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Week 8: Eating Dogs, Price Meddling and Whitegoods

Stanford GSB Sloan Study Notes, Week 8, Summer quarter

Pages assigned for reading: ~135

This was also a week of Strategy Beyond Markets exam (24 hours to answer ~10 questions in “hopefully less than” 3 hours and 16 pages; took me 5h and 10 pages -we’ll see…), a very inspiring guest speaker session with Phil Libin of Evernote (with a surprising amount of cultural parallels to early-days Skype) and series of visiting friends on campus, with Ott actually surviving an entire Microeconomics class (photo courtesy of another guest, Silver):

Usual format of study notes follow, with maybe more than usual further reading / viewing links in the end.

GSBGEN259 – Ethics (prof Krehbiel)

  • Four less-than-adequate, yet popular basic theories for right conduct:
    • Ethical egoism: an act is right when it best promotes the individual’s long-term self-interest
      • Challenge: a murderer and resisting victim are both morally right and neither could be judged
    • Ethical relativism: right and wrong are a function of the moral teachings of a particular society
      • Challenge: based deeply on tolerance (an universal moral value), yet it followed through, would require one to also tolerate a deeply intolerant society militantly enforcing its values on another society. E.g no external judging of genocide if it is considered right by one side?
    • Religious/Revealed Ethics: ethical guidance and instruction derived of a particular religious tradition and sacred texts
      • Challenges: diversity of religious disciplines. Virtually no sacred scripture or teaching is self-explanatory and needs interpretation (independent rational basis of judgement). A statement that a God is “just and loving” is based on… the ordinary human meanings of these terms (infinite loop if right is defined as the “will of God”?)
      • Most religious/revealed ethics are a superset of, and thus largely compatible with secular/rational ethics (e.g most condemn violence, theft, dishonesty, etc)
    • Right as conscience alone: right defined by “internal dictate” alone, with nothing more said
      • Challenge: personal moral judgement should a reflective and reasoned act, seeking to understand and decide weather a course of action is right or wrong. Isolation and lack of dialogue make “conscience” an impenetrable back box anyone can use to justify any conduct.
  • Ayn Rand: “people _should_behave this way…”, Milton Friedman: “people do behave…” * Both assume: markets are free & laws are just (good luck on both)
    • Corporate Social Responsibility (beyond the common forms of it being just window dressing) is sacrificing some self interest (profits) for societal good
      • ex: adding safety features on a gas burner. CSR are only those beyond the profit maximisation point
      • often an attempt to internalize or mitigate against non-market threats
    • Enlightenment-era moral philosophers
      • “[they would] close the matter on moral ambiguities, as any clear-headed thinker would arrive at the same judgments regardless of status or circumstance. Those who did not could be dismissed as cloudy-headed thinkers who would eventually arrive at the “correct” conclusion once they set aside self-interest and overcame stupidity.”
    • “na ̈ıve realists” (Robinson et al., 1995): assuming that their perception of the world is a veridical representation of its actual properties rather than a subjective perception of the world as it merely appears to them.
      • Others who perceive the world differently are therefore logically seen as motivationally distorted by self-interest, mentally crippled by stupidity, or both (Pronin et al., 2002).
      • Because egocentric evaluations happen rapidly, unintentionally, effortlessly, and without conscious awareness (i.e., automatically; Bargh, 1994), there is no trace of biased reasoning or ethical subjectivity to stimulate judgmental correction (Wilson and Brekke, 1994).
    • Egocentric biases: people tend to overestimate the extent…
      • to which others notice and attend to their behavior (Gilovich and Savitsky, 1999)
      • to which their internal states are transparent to others (Gilovich et al., 2000; Vorauer and Ross, 1999)
      • to which others will share their attitudes, beliefs, knowledge, and emotional reactions (Keysar and Barr, 2002; Prentice and Miller, 1993; Ross et al., 1977)
    • Trick to test more “automatic” biases in subjects: ask them to evaluate things while keeping a 6-digit number in mind (cognitive overload)\
    • There is (at best) a weak relationship between moral reasoning and moral action (Haidt, 2001)
      • can be almost completely explained by covariation with intelligence instead (low IQ -> less impulse control, more negative morality)
    • Intuitional (as opposed to rational) model of moral judgement:
      • moral judgments are based upon rapid and automatic emotional responses to morally relevant stimuli (i.e., moral intuitions)
        • moral intuition: “sudden appearance in consciousness of a moral judgment, including an affective valence (good–bad, like–dislike), without any conscious awareness of having gone through steps of searching, weighting evidence, or inferring a conclusion” (Haidt, 2001)
        • example: “Your dog, a favourite pet for 10 years was hit by a car, right in front of the house. Your family gathers around the good old friend only to see it die in your arms. You decide, that to honor the dog’s life you will cook and eat it for family dinner.” — the (likely) reaction of disgust and disbelief comes automatically, much quicker than you would be rationally able to argument why you feel that way
      • moral reasoning is a post hoc explanation or justifica- tion of these emotional reactions
      • clinical psychopaths who show no decrement in reasoning abilities but generally do not experience emotional reactions to arousing stimuli, especially negative stimuli (Cleckley, 1955; Hare, 1993)
    • Different moral arguments depending on which constituencies’ judgements matter to you:
      • shareholders: Friedmanesque profit maximisation focus
      • internal (leadership, staff): potential (yellow flag) moral issues with market could be enough to seek other markets
      • external (public, activists searching a scapegoat, …): needs risk calculation per Strategy Beyond Markets
    • Moral judgement can be based on…
      • Utilitarianism: maximum wellbeing (costs are left on the table – who will pick them up?)
      • Paternalism: imposing your values on others
      • Rights: e.g. human rights of an unborn baby in abortion discussion
    • Book recommendations on decision making, judgement, etc:

MGTECON209 – Statistics & Economics (prof Oyer)

  • When price taker competitive firms can only change their production quantity to maximise profit (price is given by the market), monopolies can choose either their quantity or price.
    • … just not both at the same time (high quantity & high price -> infinite profit), in other words: can’t pick a point above the demand curve
  • Two-step analysis for maximising profit
    • Determine output quantity Q* which makes highest possible profit (marginal revenue = marginal cost)
    • Decide if it should benefit more from producing Q* or shutting down
  • True maximum of profits is to grab all consumer surplus and turn it into producer surplus
  • Linear demand curve is more elastic in smaller quantities, therefore
    • Monopoly profit is maximised in the elastic portion of the demand curve
    • Monopoly never operates in the inelastic portion of its demand curve
  • Question: why is the Marginal Revenue of a monopoly “half” of its demand curve? (two times steeper slope) Mathematically provable, but what is the real-life parallel?
  • Marginal cost/revenue is a derivative of cost/revenue
    • if MC/MR is a straight line, you can deduct C & R are quadratic functions (where the marginals were derived from)
    • ex: p = 24 – Q; R = pQ = 24Q – Q^2; MR = 24 – 2Q
  • On monopoly cost advantage protection
    • Secrecy is more commonly used for protecting process innovation, patents used more than secrecy to protect product innovation (Levin et al 1987)
  • Pricing discrimination:
    • As long as the cost of differentiating markets is negligible, a firm cannot do worse by pricing markets separately
    • Lower prices to those with more elastic demands & vice versa
    • With super high elasticity (almost vertical demand curve), not worth the trouble – just take the high profit one way 🙂
    • When you see a highly complex way of price discrimination, always consider an alternative hypothesis that someone just screwed up
    • eBay example:
      • 100 people selling 100 items: is is just a market in action
      • 1 person selling same item to 100 people with varied prices: price discrimination
    • Degrees of Price Discrimination:
      • Third – product differentiated such that different prices can be charged
      • Second – non-linear prices (volume discounts, fixed fees)
      • First – individually tailored prices
  • Externalities are effects (both positive or negative) of production & consumption of good that are not captured by price
  • Network externality definition: People use a product because [other] people use a product.
  • A reaction function: modelling the interdependent price or quantity or two parties on the single graph as two linear functions
    • For example: one axis is quantity of books & other quantity of coffee. And two lines show quantity of books sold given a certain quantity of coffee next doors & the other one vice versa.
    • Their intersection is the equilibrium point from game theory point of view
    • For strategic applications think of the underlying price (which you can change), yet OK to use quantity in calculations as a proxy (changes as a function of price you set)
  • Triggering anti-trust intervention from governments
    • collusion (price fixing) between substitute goods (ex: Coke & Pepsi) is bad
    • in case of complementing goods (books & coffee), collusion actually increases both consumer & producer surplus!
      • in one-directional positive externality, only losers are the small subset of illiterate coffee lovers
  • Tragedy of the Commons inside corporations
    • If two divisions are using shared resource and their performance is measured as local optimum, the profit will be suboptimal for the corporation as a whole
      • Solution: bonuses on corporate profit instead (issue: free riding)
      • Solution: activity based costing – charging a corporate “tax” on divisions per each instance of shared resource use (issue: complexity)
  • Taxes create distortions in market (bad)
    • yet, if the markets are already distorted (failing), taxes can actually help improving the situation

Effective Communication preview (prof Schramm)

  • In “art and science of” communication, the art bit is often called style
  • Nuances about secondary audiences
    • they are (potentially) unintentional (“consider if you’d like to ready X on the cover of NYT”)
    • they are sometimes more important than primary ones
      • cascading down messages through reporting lines
      • interfacing with gatekeepers in sales process
  • A great example of a reversal speech: Barbara Bush’ Commencement Speech at Wellesley College
  • Free 15-minute video communication lessons created by Stanford GSB students
  • Big stage talk series (with coaching and mentoring) for students on advanced communications level at Stanford GSB: LOWKeynotes


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