Week 7: Drugs, Perfect Competition and Rock’n’Roll

Stanford GSB Sloan Study Notes, Week 7, Summer quarter

Pages assigned for reading: only 108!

With the Negotiations crash course ending, due date and presentations of the group projects in Strategy Beyond Markets and all kinds of housekeeping for study groups and Winter/Spring quarter high demand class application “superrounds” and now a long Labour Day weekend ahead, this week turned out to be quite a gear shift down… But a few notes to take down still.

POLECON239 – Strategy Beyond Markets (prof Jha)

  •  “You can always trust the USA to do the right thing, once they have exhausted all other alternatives” – Churchill
  • The public pressure on AIDS drugs pricing in Sub-Saharan Africa made US government to stop pressuringdeveloping countries on pharma IP issues in 90s
    • Did not officially change their view on TRIPS and other international agreements – those still in force
    • Yet “closed” an eye so that Brazil, Thailand, South Africa, India could start producing cheap copies
    • US own GlaxoSmithkline put into substantially worse competitive situation
  • Class-triggered open question to self: what happens to the pharma IP dynamic in the context of medical singularity (e.g when less than a year of treatment can add more than a year to a human’s lifespan)?
    • typical conflict cases (pricing, access to drugs in developing world) to date seem to focus on medication that is intended to reduce suffering, fix diseases, delay death through sickness
    • how will the global relations and corporate VS public needs play out when the drugs are not about fixing diseases, but enhancing/prolonging healthy life?
  • Allegedly some data shows PE/VC investments into life sciences with a negative return over last 20 years?!
    • Herbert – can you find a link to go deeper on this? whose data?
  • Decomposition of complex issues is a natural problem solving heuristic for humans
    • Integration of those pieces later is not
    • Very important for managing the complexity of non-market interactions
  • Any non-market interaction can…
    • mitigate effects (example: what happens when Iran stops selling oil?)
    • magnify effects (example: actors respond to each others’ behaviour by becoming more involved. accentuates the challenge)
  • Market & non-market competition:
    • Similarities: you can think of political action in supply and demand terms (politicians vs electorate)
    • Differences:
      • Voluntary exchange (market) versus coercive (institutions) power
      • Coin of the realm: $$ (market) versus sources of access, rights, influence (non access)

MGTECON209 – Statistics & Economics (prof Oyer)

  • In simplest competition models supply slopes up because higher prices induce increase in current suppliers production or entry of new identical firms
  • In perfectly competitive markets
    • fixed costs tend to be more avoidable(sounds like a paradox)
      • reason: if the market entry is really easy, it is more likely you can sell your entire business as a single item (ex: dry cleaners or news stand)
    • price can be deducted from knowing only the cost (no information of demand needed)
  • Long-term economic (not accounting) profit of competitive markets is zero
    • economic costs include all opportunity costs (value of leisure, ROI of benchmark competition – like 20% return of capital, any other alternative uses of the same capital)
    • meanwhile, accounting profit is higher than zero because all these costs are hard to adequately account for
    • zero economic profit means the firm is indifferent to being in this business or exiting
  • After shocks, markets return to equilibrium through: entry/exit of firms & increase in incumbent production levels
  • Economics meets philosophy – analysing equilibria and market outcomes, consider two dimensions
    • Efficiency – how large are total benefits for society?
      • measured through surplus (ideally) or GDP/profits (practically)
      • optimised for by libertarians (extreme), republicans, conservatives
    • Equity – how fairly are these benefits divided?
      • measured by metrics such as “what fraction of wealth held by top X%”, “difference in wealth by top and bottom quartiles”
      • optimised for by communists (extreme), democrats
  • Supply curve is a flat horizontal line for long-term, perfect markets with free entry
    • In that situation, producer surplus is zero
  • We wish markets as a whole operated as a firm (marginal revenue = marginal cost), but that of course never happens
  • Global trade increases globalwelfare
    • Locally measured welfare might not: e.g blue-collar jobs shifting from US to China much faster than high value add ones -> unemployment numbers differ in segments -> income gap grows
  • Main reasons for market inefficiencies
    • Market power (infrastructure-based monopolies)
    • Externalities not captured by the price system
      • for example: larger share of poor has indirect societal cost through crime
    • Information limits
      • Great experiment of mobile coverage expanding on coast of India. The fisherman had to choose which village they try to sell their daily catch based on very low information (guessing/hoping where demand would be). With mobiles, the actual sales price corridor narrowed from 2..16 to 7..9 rupees per unit & the amount of fish unsold and thrown away by the evening dropped to zero.
  • Ecomics is about maximising the pie, market strategy about capturing a slice of the pie
  • We tolerate market inefficiencies because market power (like granted IP protection for a time period) makes innovation worthwhile
  • Most interventions in competitive markets (taxes, subsidies) lower total surplus (consumer + producer)
    • hurt consumers and/or cost governments more than they help producers
    • yet, they provide infrastructure to make markets more efficient or break monopolies / limit market power

Managing Difficult Conversations session (actually a waste of half a day, but trying to extract something positive nevertheless..)

  • Thomas Killman Conflict Mode Instrument
    • One thought combining TKI & the Negotiations learnings: if you imagine a conflict of interest in a situation involving people of different power, like a customer & a super market clerk
      • there is a possible reaction of strong competition/conflict triggered because of the clear difference in power (TKI scale: High Assertiveness, focus on your interests) makes “winning” likely (spend an hour to escalate to clerk’s manager, argue, fight…)
      • …whereas there is virtually zero value in the future relationship (TKI: Cooperativeness, focus on relationships) and thus the rational choice could be avoid/ignore conflict (do something else with the hour that actually benefits you)
  • Suggested quick end-of-project peer to peer feedback format between all team members: “Because of you, I <insert learning>”

 

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