Single-Course Engelsk 5 ECTS

Business Economics and Finance

Overall Course Objectives

The course offers concepts and tools in economics and finance to support strategic managerial decision-making. The course connects corporate finance and economic theory to strategic management. It emphasizes theory and practice, with real-life examples, to sharpen analytical skills, teach the fundamentals of corporate finance necessary for strategic financial decisions, and integrate the Structure–Conduct–Performance (SCP) paradigm and Porter’s competitive framework. and provide intuition for strategic competition under different market structures. Students will experience solving decision-making problems using the tools covered in the course. The importance of theory in the decision-making process, the key issues in pricing in different market structures, and product differentiation choices will be introduced. The effects of strategic decisions and government regulation on firm performance and social welfare will be discussed.
To give students an understanding of…
• How to use capital budgeting techniques to assess strategic investments
• How risk and return shape financial performance
• How demand and supply forces work under different market structures
• How market structure, firm conduct, and performance are linked
• How to assess competitive intensity
• How oligopolistic markets differ from perfectly competitive markets and a monopoly
• How to think strategically when there is mutual interdependence between market players
• How pricing, output, and location strategies affect firm performance and welfare in different markets

See course description in Danish

Apply comparative statics to understand how market equilibrium changes
Understand and use capital budgeting techniques
Use elasticity estimates for managerial decisions
Describe the relation between assets’ risk and return
Estimate and interpret the market risk of a financial asset
Understand and quantify key determinants of market structure, performance, and conduct.
Assess competitive intensity using SCP and Porter’s Five Forces
Strategically determine optimal 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.
Formulate strategic recommendations based on economic analysis of markets

I. Course introduction
II. Strategic Investment Decision-Making
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. From SCP to Competitive Strategy
a. Mapping SCP to Porter’s Five Forces
• Rivalry among existing firms
• Threat of entry
• Threat of substitutes
• Bargaining power of buyers
• Bargaining power of suppliers
b. Industry attractiveness vs firm performance
c. Cost leadership vs differentiation
d. Strategic positioning within industry structure

V. 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?)
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

VII. Strategy in oligopolistic games
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)