Good decision making and strategy do not exist in isolation: the success and profitability of a business depend not only on the organization’s own strategic moves but also on those that other firms make, especially competitors. Understanding the strategic linkages among firms can therefore be immensely valuable. Economics and Game theory offer tools that can specifically enhance one's understanding and ability to exploit such strategic linkages. This course will cover one of the most crucial decisions that a firm offering a differentiated product needs to make – how to price its product.
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In addition, the course will demonstrate some of the consequences of governments and platforms intervening in markets, either because markets may have failed or because the rule-maker may have been persuaded to intervene by key stakeholders. Importantly, the course will layer game-theoretic considerations on top of economic considerations in the marketplace.
By the end of the course, students will be able to:
• Develop an understanding of the economic concept of elasticity and be able to utilize it in making informed decisions on how, if at all, to alter a product’s pricing.
• Identify the implications of market intervention for various stakeholders, including consumers, firms, and government, and incorporate them in analyzing potential policies.
• Identify sources of market power and solve for profit-maximizing prices.
• Classify forms of price discrimination and develop an understanding of why the practice can be beneficial in customer segmentation and price customization.
• Develop an understanding of the dynamics of oligopolistic price and quantity competition.
• Describe introductory concepts in game theory, including simultaneous games, sequential games, and auctions, as well as develop an understanding for how asymmetric information can lead to adverse selection issues.
What you'll learn
- The economic concept of elasticity, and how to utilize it in making informed decisions on pricing products.
- Sources of market power and how firms with market power set prices, segment customers, and customize prices to different segments.
- Concepts in game theory, including simultaneous games, sequential games, auctions, and adverse selection issues.
Syllabus
Module 1: Price Elasticity of Demand
Welcome to Business Economics and Game Theory for Decision Making! Module 1 introduces the concept of elasticity, and specifically, price elasticity of demand, which quantifies the intricate relationship between price changes and buyer behavior. Price elasticity of demand measures the responsiveness of consumer demand to fluctuations in product prices. Understanding elasticity is paramount in economics, as it empowers businesses and policymakers to make informed decisions regarding dynamic pricing strategies, revenue optimization, and resource allocation. By calculating and analyzing the elasticity of demand for various products, economists can identify the optimal price points that maximize profitability and market efficiency. This module explores some of the foundations of price elasticity and its applications, to provide the requisite infrastructure for further study in subsequent modules, as we aim to navigate the complex landscape of pricing in today's dynamic markets.
Module 2: Policy; Winners and Losers from Intervention; Influencing Policy
Module 2 delves into the complex relationship among governments, platforms, businesses, and consumers, shedding light on the profound impacts of policy interventions on various stakeholders. In an increasingly interconnected world, government policies and platform regulations wield immense influence over market dynamics. This module explores how these interventions can lead to clear winners and losers among businesses, consumers, and society at large. Moreover, it delves into the strategies and tactics employed by firms to actively influence and shape market policies to their advantage. By examining actual policy scenarios, learners will gain an understanding of the multifaceted interactions within modern markets, the pivotal role played by government and platforms in shaping their outcomes, and the high potential for unintended consequences from market intervention.
Module 3: Pricing with Market Power
Module 3 begins to cover a crucial component of strategy – pricing – by directly solving a profit maximization problem. Market power enables firms to set prices and influence consumer choices to a substantial degree. This module delves into the complexities of optimal pricing in a number of scenarios, providing a foundation for concepts such as price discrimination, monopolistic competition, and strategic pricing. Learners will gain insights into the potential trade-offs between profit maximization and consumer welfare, as well as the economic and ethical implications of firms wielding substantial pricing authority. By examining actual scenarios, this module equips students with the analytical tools and knowledge needed to begin to navigate the challenging terrain of pricing strategies.
Module 4: Competing Market
Module 4 continues the coverage of optimal pricing with market power by providing a second, dynamic and iterative approach that firms employ in determining product pricing – by tying together the concepts of elasticity and profitability. As a result, the module offers profound insights into the dynamic world of pricing strategies. In today's complex and diverse markets, businesses must tailor their approaches to meet the varying needs and preferences of different consumer groups. This module explores the fundamental concept of market segmentation, by which firms identify and categorize distinct customer segments based on factors such as demographics and behaviors as a means of price customization, where pricing strategies are adapted to align with the unique characteristics and willingness-to-pay of each segment. This module equips learners with the knowledge and skills to craft effective pricing strategies that maximize profitability, integrating all of the previously covered concepts in the course into a single, simple rule that is employed by sophisticated firms to price optimally and dynamically: The Optimal Markup Rule.
Module 5: Game Theory
Module 5 serves as a capstone in the economics sequence – ending where the sequence began – providing students with a compelling framework for understanding strategic decision-making, including pricing, in a wide range of contexts. Non-cooperative game theory, which analyzes the strategic interactions and choices of economic agents such as individuals and firms within competitive settings, is essential for fostering an understanding of how economic agents make decisions that impact outcomes. This module introduces students to the key concepts and principles of game theory, such as Nash equilibrium, dominant strategies, and information asymmetries, while exploring its applications in economics, business, and policy. Students will develop the analytical skills needed to assess and predict outcomes in simple strategic interactions, connecting together all of the concepts from the economics sequence into a single framework.
Summative Course Assessment
This module contains the summative course assessment that has been designed to evaluate your understanding of the course material and assess your ability to apply the knowledge you have acquired throughout the course.
