Exam 1 (Topics 1-3) Flashcards
BP made 2 strategic acquisitions, who?
- Arco and Solarex
- Solarex acquisition made BP the largest solar energy company in the world
- Arco made the BP the largest oil and gas recovery company in the world
Corporate Social Strategy
- Integrate non-market forces (political, economic, social, and technological into your market strategy (look for non-market opportunities to exploit)
- Competition tends to school managers to think in terms of outcomes (profit, sales, market share, etc)
- However in interactions with non-market players, processes become more important (oversight, social reputation)
PEST Framework
Political, economic, social, and technological factors help determine firm and market strategy and when non-market strategy is added to this, produces Integrated Corporate Social Strategy
BP’s Non-Market Integration
BP launched the Beyond Petroleum campaign and began rebranding
Do customers care about the brand of oil and gas?
Gas is a commodity, price and convenience are most important for customers HOWEVER, and enhanced corporate brand will differentiate from competitors and lead to more franchise options
Do employees care about where they work?
To be #1 energy company in the world, you have to recruit and retain the brightest engineers and scientists (want to work for industry leader)
Do investors care about who they invest in?
SRI (socially responsible investors) care and want high returns with no guilt (Oil & gas has high returns but also high guilt (environmental degradation and climate change), Beyond Petroleum branding helps to remove guilt
Are policy makers concerned about corporate reputations?
Industry leaders not only influence if new policy is written but also shape how it is written
- IF: proactive self-regulation can preempt need for regulation
- HOW: Industry leaders give testimony on new regulation feasibility
Beyond Petroleum Risks
- Heightened public expectations (especially from NGOs)
- Greenpeace gave BP the Greenwash of the Year award
- 45 mil spent on Solarex, 26.5 bil spent on Arco (588 times more and 207 mil spent on rebranding)
Beyond Petroleum - theory
BP found an avenue to create “shared value” by integrating societal concerns over fossil fuels with their core market strategy
Social Regulators (and Market Efficiency)
- NGOs usually take political or direct action when market inefficiencies exist (when outcome is not socially efficient)
- Public policy changes can either correct existing inefficiency or it can be the cause of inefficiency
Socially efficient production level
- Produce and sell product that consumers value more than the costs of production
- Avoid producing and selling product that consumers value less than the costs of production
- Socially efficient and profit maximizing can be very different
Demand is based on…
- The value to customers
- Consumer surplus: Difference between what customers are willing to pay and the price they have to pay (represents consumer behavior)
Supply is based on…
- The cost to producers
- Producer surplus: Difference between the price sellers receive and the minimum supply price needed to cover costs
Social efficiency occurs at…
The market equilibrium if all costs and value are accounted for in the D&S curves
Market price will be efficient if…
Reflects true cost & value in society
Producing below the socially efficient quantity…
You are giving up producing some units that are valued more than their productive costs
Producing beyond socially efficient quantity…
You are producing in a range where the units are above consumer value
Effect of taxes on sellers
Cause an inward shift of the supply curve (decreased supply); taxes on sellers raise the costs of production
General results of a tax: (5)
1) Government revenue collected
2) Increased prices to buyers - consumer surplus decreases
3) Decreased prices to sellers - producer surplus decreases keep less in their pocket
4) Reduced quantity bought and sold
5) Taxes are efficiently enhancing in markets tht are over-producing relative to Qe
Subsidies given to sellers cause:
anotward shift of the supply curve (increase supply) and lower the costs of production (incentivize increasing sales)
General results of a subsidy:
1) Decreased prices to buyers (consumer surplus increases)
2) Increased prices to sellers (producer surplus increases)
3) Increased quantity bought and sold
4) Subsidies are efficiency enhancing in markets that are under-producing relative to Qe
Productive regulation on sellers cause:
an inward shift of the supply curve (decreased supply) which is a burden on sellers –> high operating costs
General results of a productive regulation:
1) Increased prices to buyers (consumer surplus decreases)
2) Decreased prices to sellers (producer surplus decreases)
3) Reduced quantity bought and sold
4) Productive regulations are efficiently enhancing in markets that are overproducing
5) No government revenue
Voters are assumed to be:
- Rationally ignorant
- Benefit of being knowledgeable is lower than the cost
Politicians are assumed to be:
Vote-maximizers, regardless of motivation, their ultimate goal is to be elected so they provide as much information to voters at no charge
Bureaucrats (civil servants) are assumed to be:
Budget-Maximizers, they are not elected but are hired and seek bigger budgets to achieve promotions, higher pay, prestige, job security
Public Sector Inefficiencies (list) –>
- Shortsightedness effect
- Lack of Operational efficiency
- Lobbying/Rent seeking
- Special Interest effect
The Shortsightedness Effect
- Politicians support projects that have clearly defined current benefits and future costs that are difficult to identify (not well defined)
- Maximized influence on current voters at the expense of future generations - biased towards such projects even when they are inefficient
Operational Inefficiency
- Public sector has no profit motive
- Reduces the incentive of government to keep cost low (don’t benefit from minimizing
- Less conscious of costs because spending other peoples money
Lobbying/Rent Seeking
-Devoting resources to influence public policy formation in order to bring more income (cost of lobbying can produce significant inefficiencies if its main affect is solely income
Function of lobbyists
- Find political opportunities and threats (to try to shape regulation)
- Inform politicians and influence public opinion
- Form coalitions: identity groups with similar interests
Special Interest Effect
- Small group of people receive benefits at teh expense of a large group
- Large, widely dispersed groups rarely gain political power (individual benefits of taking action often exceed the potential individual costs)
Majoritarian
Widely dispersed benefits
Widely dispersed costs
Client
Concentrated benefits
Widely dispersed costs
Entrepreneurial
Concentrated costs
Widely dispersed benefits
Interest Group
Concentrated benefits
Concentrated costs
Majoritarian politics
- No specific interest groups take action on either side of the issue
- Example: Social security
- Lobbying does NOT occur
Client Politics
- One special interest group is active in favor of an issue
- Lobbying does occur?
Interest Group politics
- Active special interest groups on both sides of the issue
- Example: legalizing marijuana
- Lobbying outcome depends on the relative strength of lobbying
Entrepreneurial politics
- One special interest group active against an issue
- Example: nuclear waste dumps
- Lobbying will be very costly
Communal Property Rights
- No single owner, everyone has access while it lasts
- Over-utilization (no incentive to conserve for the future)
Government Property Rights
-Property decisions made by a small group of elected political representatives
Secure Private Property Rights
give property owners incentive to:
- create value w property (benefit others)
- maintain property and conserve for the future
- innovate and create new technologies
- engage in voluntary exchange
Intellectual Property (IP) Rights
Patent, trademark, copyrights
Patent
Right to exclude all others from using, producing, or selling an invention (pharmaceutical drugs, manufacturing, equipment, electronics)
Trademark
A word, name, symbol, or device that is used in trade with goods to indicate their source (used to distinguish goods from competitors)
Copyright
Right to exclude all others from reproducing, distributing, or performing a work (writing, software, music, art, movies, programs)
Gary Becker’s Criminal Decision Rule
current utility = Yo
expected utility = Prob of success * outcome + probability of getting caught* outcome
Will commit if expected is greater than current utility
Variables of interest
- Size of punishment (Strategic)
- Probability of getting caught (Strategic) –> government and criminals can both affect this
- Payoff of the crime (not strategic once you choose the crime)
- Income (Not strategic)
Problem of internet piracy is:
GLOBAL ENFORCEMENT
-increasing probability of getting caught is nearly impossible, so they increase the penalty
Explicit costs
When a monetary payment is made (wages paid to labor)
Implicit costs
involve the firm’s resources but do not have a monetary payment (opportunity cost of owners investment)
Economic profit
Revenues minus all costs (implicit costs are calculated as a normal rate of return)
Normal rate of return
what firms could get by investing in businesses in similar risk
Role of entrepreneurs
Take risk in order to find what ventures are profitable
entrepreneur: someone who tries to exploit opportunities that exist within markets
Intrepreneur
an entrepreneurial individual that is employed by a firm
- Needed to keep ahead of rival firms
- Needed to improve overall efficiency
- An effort to keep brightest minds within the corporation
- Incentive to incorporate more profitable projects
Economic freedom and economic growth
positive link between economic freedom and economic growth
- economic freedom: highest with lowest taxes, low regulation, secure property, and consistent legal structure
- Creates an environment that is conducive to entrepreneurship (leads to economic growth)
Creative destruction
When entrepreneurial change makes older industries or technologies become obsolete
- Less efficient industries die off and free resources that can go to new more efficient industries
- Government can enact policies to protect dying industries
Conflict of Interest
- When a professional individual has a private interest sufficient enough to influence pursuit of their official duties
- Key elements?
Self-dealing
Use your position to secure personal benefits
Influence peddling
Use your position to secure benefits for a third party (anyone who is not yourself)
Accepting benefits
Receiving bribes or non-monetary gifts
Misuse of Inside Information
Misusing confidential information
Misuse of employer’s property
Personally gaining from employers property without consent
Outside employment or Moonlighting
Holding multiple employment positions at one time which biases professional behavior
Post-employment
Holding a sequence of employment positions where you carry a bias from one job to the next
Petty corruption
Decisions made by low-level bureaucrats, often centered on local/regional regulations
Grand corruption
Decisions made by high-level politicians - often centered on national policy formation, infrastructure, subsidies
