Business Economics and Finance

• Apply comparative statics to understand how market equilibrium changes
• Understand and use capital budgeting techniques
• Use elasticity estimates for managerial decisions
• Estimate and interpret the market risk of a financial asset
• Understand and quantify key determinants of market structure, performance, and conduct.
• Think strategically regarding location, quantity, and price choices
• Find optimal pricing and output levels in different markets using game theory
• Evaluate the link between competition, regulation, and welfare.
• Develop strategies for product pricing.

I. Course introduction
II. Corporate finance
a. Intro, basic concepts, and definitions
b. Valuation
c. Fundamentals of capital budgeting
d. Risk and return
III. Structure, conduct, performance
a. Basic Market Structure (Demand and Supply, elasticities, and consumer and producer
surpluses)
b. How to measure market structure: concentration measures, product heterogeneity,
entry/exit barriers, information
c. Understanding firm conduct: pricing-output decisions with market power (more detail
in game theory), R&D, advertising, collusion (cartels: OPEC)
d. How to measure firm and market performance: profit, different performance
measures, efficiency, welfare
IV. Step into other players’ shoes (strategic interactions)
a. Simultaneous move (Normal form) games: Dominant strategy, iterated elimination of
dominated strategies, Nash equilibrium (brief intro to best response functions)
Examples: prisoner’s dilemma (PD), pollution abatement, coordination, technology
adoption, game of chicken, strict competition.
b. Sequential move (Extensive form) games: Backward induction, subgame perfect
equilibrium, strategies to deal with empty threats and promises (Examples: Chain-
store, centipede, bargaining)
c. Repeated games (finite and infinite): discounting, tit-for-tat, and grim trigger
strategies (Examples: repeated PD, can collaboration be saved?)
d. Equilibrium in mixed strategies: randomization to prevent exploitation or as a means
of coordination (Examples: matching pennies, Battle of the Sexes, PD)
e. Evolutionary games: evolutionarily stable strategies, replicator dynamics (Examples:
Hawk-Dove
VI. Markets and pricing strategies
a. Perfect Competition: a benchmark market structure
b. Monopoly: highest market power, natural gas, oil, and electricity as natural
monopolies
c. Monopolistic Competition: product differentiation creates monopoly power
d. Price Discrimination
i. 1st degree (perfect) discrimination
ii. 2nd degree (quantity) discrimination: à la carte vs buffet
iii. 3rd degree (group) discrimination: student/senior discounts
V. Oligopolistic games (Ramazan Sari) 2 weeks
a. Cournot: duopoly, N-player, symmetric, asymmetric, welfare (Example: Airbus vs
Boeing)
b. Bertrand: pricing in homogeneous/heterogeneous product markets, welfare (Example:
Pizza Hut & Dominos)
c. Stackelberg: symmetric/asymmetric costs, welfare (Example: Coke vs Pepsi)
d. Spatial and attribute space location choice: Hotelling’s linear city, Salop’s circle
(Examples: gas stations, ice cream flavors)

42009, Introductory Economics or equivalent

Lectures and exercises