Week 4: Monopolies, Multiple Regressions & Negotiations Kickoff

Stanford GSB Sloan Study Notes, Week 4, Summer quarter

Pages assigned for reading: 121 (but quite a few written assignment deadlines)

POLECON239 – Strategy Beyond Markets (prof Jha)

  • US Antitrust regulation (from Baron textbook)
      • Protecting competition does not mean protecting competitors
      • Even though it can seem that most antitrust activity in the US is enforced by strong government interest, in reality 90% of lawsuits filed under federal antitrust laws are brought by private litigants

    • Antitrust activities classification
      • Horizontal (inside the same industry): monopolisation, predatory pricing, price fixing, bid rigging, allocation of customers, group boycotts
      • Vertical (involving firms in supply arrangement or channel of distribution): allocation of territories by manufacturer among distributors/retailers, refusals to deal, exclusive dealing arrangements, resale price maintenance, reciprocal arrangements, tying (forced bundling). Also, mergers between manufacturers & suppliers/distributors.
    • Monopoly achieved as a result of market forces combined with a superior product (result of “superior skill, foresight and industry”) is NOT illegal.
  • Funky US legal system nuances & terms:
    • Treble damages: if an antitrust suit is filed against a firm by Department of Justice, private parties can run along with private lawsuits to request damages. (DOJ-supporting court decision makes the private follow-ups quite likely wins)
    • Per Se violations: some acts are “sufficiently egregious” so that the court doesn’t even discuss the extent howdamaging they were. Examples today: price fixing, allocation of customers between competitors are per se violations.
      • The only defence the defendant can bring is that they did not commit the act at all.
    • Rule of reason: a possibility to evaluate if an act is “unreasonable” if literal interpretation of the too sweeping language of antitrust laws would be harmful to competition and efficiency.
      • The defendant can argue that a) they didn’t do it at all, or b) it was not unreasonable to behave as they did. For latter, the plaintiff needs to prove otherwise.
  • EU Common Market antitrust regulation
    • refers to group activities that may limit competition or constitute a barrier to trade among member states
    • allows for economic consequences for antitrust violations explicitly (thus no per se violations needed)
    • Article 81 paragraph 3 virtually grants block exemptions for things like exclusive distributorships, exclusive purchase agreements, patent licensing, motor vehicle distribution, specialisation, R&D, franchises and know-how licensing — all on the basis that firms are obligated to use the least restrictive means to achieve efficiency and some of the efficiency gains need to be passed on to consumers.
    • DG for Competition is both prosecutor and the judge. Courts only enter the picture in case of appeal.
    • EU requires a merger notification from companies registered outside EU, if their sales in EU >100M EUR. (Ex: 2001 EU blocked General Electric + Honeywell merger that 15 countries had approved already)
    • DG for Competition also monitors member states aid to companies and handles other private parties complaints to stop aid.

MGTECON209 – Statistics & Economics (prof Oyer)

  • You want a reliable Beta for useful regressions
    • Standard Error (Beta) = SQRT ( Variance of Residuals / Sum of Squared Deviations of X )
      • The bigger the sample in denominator, the smaller the standard error!
    • Tips for picking a useful sample: Beta will be less realiable (SE(Beta) is higher) if
      • Residuals vary more
      • X-variable varies less
      • Sample size gets smaller
  • p-value makes only a statistical difference, not necessarily in business or economic sense. Don’t jump to conclusions.

OB289 – Negotiations (prof Neale)

  • Basic negotiation errors (Bazerman & Neale textbook)
    • You can think of market competition as a form of negotiations between competitors over industry practices (for example pricing). Which in turn can lead to the very same irrational mistakes as in any other negotiation – for example the “irrational escalation of commitment,” where winning the other party on any terms becomes more important than, say, maximising the profits in an industry.
    • Misdirected persistence: decisionmakers are often obsessed by the small probability that escalating the conflict one step further could lead to victory.
      • People (esp leaders, politicians) want to look consistent. Persistence, even if irrational, helps to be perceived that way.
      • Organizations need systems to reward good decision making over effective impression management.
    • Focus on time and money already invested in negotiations (the sunk costs) as an argument, rather than evaluating only the future costs & benefits
    • Reactive devaluation of proposals just because they are made by adversary
    • Attempt to solve singular issues (sometimes “let’s start with easy ones”, sometimes “the hardest ones”) instead of issue “packages” which allow for more granular compromises & trading

Other thoughs to remember (no attribution as we just agreed to Chatham House Rule for in class and for guest presentations):

  • Q: Why would you go establish your China outpost in Beijing, not in Shanghai, Hong Kong or other places with seemingly more livid business scene? A: Because the kind of China many people in the world, and inside China, are hoping to see one day will be a result of decisions made in Beijing.
  • To manage smart people moving between academic research and private industry (e.g working in the Valley), you just have at all times to know and agree on where their center of intellectual focus is. A professor consulting startups for a day a week is fine, but his success is entirely measured by his work on campus – teaching, researching, publishing, peer & student feedback. When the private sector interest takes over, this should be formed clearly as an academic break, not half-hearted contribution to school. And the person is very eagerly waited to return in a few years, with much more experience from private sector life.
  • “Sometimes my answer is ‘yes’, sometimes ‘no’ and sometimes ‘maybe’. Yet, I never say ‘yes’ when I mean ‘maybe’, or ‘maybe’ when I really mean ‘no’.”

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