Managerial Economics and Organizational Architecture, 7th Edition PDF by James A. Brickley, Clifford W. Smith and  Jerold L. Zimmerman

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Managerial Economics and Organizational Architecture, Seventh Edition

By James A. Brickley, Clifford W. Smith and  Jerold L. Zimmerman

Managerial Economics and Organizational Architecture, Seventh Edition

Contents

Part 1: Basic Concepts

Chapter 1: Introduction 1

Managerial Economics and Organizational Architecture 2

Organizational Architecture 3

Economic Analysis 4

Economic Darwinism 6

Survival of the Fittest 6

Economic Darwinism and Benchmarking 6

Purpose of the Book 8

Our Approach to Organizations 8

Chapter 2: Economists’ View of Behavior 12

Economic Behavior: An Overview 13

Economic Choice 13

Marginal Analysis 14

Opportunity Costs 16

Creativity of Individuals 16

Graphical Tools 18

Individual Objectives 18

Indifference Curves 19

Opportunities and Constraints 20

Individual Choice 23

Changes in Choice 24

Motivating Honesty at Wells Fargo 26

Managerial Implications 29

Alternative Models of Behavior 30

Only-Money-Matters Model 31

Happy-Is-Productive Model 31

Good-Citizen Model 32

Product-of-the-Environment Model 33

Which Model Should Managers Use? 33

Behavioral Economics 35

Decision Making under Uncertainty 36

Expected Value 36

Variability 36

Risk Aversion 37

Certainty Equivalent and Risk Premium 38

Risk Aversion and Compensation 38

Summary 39

Appendix A: Consumer Choice 46

Appendix B: Inter-Temporal Decisions and the Fisher Separation Theorem

59

Chapter 3: Exchange and Markets 64

Goals of Economic Systems 65

Property Rights and Exchange in a Market Economy 66

Dimensions of Property Rights 67

Gains from Trade 67

Basics of Supply and Demand 72

The Price Mechanism 73

Shifts in Curves versus Movements along Curves 76

Using Supply and Demand Analysis for Qualitative Forecasts 76

Linear Supply and Demand 77

Supply and Demand—Extended Analysis 79

Price versus Quantity Adjustments 79

Short-Run versus Long-Run Effects 81

Industry Cost Increases and Price Adjustments 83

Prices as Social Coordinators 87

Efficient Exchange and Production 87

Measuring the Gains from Trade 87

Government Intervention 88

Externalities and the Coase Theorem 93

Markets versus Central Planning 95

General versus Specific Knowledge 95

Knowledge Creation 96

Specific Knowledge and the Economic System 98

Incentives in Markets 99

Contracting Costs and Existence of Firms 100

Contracting Costs in Markets 100

Contracting Costs within Firms 102

Managerial Decisions 103

Summary 104

Appendix: Shareholder Value and Market Efficiency 112

Part 2: Managerial Economics

Chapter 4: Demand 117

Demand Functions 118

Demand Curves 119

Law of Demand 121

Elasticity of Demand 121

Linear Demand Curves 126

Other Factors That Influence Demand 128

Prices of Related Products 128

Income 130

Other Variables 132

Industry versus Firm Demand 133

Network Effects 134

Product Attributes 136

Product Life Cycles 137

Demand Estimation 138

Interviews 139

Price Experimentation 139

Statistical Analysis 140

Implications 143

Summary 144

Appendix: Demand 151

Chapter 5: Production and Cost 154

Production Functions 155

Returns to Scale 156

Returns to a Factor 157

Choice of Inputs 160

Production Isoquants 160

Isocost Lines 162

Cost Minimization 163

Changes in Input Prices 164

Costs 166

Cost Curves 166

Short Run versus Long Run 169

Minimum Efficient Scale 173

Economies and Diseconomies of Scale 174

Learning Curves 175

Economies of Scope 176

Profit Maximization 177

Factor Demand Curves 178

Cost Estimation 181

Summary 183

Appendix: The Factor-Balance Equation 189

Chapter 6: Market Structure 190

Markets 192

Competitive Markets 192

Firm Supply 192

Competitive Equilibrium 195

Barriers to Entry 198

Incumbent Reactions 199

Incumbent Advantages 200

Exit Costs 201

Monopoly 201

Monopolistic Competition 203

Oligopoly 205

Nash Equilibrium 206

Output Competition 207

Price Competition 209

Empirical Evidence 210

Cooperation and the Prisoners’ Dilemma 211

Summary 215

Chapter 7: Pricing with Market Power 221

Pricing Objective 222

Benchmark Case: Single Price per Unit 223

Profit Maximization 223

Estimating the Profit-Maximizing Price 226

Potential for Higher Profits 228

Homogeneous Consumer Demands 229

Block Pricing 229

Two-Part Tariffs 231

Price Discrimination—Heterogeneous Consumer Demands 232

Exploiting Information about Individual Demands 233

Using Information about the Distribution of Demands 236

Bundling 240

Other Concerns 242

Multiperiod Considerations 242

Strategic Interaction 243

Legal Issues 244

Implementing a Pricing Strategy 245

Summary 247

Chapter 8: Economics of Strategy: Creating and Capturing

Value 254

Strategy 255

Value Creation 256

Production and Producer Transaction Costs 258

Consumer Transaction Costs 258

Other Ways to Increase Demand 259

New Products and Services 262

Cooperating to Increase Value 262

Converting Organizational Knowledge into Value 263

Opportunities to Create Value 264

Capturing Value 266

Market Power 267

Superior Factors of Production 270

A Partial Explanation for Walmart’s Success 275

All Good Things Must End 277

Economics of Diversification 279

Benefits of Diversification 279

Costs of Diversification 280

Management Implications 281

Strategy Formulation 283

Understanding Resources and Capabilities 283

Understanding the Environment 284

Combining Environmental and Internal Analyses 284

Strategy and Organizational Architecture 285

Can All Firms Capture Value? 286

Summary 287

Chapter 9: Economics of Strategy: Game Theory 293

Game Theory 294

Simultaneous-Move, Nonrepeated Interaction 295

Analyzing the Payoffs 296

Dominant Strategies 296

Nash Equilibrium Revisited 298

Competition versus Coordination 300

Mixed Strategies 303

Managerial Implications 305

Sequential Interactions 307

First-Mover Advantage 309

Strategic Moves 309

Managerial Implications 310

Repeated Strategic Interaction 311

Strategic Interaction and Organizational Architecture 313

Summary 315

Appendix: Repeated Interaction and the Teammates’ Dilemma 320

Chapter 10: Incentive Conflicts and Contracts 326

Firms 328

Incentive Conflicts within Firms 329

Owner-Manager Conflicts 329

Other Conflicts 331

Controlling Incentive Problems through Contracts 332

Costless Contracting 333

Costly Contracting and Asymmetric Information 335

Postcontractual Information Problems 336

Precontractual Information Problems 340

Implicit Contracts and Reputational Concerns 343

Incentives to Economize on Contracting Costs 345

Summary 347

Part 3: Designing Organizational Architecture

Chapter 11: Organizational Architecture 351

The Fundamental Problem 353

Architecture of Markets 353

Architecture within Firms 354

Architectural Determinants 356

Changing Architecture 360

Interdependencies and Complementarities within the Organization

361

Corporate Culture 363

When Management Chooses an Inappropriate Architecture 367

Managerial Implications 368

Evaluating Management Advice 369

Benchmarking 369

Summary 370

Chapter 12: Decision Rights: The Level of Empowerment 373

Assigning Tasks and Decision Rights 374

Centralization versus Decentralization 377

Benefits of Decentralization 377

Costs of Decentralization 379

Illustrating the Trade-offs 382

Management Implications 386

Lateral Decision-Right Assignment 389

Assigning Decision Rights to Teams 390

Benefits of Team Decision Making 390

Costs of Team Decision Making 392

Management Implications 392

Decision Management and Control 394

Decision-Right Assignment and Knowledge Creation 396

Influence Costs 397

Summary 400

Appendix: Collective Decision Making 404

Chapter 13: Decision Rights: Bundling Tasks into Jobs and

Subunits 407

Bundling Tasks into Jobs 408

Specialized versus Broad Task Assignment 408

Productive Bundling of Tasks 412

Bundling of Jobs into Subunits 414

Grouping Jobs by Function 414

Grouping Jobs by Product or Geography 416

Trade-offs between Functional and Product or Geographic Subunits

416

Environment, Strategy, and Architecture 419

Matrix Organizations 420

Mixed Designs 422

Network Organizations 422

Organizing within Subunits 423

Recent Trends in Assignments of Decision Rights 423

Summary 428

Appendix: Battle of the Functional Managers 432

Chapter 14: Attracting and Retaining Qualified Employees 434

Contracting Objectives 436

The Level of Pay 436

The Basic Competitive Model 436

Human Capital 437

Compensating Differentials 439

Costly Information about Market Wage Rates 441

Internal Labor Markets 442

Reasons for Long-Term Employment Relationships 443

Costs of Internal Labor Markets 444

Pay in Internal Labor Markets 445

Careers and Lifetime Pay 445

Influence Costs 450

The Salary–Fringe Benefit Mix 450

Employee Preferences 451

Employer Considerations 453

The Salary–Fringe Benefit Choice 453

Summary 459

Chapter 15: Incentive Compensation 464

The Basic Incentive Problem 465

Incentives from Ownership 468

Optimal Risk Sharing 469

Effective Incentive Contracts 471

Principal-Agent Model 472

Informativeness Principle 477

Group Incentive Pay 478

Multitasking 480

Forms of Incentive Pay 481

Incentive Compensation and Information Revelation 482

Selection Effects of Incentive Contracts 483

Does Incentive Pay Work? 484

Summary 489

Appendix: Multitasking Theory 494

Chapter 16: Individual Performance Evaluation 498

Setting Performance Benchmarks 501

Time and Motion Studies 502

Past Performance and the Ratchet Effect 502

Measurement Costs 504

Opportunism 506

Gaming 507

Horizon Problem 508

Relative Performance Evaluation 508

Within-Firm Performance 508

Across-Firm Performance 510

Subjective Performance Evaluation 510

Multitasking and Unbalanced Effort 511

Subjective Evaluation Methods 512

Problems with Subjective Performance Evaluations 514

Combining Objective and Subjective Performance Measures 517

Team Performance 518

Team Production 519

Evaluating Teams 521

Government Regulation of Labor Markets 522

Summary 524

Appendix: Optimal Weights in a Relative Performance Contract 530

Chapter 17: Divisional Performance Evaluation 534

Measuring Divisional Performance 536

Cost Centers 536

Expense Centers 539

Revenue Centers 540

Profit Centers 541

Investment Centers 541

Transfer Pricing 546

Economics of Transfer Pricing 547

Common Transfer-Pricing Methods 552

Reorganization: The Solution If All Else Fails 556

Internal Accounting System and Performance Evaluation 557

Uses of the Accounting System 557

Trade-offs between Decision Management and Decision Control 558

Summary 561

Capstone Case Study on Organizational Architecture:

Arthur Andersen LLP 568

Part 4: Applications of Organizational Architecture

Chapter 18: Corporate Governance 575

Publicly Traded Corporations 577

Corporate Form of Organization 577

Stock Exchanges 578

Stock Ownership Patterns 578

Governance Objectives 579

Separation of Ownership and Control 580

Incentive Issues 580

Survival of Corporations 580

Benefits of Publicly Traded Corporations 581

Top-Level Architecture in U.S. Corporations 582

Sources of Decision Rights 583

Shareholders 584

Board of Directors 589

Top Management 592

External Monitors 596

International Corporate Governance 599

Market Forces 602

Sarbanes-Oxley Act of 2002 604

Corporate Governance: An Historical Perspective 606

Summary 607

Appendix: Choosing among the Legal Forms of Organization 612

Chapter 19: Vertical Integration and Outsourcing 623

Vertical Chain of Production 625

Benefits of Buying in Competitive Markets 628

Reasons for Nonmarket Transactions 629

Contracting Costs 629

Market Power 632

Taxes and Regulation 634

Other Considerations 635

Vertical Integration versus Long-Term Contracts 635

Incomplete Contracting 636

Ownership and Investment Incentives 636

Specific Assets and Vertical Integration 637

Asset Ownership 641

Other Reasons 641

Continuum of Choice 643

Contract Duration 644

Contracting with Distributors 645

Free-Rider Problems 645

Double Markups 646

Regulatory Issues 650

Trends in Outsourcing 651

Summary 654

Appendix: Ownership Rights and Investment Incentives 659

Web Chapter 20: Leadership: Motivating Change within

Organizations 663

Leadership 20-3

Vision Setting 20-3

Motivation 20-4

Decision Making within Firms 20-5

Incentive Problems and Organizational Politics 20-5

Understanding Attitudes toward Change 20-6

Changing Organizational Architecture 20-7

Proposal Design 20-9

Maintaining Flexibility 20-9

Commitment 20-10

Distributional Consequences 20-10

Marketing a Proposal 20-11

Careful Analysis and Groundwork 20-11

Relying on Reputation 20-11

Emphasizing a Crisis 20-13

Organizational Power 20-14

Sources of Power 20-14

Tying the Proposal to Another Initiative 20-17

Coalitions and Logrolling 20-18

Is Organizational Power Bad? 20-19

The Use of Symbols 20-20

Summary 20-21

Appendix: Strategic Value of Commitment and Crisis 20-23

Chapter 21: Understanding the Business Environment: The

Economics of Regulation 664

Importance of Regulation to Managers 665

Economic Motives for Government Intervention 666

Defining and Enforcing Property Rights 666

Redressing Market Failures 669

Redistributing Wealth 675

Economic Theory of Regulation 677

Demand for Regulation: Special Interests 677

Supply of Regulation: Politicians 677

Market for Regulation 680

Deadweight Losses, Transaction Costs, and Wealth Transfers 682

Managerial Implications 683

Restricting Entry and Limiting Substitutes 683

Forming Coalitions 686

On Business Participation in the Political Process 686

Summary 688

Chapter 22: Ethics and Organizational Architecture 691

Ethics and Choices 694

Corporate Mission: Ethics and Policy Setting 696

Ethics 696

Value Maximization 697

Corporate Social Responsibility 698

Economists’ View of Social Responsibility 700

Corporate Policy Setting 702

Mechanisms for Encouraging Ethical Behavior 705

Contracting Costs: Ethics and Policy Implementation 708

Codes of Ethics 710

Altering Preferences 712

Education 713

Corporate Culture 714

Summary 716

Web Chapter 23: Organizational Architecture and the Process of Management Innovation 721

Management Innovations 23-3

The Demand for Management Innovations 23-5

The Rise of TQM 23-6

Other Innovations 23-7

Why Management Innovations Often Fail 23-8

Marketing 23-8

Underestimating Costs of Change 23-11

Failure to Consider Other Legs of the Stool 23-12

Managing Changes in Organizational Architecture 23-16

Summary 23-19

Index 722

Web Glossary G-1

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