Managerial Economics: A Case Study of Boeing and Airbus, Slides of Managerial Economics

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INTRODUCTION

MANAGERIAL ECONOMICS

Managerial economics: Science of directing scarce resources to manage more effectively  resources – financial, human, physical  management of customers, suppliers, competitors, internal organization  organizations – business, nonprofit, household

QUESTIONS OF MANAGERIAL ECONOMICS

RELATED TO THE CASE

 Why did Airbus corporatize in 2001? What are benefits from corporatization?  Why did Airbus Chief Commercial Officer John Leahy remark that A350 would “put a hole in Boeing’s Christmas stocking”?  How should Boeing respond?

HOW SHOULD BOEING RESPOND?

 Should Boeing proceed with its plan to develop the Dreamliner or should it alter its development plans?  Should Boeing respond by changing its pricing for its new jet??  How much would development and manufacturer cost, and how do these costs depend on sales volume?  Did Airbus respond correctly to Boeing’s Dreamliner?

NEW ECONOMY: INTERNET

 Managerial Economics also applies to the new economy.  Example: In pricing, Airlines use online auctions to segment their market between business and leisure travelers.  Example: In competitive strategy, Google competes fiercely with Yahoo.

OLD/NEW ECONOMY

 Differences between “New” and “Old” economy: _ role of network effects in demand **network effects – benefit/cost depends on total number of other users example: Internt _ importance of economies of scale and scope example: Information in Yahoo is scalable

EXAMPLE: INCREASE IN OIL PRICE

 Micro effect: vehicle users, electronic power generators  Macro effect: inflation, unemployment

METHODOLOGY

 economic model – concise description of behavior and outcomes  marginal vis-à-vis average  stock vis-à-vis flow  other things equal

ORGANIZATION

 Vertical boundaries – closer to or further from end user  Samsung Electronics – vertical boundaries longer than  Intel – specializes in semiconductors (upstream)  Motorola – specializes in mobile phones (downstream)

ORGANIZATION

 Horizontal boundaries – scale and scope of activities  Samsung Electronics – horizontal boundaries broader than  LG.Philips LCD – specializes in LCD  Motorola – specializes in mobile phones

MARKET: CONTINUED

 Competitive Markets  Market Power  Imperfect Markets

COMPETITIVE MARKET

 Benchmark for managerial economics  Extremely competitive market  many buyers and many sellers  no room for managerial strategizing  Achieves economic efficiency

MARKET POWER

 Definition – ability of a buyer or seller to influence market conditions  Seller with market power must manage  costs  pricing  advertising expenditure  R&D expenditure  strategy toward competitors

IMPERFECT MARKET

 Definition: where  one party directly conveys a benefit or cost to others, or  one party has better information than others