methods of market entry

May 6, 2020

Case analysis

May 6, 2020

Microeconomic theory

INTRODUCTION
Microeconomic theory explains the behaviour of economic agents (consumers and
producers), confronting their choices and the constraints of the market place.
Microeconomics lies at the heart of economic analysis, providing the foundations of
macroeconomics and of the subject specific areas of study such as those offered in
optional modules in your degree programmes.
SUMMARY
This module will develop the model building techniques encountered at level 4, and
extend the scope of these models to a wider range of problems. It will show the use of
microeconomic models in a problem solving context and provide an analytical basis for
subsequent elective modules.
On completion of the module, you will have a good knowledge of the major techniques
and issues in modern microeconomic theory and policy and how to apply this
knowledge in the discussion and evaluation of contemporary microeconomic issues.
2
AIMS
?
develop additional models and extend the scope of models encountered at level 4
to a wider range of problems.
?
To show the use of microeconomic models in a problem solving context
LEARNING OUTCOMES
On successful completion of the module, students will be able to:
?
Demonstrate an understanding of the main models of household and firm decision
making and the impact of uncertainty on decision making.
?
Demonstrate some fluency in communicating the knowledge gained and applying it
to some contemporary problems;
?
Demonstrate an appreciation of the problems facing policymakers in using
microeconomics to improve economic welfare/alter economic outcomes.
INDICATIVE MATERIALS
Main text (students should buy the following):
?
Goolsbee A, Levitt S and Syverson C (2013) Microeconomics. MacMillan Higher
Ed
ucation (International edition); denoted by the acronym GLS below.
This book covers the majority of material on the module and provides an intuitive,
conceptual and mathematical treatment of the material with many real world examples.
Auxiliary main text (it is recommended that students should also buy any one the
following):
?
Perloff, J. M. (2012). Microeconomics, 6th ed., Pearson; denoted with P.
?
Pindyck, R. S. and Rubinfeld, D. L. (2009). Microeconomics, 7th ed.,
Pearson/Prentice-Hall international edition; denoted with PR.
?
Varian, H. (2010). Intermediate Microeconomics: a modern approach, 8th ed.,
Norton; denoted with V.
About half of the lectures (on producer theory, externalities, oligopoly and game theory)
follow PR closely whereas the lectures on consumer theory are more closely associated in
style to V. V provides a more concise and technical (quantitative) treatment of the material
relative to P and PR. Whereas P and PR have more real world examples and are arguably
more intuitive than V. You may wish to decide base your decision of which auxiliary text to
purchase on that which will be most useful for the assessment.
3
Additional useful texts include:
?
Frank, R. H. (2010). Microeconomics and Behaviour, 8th ed., McGraw-Hill.
?
Morgan, W., Katz, M. and Rosen, H. (2009). Microeconomics, 2nd ed., McGraw-Hill
European edition
;
denoted by MKR.
?
Perloff, J. M. (2011). Microeconomics with Calculus, 2nd ed., Pearson.
Useful journal articles include
?
Akerlof
, G. A. (1970).
The Market for Lemons’: Quality Uncertainty and the Market
Mechanism,
Quarterly Journal of Economics
, 488

500.
?
Card, D. and Krueger, A.
B. (1994). Minimum Wages and Employment: A Case
Study of the Fast-Food Industry in New Jersey and
Pennsylvania.
American
Economic Review
, 84, 4, 772

793.
?
Deere, D. Murphy, K. M. and Finis, W.
(1995). Employment and the 1990
Minimum-
Wage Hike.
American Economic Review
, 85, 2, 232

237.
?
Hoel, M.
(1998) Emission Taxes Versus Other Environmental Policies.
Scandanavian Journal of Economics
, 100, 1, 79

104.
?
Kolay, Sreya and Shaff
er, Greg (2003). Bundling and Menus of Two
–
Part Tariffs.
The Journal of Industrial Economics
, 51, 3, 383

403.
?
Neumark, D. and Wascher, W.
(2000). Minimum Wages and Employment: A Case
Study of the Fast-
Food Industry in New Jersey and Pennsylvania: Comment.
American Economic Review
, 90, 5, 1362

1396.
?
Oi, W.
Y. (1971). A Disneyland Dilemma: Two
-Part Tariffs for a Mickey Mouse
Monopoly.
Quarterly Journal of Economics
, 77

96.
Indicative online resources
Instructional videos on relevant microeconomics topics can be accessed via YouTube.
Example links include:

8D16137&index=48&playnext=2
INDICATIVE SYLLABUS
Below is a guide to the weekly teaching schedule (there may be some deviation from
the timings given below). Some recommended reading from some of the texts (above) is
given below each topic.
4
SEMESTER 1, TEACHING BLOCK A: Consumer theory.
Week 1: Demand Supply Diagram
GLS Ch1, Ch 2.1

2.4, Ch 3.1); V Ch 1, 15,16
Week 2: Consumers’ Decision Problem
GLS Ch 4.3; V Ch 2
Week 3: Preferences and Utility Function
GLS Ch 4.1

4.2; V Ch 3, 4
Week 4: Solving the Decision Problem
GLS Ch 4.4, Ch 4.Appendix p. 157-159; V Ch 5
Week 5: Marshallian Demand
GLS Ch 5.1

5.2; V Ch6
Week 6
:
Enhancement Activity Week (EAW)
There is no scheduled teaching this week.
SEMESTER 1, TEACHING BLOCK B
:
Producer theory.
Week 7: Technology, Production Functions and Costs 1.
Production functions, isoquants, returns to scale, marginal product, marginal rate of
technical substitution,
isocost lines, cost minimisation
and
conditional factor demands.
GLS, Ch. 6 and 7
.
MKR, Ch. 8, Ch. 9 and Ch. 9A. P, Ch. 6 and 7. PR, Ch. 6 and Ch. 7. V,
Ch.
18, 19, 20 and 21.
Week 8:
Technology, Production Functions and Costs 2.
The cost function, short-run and long
-run costs, expansion paths, cost curves, economies
of scale,
economies of scope and the production possibility frontier
.
GLS, Ch. 6 and 7. MKR, Ch. 8, Ch. 9 and Ch. 9A. P, Ch. 6 and 7. PR, Ch. 6 and Ch. 7. V, Ch.
18, 19, 20 and 21.
Week 9: Perfect Competition.
GLS, Ch. 8. MKR, Ch. 10, and Ch. 11. P, Ch. 8 and 9. PR, Ch. 8. V, Ch. 22 and 23.
Week 10: Monopoly 1
.
Profit maximization, mark-up pricing & the impact of an output tax
.
GLS, Ch. 9. MKR, Ch. 13. P, Ch. 11. PR, Ch. 10. V, Ch. 24.
Week 11: Monopoly 2
.
Price discrimination, pricing models, barriers to entry and regulation
.
GLS, Ch. 10. MKR, Ch. 13. P, Ch. 12. PR, Ch. 11. V, Ch. 25.

Chemical Processing at MBM Tool&Machine

OnMarch23,2005,BorisKikely, president ofMBMTool&Machine(MBM), atier2aerospacecompanylocatedinVaughan,Ontario,wasreviewinghisprofit/lossstatementsfromthepreviousmonth.Hewasupsettodiscoveryetanotherreportfromhisvice-presidentofFinanceandAdministration,indicatingthatcostsforoutsourcedchemicalprocessinghavebeenescalatingand,inaddition,therewerecontinuousqualityproblemswiththecompanythatMBMhadcontractedtoperformchemicalprocessing.Herealizedthatthissituationhaddefinitelygoneonlongenoughandit wastimethatMBMstoppeddragging itsfeetonadecisiontoinsource chemicalprocessing.

TheAerospaceIndustryin Ontario

In2005,amongthecompaniesintheOntarioaerospaceIndustry,therewereabout45CNCPrecisionmachiningshopsmanufacturingproductprimarilyforthefollowingTier1orOriginalEquipmentManufacturingcustomers(T1-OEM):GoodrichAerospace,BombardierAerospace,Messier-Dowty,andBoeingAerospace.Thesefourcustomerscontrolledanddirectedthesourcingofproductforapproximately85-90%ofprocuredproduct.QualityisparamountfortheT1-OEMcustomers.Assuch,thesecustomerscontrolledallprocessstepsalongeachproductsvaluechain.Indeed,theT1-OEMcontrolledwhereeachmachineshopwastohaveitsproductschemicallyprocessedinorderforproducttomeetfinal expectations

ChemicalProcessing

In2005inOntario,T1-OEMcustomershadonlycertified3supplierstoperformchemicalprocessing.Therefore,mostmachineshopswereforcedtoseekchemicalprocessingabroad:US,Quebec,andeveninsomecasesasfarawayasEurope.Thisusuallypresentedlogisticalproblemsandcostpremiumsassociatedwithtransportation.ToestablishanewchemicalprocessingcompanyinOntariorequiredabout18monthsofpermissionsandapprovalsfrombothGovernmentandcustomers.Intheend, evenifsuccessful,thisdidnotguaranteeworkfortheprocessing company.

MBMTooland Machine

BorisKikelyopenedMBMininthesummerof1967.Initiallyscramblingandtakinganytypeofworkhewaspresented,Kikelywouldtravelfromcustomertocustomerseekingworkanddevelopingrelationships.By2005,MBMhadevolvedfromasmallmom-poptypecompanyintoamid-sizeenterprisewithsalesofabout$17MillionCADperyear,andgrossprofitmarginsrangingfrom25to30%.

Thebusinessfocusedoncomplexmid-to-largersizecomponentsandassembliesExhibit1providesasampleofthecomplexityofthetypical component’svaluechain.

TheCurrent Process

Afterincurringmuchtroublewithlocalchemicalprocessingcompanies(quality,deliveryandpricingissues),MBMhad,forthelastcoupleofyears,outsourcedmostofitschemicalprocessingworktoa

companyinMontreal.Althoughthechemicalprocessingwasdonefairlywell,MBMquestionedthequalityoftheworkandwasforcedtoinspectallproductreceivedfromthechemicalprocessingsupplier.Indeed,productwasnotdeliveredtothe expectedhighqualitystandards.

MBMpurchasedabout$5Millioninchemicalprocessingservicesayearrepresenting about40%ofallofitsannualexpenses.Tosupportthemovementofproducttothechemicalprocessingsuppliers,MBMpurchasedatruckatacostof$45,000andhiredtwodriversatacostof$25perhour,specificallywiththetaskofmovingproductbetweenVaughanandMontrealonadailybasis(6daysaweek,assume12hourworkdays per driver,withtheoperating costforthetruck at$.52/Km. Each driver driving about600km/day,notincludedintheprocessing spendvalue).

Insource Processing

KikelyrealizedthatMBMwouldnotbeabletorepatriateallprocessingandassuch,hefocusedhiseffortonout-sourcedprocesssteps14-22inExhibit1,representingabout75%ofallchemicalprocessingcosts.Inordertosetupaprocessingline,MBMwouldberesponsibleforenvironmentalandcustomer approval ofthenewfacility.Total fixedcostsassociatedwithbuilding theprocessing facility:

1. Building Expansion:$2.5Million
2. ApprovalsandCertifications:$500Thousand
3. ProcessingEquipment:$1.5MillionVariable costs:
1. Labour:9peopleat$15/hr(assume3personpershift,24hroperation,300days)
2. Chemicals:$250/Hr(assume 300 daysayear, 24hoursperday)
3. 1Maintenanceworkerat $30/hr,8hourshift,300 daysayear
4. DriversAssume the drivers are reassigned, with cost to driver reduction the vehicle only.

Thecompanywouldstillrequirethedriverandthetruckforthebalanceofoutsourcedprocessingrequirements.Howeverthetruckwouldberequiredtooperate,onaverageonly6hours,or driving only 600km per day. Mostoftheremainingoutsourcedoperationsare performedlocally.

Inadditiontotheaddedlaborcosts,Kikelyknewthatrunninganewchemicalprocessingplantwoulddramaticallyincreasetheplant’shourlyconsumptionofenergyandgas.BasedontheCFO’sestimates,thenewfacility wouldlikely consumeanadditional$15.00ofelectricityand$7.50ofgasevery hourthatitwasrunning.Further,MBMwouldhavetoproperlydisposeofusedchemicalsatacostof$35percubicmeter,wherethecompanywasgenerating,onaverage,1cubicmeterofwastechemicalsperhour.

Withthisnewinvestment,Kikelyexpectedon-timedeliverytocustomerstoimprovetoover90%,andqualitytoexceed98%.Furthermore,hesawtheadditionofthenewfacilitytobeapositivemoveinthequesttowinnewordersandcontracts.

Kikelyestimatedthatthechemicalfacilityneededtorun300days/year(6daysaweek,24hoursperday,for50weeks).Kikelyassumedthefacilityneededtooperateat80%efficiencytomeethiscurrentdemandneeds.

Decision

AsKikelylookedthroughalloftheinformationthatheandhisteamhadcollectedregardingthisinvestment,hehadseveralconcerns.Hequestionedwhetherthebuildingofanewchemicalprocessingplantwastherightchoice.KikelybelievedthatinsourcingchemicalprocessingwastherightmoveforMBM;itwasagoodsteptowardgrowthandwouldhelpthecompanyimproveitscontrolofthequalityofitsproducts.However,healsoknewthathewouldneedtomakeastrongcasetohisinvestmentpartnerstogainapprovalforthismajorinvestmentexpense.Hewantedtoensurethathehadconvincing quantitativeandqualitativeargumentsfortheinvestment.

Questions

1. QualitativeAnalysis:
a. Provideareviewoftheindustrygiving thoughttothefollowing:Continuedoutsourcing,Insourcing,orcompanyacquisition.Pleasediscussthepros/consofeachoftheabove.
2. QuantitativeAnalysis:
a. Determinetheannual costs forinsourcing product at MBM.
b. AssessMBM’spaybackonthenewFacilityInYears,howlongbeforethefacilityispaidoff.AssumingthatKikelyhasapaybackrequirementof3yearsonanycapitalinvestments,doestheinvestmentmeetthisobjective
3. Asopposedtobuildingachemicalprocessingplantfromscratch,ifKikely hadtheopportunitytopurchaseanexistingchemicalprocessingcompanyfor$6Milliondollars,withoperatingcosts30%lessthanthoseprojectedtobespentatMBM,shouldKikelybuythecompanyinsteadofconstructing thenewfacility? Pleaseprovideyoursupporting information
4. In2008,thegovernmentislobbyingtoimposenewenvironmentregulationsthat, ifpassed,willresultsin$1Millioninincreasedannualcostsinforallprocessingfacilities.Assesshowthisannualexpansemaychangeyourassessmentabove(keepin mind thatifyou optto notconstructorbuyafacility,processingsupplierswillpasson50%ofthefeetoyou,asitsprimarycustomer.

Exhibit1:TypicalProductValueChain Profile:HardSteel

#
Activity
Sourcing
1 ProfileMilling In-Source
2
DeepHoleBoring/RoughHoleDrilling/LugFaceMilling

In-Source
3 Polishing/Blending In-Source
4 HeatTreat Out-Source
5 FinishMachining/Grinding Out-Source
6 Deburring In-Source
7 ElectrochemicalDeepEtchMarking In-Source
8 NitalEtchInspection In-Source
9 Embrittlementand/orStressRelief In-Source
10 MagneticParticleInspection Out-Source
11 ShotPeening Out-Source

12 ChromePlating(orHVOFcoatingEmbrittlementreliefisnotrequired)
Out-Source
13 Inspection In-Source
14 CoatingStripping Out-Source
15 Bake/EmbrittlementRelief Out-Source
16 Chrome/HVOFGrind Out-Source
17 Rollscan Out-Source
18 CadPlating,Nickel Out-Source
19 CoatingStripping Out-Source
20 Bake/EmbrittlementRelief Out-Source
21 MagneticParticleInspection Out-Source
22 EpoxyPrime Out-Source
23 Bushing,HardwareInstallation In-Source
24 SealingofBushings,etc In-Source
25 PolyurethaneEnamelTopcoat Out-Source
26 WipeonPrimer Out-Source
27 FinalAssembly&QualityInspection In-Source

Chemical Processing at MBM RobertRuggieri,GeorgeBrownCollege,Sept2013
ChemicalProcessingatMBMTool&Machine

TheAerospaceIndustryin Ontario

ChemicalProcessing

MBMTooland Machine

Thebusinessfocusedoncomplexmid-to-largersizecomponentsandassembliesExhibit1providesasampleofthecomplexityofthetypical component’svaluechain.

TheCurrent Process

Afterincurringmuchtroublewithlocalchemicalprocessingcompanies(quality,deliveryandpricingissues),MBMhad,forthelastcoupleofyears,outsourcedmostofitschemicalprocessingworktoa

Insource Processing

Kikelyestimatedthatthechemicalfacilityneededtorun300days/year(6daysaweek,24hoursperday,for50weeks).Kikelyassumedthefacilityneededtooperateat80%efficiencytomeethiscurrentdemandneeds.

Decision

Questions

Exhibit1:TypicalProductValueChain Profile:HardSteel

#
Activity
Sourcing
1 ProfileMilling In-Source
2
DeepHoleBoring/RoughHoleDrilling/LugFaceMilling

Microeconomic theory

methods of market entry

Case analysis

Microeconomic theory

Related posts

How are pragmatism and analytic philosophy uniquely American movements? What ideas make them different from the way Europeans of the same period were