyer supplier

relationships to a much greater degree than more highly integrated firms do just to

overcome the potential last-period problems, if nothing else

Put another way, Japanese firms are able to engage in what is called strategic

outsourcing, and do so competitively, because they are willing and able to develop long

term working relationships If they didn’t, they would have to endure the added costs

associated with the ever present closing of those relationships It doesn’t surprise us

that many buyer supplier relationships in Japan give the “look and feel” of integrated

firms with buyers and suppliers helping each other and investing in each other (which is

what happens, to more or less degree, within unified firms)

When Honda signs a contract with a supplier, it expects the working relationship

to continue for 25 to 50 years, which effectively means that the last-period problem is set

back considerably.18 Moreover, the permanence of the buyer supplier relationship is

two way, with commitments on the parts of both buyers and suppliers Buyers agree to stay with the suppliers, and vice versa, through ups and downs (at least up to a point)

Hence, Honda can justify incurring the costs associated with helping its suppliers

increase productivity, even provide the needed technology and specialized equipment

Moreover, such expenditures, plus investments in the specific assets of the suppliers, by

Honda have the added advantage of being a bond, the value of which is forgone if Honda

does not abide by its agreement Managers at Honda are basically saying to suppliers,

“Look at what we are doing We are serious in our commitment If we renege, our up front investment will be worth very little We will lose our projected income stream from

the investment Because of those costs, you can count us in for the long run.” Such tie

ins aid in making the contracts self enforcing and durable; they help to make the long

run a viable perspective

15

Ibid

16

As reported in Toshihiro Nishiguchi and Masayoshi Ikeda, “Suppliers’ Process Innovation: Understated Aspects of Japanese Industrial Sourcing,” in Managing Product Development, edited by Toshihiro

Nishiguchi (New York: Oxford University Press, 1996), pp 206 230

17

As reported in Lisa H Harrington, “Buying Better,” Industry Week, July 21, 1997, pp 74 80

18

Ibid

The Role of Markets

Should production be rigidly integrated as in American firms or more loosely integrated

as in Japanese business consortiums? We surely cannot answer that question with the

certitude that many readers will want Japanese firms obviously gain the benefits of

keeping their suppliers in a position that is marginally more tenuous and, maybe, more

competitive with other potential suppliers, but they have to deal with the marginally more

severe last-period problems Many factors, which are offsetting and subject to change

with the costs associated with contracting and with principal/agency problems we have

discussed, are involved We suspect that different organizational forms will suit different

situations and eras (as has obviously been the case in Japan where relational contracting

has not always been prevalent19)

Answers will come from real world experimentation in the marketplace We

suspect that competition will press firms to adjust their organization forms, and the

inherent incentive structures, as some variation of organizational form is relatively more

successful Many American firms have had to seriously consider and, to a degree,

duplicate the added organizational flexibility of Japanese firms Why? Their

management methods have obviously worked in some industries, most notably the

automobile industry It takes 17 hours to assemble a car in Japan and 25 to 37 hours to

assemble a comparable car in the United States and Europe Japanese firms can develop

a new car in 43 months, whereas it takes American and European firms over 60 months,

and Japanese cars come off the production lines with 30 percent fewer defects The worst American made air conditioning units have a thousand defects for every defect in the

best Japanese made units.20

Firm integration and relational contracting are hardly the only means of

moderating last-period problems Joint ventures, which more often than not require up

front investments by the firms involved, can also be seen as extensions of firm efforts to

reduce last-period problems, with the potential of enhancing the quality of the goods and

services produced and lowering production costs Joint ventures might lower production

costs because they give rise to economies of scale and scope through the application of

technology, but they also can lower production costs by lowering the potential costs

associated with opportunistic behavior and monitoring They make the future income

streams of each party a function of the continuation of the relationship

* * * * *

The “last-period” problem is nothing more than what we have tagged it, a

“problem” that businesses must consider and handle It implies costs At the same time,

firms can make money by coming up with creative ways of making customers and

suppliers believe that the “last period” is some reasonable distance into the future

Failing firms have a tough time doing that, which is one explanation why the pace of

19

See Toshihiro Nishiguchi, Strategic Industrial Sourcing: The Japanese Advantage (New York: Oxford University Press, 1994), chap 2

20

As reported with citations to other sources by Nishiguchi, Strategic Industrial Sourcing, pp 5 6

failure quickens when the prospects are recognized, given that customers and suppliers

can be expected to withdraw their dealings as the expected date of closing approaches

Firms that want to continue to exist have an obvious interest in making sure there

is a resale market for their firm, not just the assets that might be sold separately The

owners and workers can then capture the long run value of their efforts to build the

firm By highlighting the last-period problem, we are suggesting that the firm resale

market can boost the long term value of those assets simply by alerting people to the

fact that the firm can continue for some time into the future This means that those firms

brokers who make a market for the sale of firms add value in a way not commonly

recognized, by giving firms the prospect of longevity

The “hollow corporation,” in which everything is “outsourced,” or nothing is

produced directly, is sometimes viewed as the organizational ideal, given that the firm

owners can rely on competitive forces to keep the prices of what they sell as low as

possible We doubt that the “hollow corporation” will ever dominate the economic

landscape of any country for a simple reason that comes out of the analysis of this

“Manager’s Corner”: The absence of the continuing association of employees under one

roof would mean that the last-period problems would arise in spades This is because the direct association of people under one roof has an unappreciated benefit: as in the

keiretsu in Japan, the firm permits the creation of abiding relationships that reduce the

incentive individuals have to behave opportunistically in the short run and enhance their

incentives to work with their long term goals in mind “Bonding” is something that

firms do

Concluding Comments

The concept of rational behavior means that the individual has alternatives, can order

those alternatives on the basis of preference, and can act consistently on that basis The

rational individual will also chose those alternatives whose expected benefits exceed their

expected costs

Traditionally economics has focused on the activities of business firms, and much

of this book is devoted to exploring human behavior in a market setting The concept of

rational behavior can be applied to other activities, however, from politics and

government to family life and leisure pursuits No matter what the activity, we all tend to

maximize our well being Any differences in our behavior can be ascribed to

differences in our preferences and in the institutional settings, or constraints, within

which we operate

Institutional settings affect people’s range of alternatives and thus the choices

they make It makes sense to examine the constraints of institutional settings In this part

of the book we will investigate the specific characteristics of the market system, the

subject of microeconomic theory Later we will look at the constraints of government

In both cases the range of choices open to individuals affects the ability of the system to

produce the results expected of it

We have also indicated in this chapter how individual rationality can give rise to a

nontrivial problem for managers, the last-period problem, which can make deals costly

At the same time, we have indicated how thinking in terms of rational precepts can

suggest ways managers can deal with their last-period problems to lower firm costs and

raise firm profitability

Review Questions

1 What are the costs and benefits of taking this course in microeconomics? Develop a

theory of how much a student can be expected to study for this course How might

the student’s current employment status affect his or her studying time?

2 Some psychologists see people’s behavior as determined largely by family history

and external environmental conditions How would “cost” fit into their explanations?

3 Why not base a course on an assumption of widespread “irrational” behavior?

4 Okay, so no one is totally rational Does that undermine the use of “rational

behavior” as a means of thinking about markets and management problems?

5 How could drug use and suicide be considered “rational”?

6 If your firm were consistently dealing with “irrational behavior” among the owners

and workers, what would happen to correct the problem? More to the point, what

might you do to correct the problem?

7 Develop an economic explanation for why professors give examinations at the end of

their courses Would you expect final examinations to more necessary in

undergraduate courses or MBA courses? In which classes – undergraduate or MBA – would you expect more cheating?

Government Controls: How Management

Incentives Are Affected

Without bandying jargon or exhibiting formulae, without being superficial or

condescending, the scientist should be able to communicate to the public the nature and variety of consequences that can reasonable be expected to flow from a given action or sequence of actions In the case of the economist, he can often reveal in an informal way,

if not the detailed chain of reasoning by which he reaches his conclusions, at least the broad contours of the argument

E J Mishan

arlier chapters showed how the models of competitive and monopolistic markets

illuminate the economic effects of market changes, such as an increase in the price

of oil This chapter will examine the use of government controls to soften the

impact of such changes We will consider four types of government control: excise taxes, price controls, consumer protection laws, and minimum-wage laws As we will see,

government controls can inspire management reactions that negate some of the expected

effects of the controls

Who Pays the Tax?

Most people are convinced that consumers bear the burden of excise (or sales) taxes

They believe producers simply pass the tax on to consumers at higher prices Yet every

time a new (or increased) excise tax is proposed producers lobby against it If excise

taxes could be passed on to consumers, firms would have little reason to spend hundreds

of thousands of dollars opposing them In fact, excise taxes do hurt producers

Figure 4.1 shows the margarine industry’s supply and demand curves, S1 and D

In a competitive market, the price will end toward P2 and the quantity sold toward Q3 If the state imposes a $0.25 tax on each pound of margarine sold and collects the tax from

producers, it effectively raises the cost of production The producer must now pay a price not just for the right to use resources, such as equipment and raw materials, but for the

right to continue production legally The supply curve, reflecting this cost increase, shifts

to S2 The vertical difference between the two curves, P2 and P1, represents the extra

$0.25 cost added by the tax

E

Figure 4.1 The Economic Effect of an Excise Tax

An excise tax of $0.25 will shift the supply curve for

margarine to the left, from S1 to S2 The quantity

produced will fall from Q3 to Q2; the price will rise

from P2 to P3 The increase, $0.20, however, will not

cover the added cost to the producer, $0.25

Given the shift in supply, the quantity of margarine produced falls to Q2 and the

price rises to P3 Note, however, that the price increase (P1 to P2) is less than the vertical

distance between the two supply curves (P2 to P1) That is, the price increases by less

than the amount of the tax that caused the shift in supply Clearly, the producer’s net has fallen If the tax is $0.25, but the price paid by consumers rises only $0.20 ($1.20 -

$1.00), the producer loses $0.50 It now nets only $0.95 on a product that used to bring

$1.00 In other words, the tax not only reduces the quantity of margarine producers can

sell, but makes each sale less profitable

Incidentally, butter producers have a clear incentive to support a tax on margarine When the price of margarine increases, consumers will seek substitutes The demand for butter will rise, and producers will be able to sell more butter and charge more for each

pound

The $0.25 tax in our example is divided between consumers and producers,

although most of it ($0.20) is paid by consumers Why do consumers pay most of the

tax? Consumers bear most of the tax burden because consumers are relatively

unresponsive to the price change The result, as depicted in Figure 4.1, is that consumers bear most of the tax burden while producers pay only a small part (20 percent) of the tax

If consumers were more responsive to the price change, then a greater share of the tax

burden would fall on producers who would then have more incentive to oppose the tax

politically Indeed, we should that the amount of money producers would be willing to

spend to oppose taxes on their product (through campaign contributions or lobbying) will depend critically on the responsiveness of consumers to a price change The more

responsive consumers are, the more producers should be willing to spend to oppose the

tax

Price Controls

Price controls are by no means a modern invention The first recorded legal code, the

four-thousand-year-old Code of Hammurabi, included regulations governing the

maximum wage, housing prices, and rents on property such as boats, animals, and tools And in A.D 301, the Roman Emperor Diocletian issued an edict specifying maximum

prices for everything from poultry to gold, and maximum wages for everyone from

lawyers to the cleaners of sewer systems The penalty for violating the edict was death

More recently, wage and price controls have been used both in wartime (during the

Second World War and the Korean War) and in peacetime President Richard Nixon

imposed an across-the-board wage-price freeze in 1971 Prime Minister Pierre Trudeau imposed controls on the Canadian economy in 1975 President Jimmy Carter controlled energy prices in 1977 and later proposed the decontrol of natural gas

Wage and price controls are almost always controversial Like attempts to control expenditures, they often create more problems than they solve We will examine both

sides of the issue, starting with the argument in favor of controls

Figure 4.2 The Effect of an Excise Tax When

Demand is More Elastic Than Supply

If demand is much more elastic than supply, the

quantity purchased will decline significantly when

supply decreases from S1 to S2 in response to the

added cost of the excise tax Producers will lose

$0.20; consumers will pay only $0.05 more

The Case for Price Controls

The case for price ceilings on particular products is complex On the most basic level,

many people believe that prices should be controlled to protect citizens from the harmful

effects of inflation When prices start to rise, redistributing personal income and

disrupting the status quo, it seems unfair Price controls may seem especially legitimate

to people, like the elderly, who must live on fixed incomes, and have little means of

compensating for the effects of price increases on goods like oil and gas