B-School Cases and Technical Notes
A Note on Present Value Analysis
In many applications, a policy decision requires the analyst to evaluate elements of a problem that occur in different time periods. Often, some or all of these elements are readily convertible to dollar figures, but sometimes they are not. Two of the thornier problems in benefit-cost analysis are 1) how to value inputs or outcomes when they are not easily converted into pecuniary (dollar) terms, and 2) how to place values that occur in different time periods on a comparable basis. This note addresses the second problem. It describes in very simple terms the technique known as present value analysis and illustrates with an example drawn from environmental policy.
An Amazing Result – The Central Limit Theorem in Action
One of the most amazing results in statistics (in our view) is the Central Limit Theorem (CLT). The CLT is in many ways the necessary foundation for much of econometric theory, particularly hypothesis testing. The CLT, in lay terms, answers the question “how do you know the distribution of that mean is “normal.” With the answer in hand, important statistical distributions related to the normal can be used for constructing statistical confidence intervals, and the “p-values” that are prominent in virtually all walks of statistical life can be easily computed.
Becker’s Economic Approach and Economic Policy Analysis
No economist has done more than Gary Becker for showing the power of the economic method in analyzing a wide range of outcomes. The economic approach, in Becker’s view, makes two assertions: that behavior is goal directed, and that observed outcomes represent economic equilibria. With these two assertions, Becker (and his students) showed how economics can be extended to analyze a dizzying array of behaviors previously thought to be outside the purview of economics: discrimination, crime, education and human capital, the family, addiction, social interactions, health, politics, and religion. He was awarded the Nobel Prize in Economic Science in 1992 for his work.
In this note, I show the common structure of Becker’s economic models, and how it can be used to fruitfully analyze a wide range of problems. I illustrate how it can provide insight into the effects of health insurance on health and health care costs, of fines and penalties on criminal behavior, of pollution taxes on environmental contamination, of cigarette and alcohol beverage taxation on health outcomes, of educational quality on human capital formation.
Microfoundations of the Value Creation and Capture Framework
In this (draft) technical note, Prof. Moore shows the linkages between the Value Creation and Capture framework of Competitive Strategy (as taught at Kellogg) and the Supply/Demand Equilibrium constructs of Microeconomics.
L-Shaped Supply Curves
Much of modern industrial activity is conducted in industries with a distinctive cost structure – they entail significant up-front investment, and relatively low post-investment production costs. High-tech production (semiconductors, LCD TVs, software, pulp and paper, mining), pharmaceuticals, branded consumer goods, and “market-platform” business (eBay, Facebook, credit cards) are leading examples.
In all of these industries, production can be usefully characterized using a device call the “L-shaped Supply Curve.” We develop this concept in simple graphical terms here, and show its implication for overall efficiency, volatility of prices and profits, and the effects of declining average costs and minimum efficient scale on industry structure.
In the Kellogg case “Mining Potash,” Tom Hubbard and I recount the events surrounding the attempt by mining giant BHP Billiton to acquire the Canadian firm PCS (Potash Corporation of Saskatchewan). The case is useful for discussing a wide range of topics in strategy classes, including added value, value creation and capture, industry analysis, etc.,), and in price theory, including cartel behavior, exhaustible resource economics, demand, profits, and costs and entry.
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