ERIC BUDISH COMPETITIVE STRATEGY

Phone: 773.702.8453 Business 42001

eric.budish@ChicagoBooth.edu Winter 2015

SYLLABUS

A. COURSE OVERVIEW

We will apply tools from microeconomics and game theory to the analysis of competitive
decision making. Specific topics covered include the sources of industry and firm profitability,
strategic positioning, the boundaries of the firm, incomplete contracts, strategic commitment,
dynamic pricing, entry and exit, vertical integration, network externalities, and auctions.

The course is designed for students who are very comfortable with microeconomics at the level
of 33001. Classes will combine case analysis and discussions with lectures.

B. TEACHING ASSISTANTS AND OFFICE HOURS

The teaching assistants for this class are

42001-01 (Mon Aft): Nisha Wadhwani (Nisha.wadhwani@chicagobooth.edu)
42001-81 (Mon Eve): Kyle Dent (kdent@chicagobooth.edu)
42001-02 (Tues Morn): Alex Simon (asimon0@chicagobooth.edu)

You should feel free to contact either me or your section’s teaching assistant if you have any
questions about the material or comments about the class.

My faculty assistant is Stephen Lamb (stephen.lamb@chicagobooth.edu).

Please direct administrative questions (e.g., scheduling) to the teaching assistant or my faculty
assistant.

My office hours are by appointment. Please send appointment requests to Stephen copying me.

C. MATERIALS

 Course Packet
 Articles to be distributed via course website
 Cabral, Luís. Introduction to Industrial Organization, MIT Press.
 Dixit, Avinash and Barry Nalebuff. The Art of Strategy, Norton. (The 2008 hardcover edition
and the 2010 paperback edition have identical content and pagination, so choose either
one.)
D. CONTENT

You are responsible for all assigned readings. You are also responsible for everything brought up
in class. Because much of the class is structured around case discussions, many of the most
important ideas will be raised by your peers.

The textbook Introduction to Industrial Organization covers most of the core economics that we
will use in the course. A significant portion of this material should be review. But, the book
provides an insightful and concise summary and should serve as a useful reference.

The book The Art of Strategy provides an informal discussion of key ideas in game theory and
their application to strategy. Among other strengths, this book has many real-world examples
and puzzles that are great for sharpening your strategic thinking.

E. WEBSITE

I will use the course website to distribute information and materials relevant to the class. The
site can be reached from http://chalk.uchicago.edu.

Case questions for each week will be posted at least one week in advance of class. Slides will be
posted before class each week and hard-copy handouts of slides will be distributed in class.

F. ATTENDANCE AND PARTICIPATION

Personally, I think it would be a poor use of resources to invest the money and time it
takes to come to Booth and then not turn up for class or turn up unprepared. But, in
general I believe that should be your choice.

There is an important difference with this class, however. A large portion of class time
consists of discussion and debate. If you are not prepared, or don’t show up at all, you
are diminishing the quality of the experience for everyone else.

For this reason I am going to provide some incentives. In particular, I will give
participation grades and will occasionally cold call (both described below).

G. COURSE REQUIREMENTS AND GRADING

Grading will be based on: participation and memoranda (40%), an in-class midterm (25%), and
an in-class final (35%).

Note that while I will always gladly meet with you to discuss the class material, I am not willing
to meet in person to discuss individual grades under any circumstances. If you think there is an
arithmetical error in the calculation of your grade, please bring this to the TA’s attention. If you
think that there is a substantive error in how your exam was graded, you should submit your
concern in writing to me and the TA within 7 days of receiving your graded exam. You should

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include the text of your exam answer, the text of what you think would constitute a “perfect”
answer, and the reasons you believe your exam answer deserves additional points. I reserve the
right to revise the grade in either direction.

Class Participation
Class participation is essential in order for you to get the maximum benefit from
the course. Your grade will be based on attendance and the quality (not
quantity!) of your contributions to class discussions.

I will assign study questions for each case which should serve as a guide to
preparation. You should come to class prepared to give concise, persuasive
answers backed up with evidence from the case.

I will occasionally cold-call students and ask them to open the discussion or
offer their views on particular points.

Before we discuss a case in class, you should neither read outside analyses of
the case (e.g., news reports about the companies involved) nor discuss the case
with students who have previously studied it (either in a previous year or in a
different course or section). Similarly, you should not share your notes on the
cases with another student who may take the course at some later time.

Memoranda
Each week, one or more case questions will be indicated as the topic of a
memorandum. You should prepare 2-3 pages of analysis and recommendations
based on the indicated question(s), written as if for a major decision maker in
the case. The page limit is for text only—you may attach as many graphs and
numerical calculations as you wish. Please use standard font sizes and spacing.

While you are of course encouraged to discuss the cases with your classmates,
you must write the memoranda on your own.

We will not write comments on the memoranda, but will grade them on a scale
of 1-5, with 5 outstanding work, 3 satisfactory work, and 1 unsatisfactory. Each
week, I will post some examples of memoranda that are particularly well done.
If for some reason you would prefer that your memorandum not be posted,
please make a note of this on the memorandum.

Please only answer the specific questions selected for the memoranda. These
are listed at the bottom of the assignment. The other questions are for you to
prepare for class, not for written submission. However I encourage you to write
out your answers to the other questions for your own benefit; it is a great way
to prepare for class discussion and will help you sharpen your views on the case
material.

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 You may miss one memorandum without penalty. Instead, find an article from
the recent press and write about its relationship to the lecture / readings from
that week, and turn it in at the following week’s class. I think you’ll all find that
competitive strategy is everywhere!

Midterm
The midterm will be given in week 6. It is a 90-minute in-class closed-book
exam. It will consist of short answer questions and essay questions. I will
discuss the format of the exam in greater detail the week before it takes place.

Final
The final will be given in the usual exam period. It is an in-class closed-book
exam, and will consist of short answer questions, essay questions, and model-
based game theory questions.

H. POLICIES

 You are welcome to attend a section other than your assigned one on an occasional basis. If
doing so, please email your TA, and cc the TA of the section you will be attending instead. If
you expect to be attending an alternate section regularly, you should change your
registration through official channels.
 Please turn in your memo by hard copy at the start of class or during the break. If you are
attending a different section on some week, or for some reason you are unable to turn in
your memo by hard copy on some week, please email it to your TA, cc’ing my assistant
Stephen Lamb.
 If you would like to take the midterm or final during a section other than your own, please
email me, cc’ing your TA. This is typically fine.
 You do not need to notify us if you are going miss class, except when the reason is
something exceptional—e.g. a serious medical or family emergency. Recruiting, business
travel, meetings, etc. are not exceptional reasons.
 Laptops are permitted only for taking notes and for the use of Excel as an aid in case
discussions.

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I. HONOR CODE

Students enrolled in this class are expected to adhere to the terms of Booth’s honor code. In this
particular class, it involves, among other things:

 Students may not discuss a case or receive notes on a case that has not yet been discussed
in class with students who have taken the class previously (either in another section or in a
prior year).
 Students may neither solicit nor receive materials from students who took the course
previously. This includes exams, cases and all other course materials.
 Students may freely discuss a case with other students in the class who have not yet
discussed the case in class (for example, with other students in the same section). Students
should write case memoranda on their own.

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J. Class Schedule and Readings

Sources: All cases are in the course pack. Newspaper, magazine, and journal articles to which
students already have online access are posted on the course website.

I. Industry and Firm-level Drivers of Profitability

Week 1 – Introduction and Industry Analysis

Cases
 Cola Wars Continue
Readings: Cabral
 Ch. 1, 5 (pp 69-75), 6 (pp 85-91), 7, 14
Readings: Course pack
 Porter “Note on the Structural analysis of Industries”
Readings: Course pack – optional
 Porter “The Five Competitive Forces that Shape Strategy”
 Harford: “Who Pays For Your Coffee?”

Week 2 – Strategic Positioning and Competitive Advantage (I)

Cases
 Husky Injection Molding Systems
 Airborne Express (A)
Readings: Cabral
 Ch. 12
Readings: Course pack
 Ghemawat and Rivkin “Creating Competitive Advantage”

Week 3 – Strategic Positioning and Competitive Advantage (II)

Cases
 Netflix (articles posted online)
 Enterprise Rent-a-Car (articles posted online)
Readings: Course pack
 Porter “What is Strategy?”
Readings: Online
 Peteraf (1993), “The Cornerstones of Competitive Advantage: A Resource-Based View”
Readings: Online – optional
 Prahalad and Hemel (1990) “The Core Competence of the Corporation”

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II. Boundaries of the Firm

Week 4 – Economies of Scale and Scope

Cases
 Kodak
Readings: Cabral
 Ch. 3, 15 (pp 277-285)
Readings: Online
 Andrade, Mitchell & Stafford (2001), “New Evidence and Perspectives on Mergers”
 Coase (1937), “The Nature of the Firm”
Readings: Online – optional
1. Akerlof (1970), “The Market for ‘Lemons’: Quality Uncertainty and the Market
Mechanism”

Week 5 – Ownership, Contracts, and Incentives

Cases
 Monitor Consulting
 Walt Disney Co.
Readings: Cabral
 Ch. 11
Readings: Online
 Holmstrom and Roberts (1998), “The Boundaries of the Firm Revisited”
Readings: Online – optional
 Hart and Holmstrom (2010), “A Theory of Firm Scope”
 Atalay, Hortacsu and Syverson (2012), “Why Companies Acquire their Supply Chains”

III. Strategic interaction

Week 6 – Introduction to strategic interaction

Cases
 Shrimp game (posted online)
Readings: Cabral
 Ch. 4
Readings: Dixit & Nalebuff
 Part I

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 Week 7 – Dynamic Pricing
Cases
 The US Airline Industry in 1995
 American Airlines (articles posted online)
Readings: Cabral
 Ch. 8
Readings: Dixit & Nalebuff
 Part II

Week 8 – Entry and entry deterrence

Cases
 Dogfight over Europe: Ryanair
Readings: Cabral
 Ch. 15 (pp 259-277)
Readings: Online
 Goolsbee & Syverson (2008): “How do Incumbents Respond to the Threat of Entry?
Evidence from the Major Airlines.”

Week 9 – Network Effects I: Creating and Capturing Value

Cases
 Power Play (A): Nintendo
Readings: Online
 Brandenburger & Nalebuff (1995), “The Right Game: Use Game Theory to Shape
Strategy.”
 Lee and Wu (2009): “Subsidizing Creativity through Network Design: Zero-Pricing and
Net Neutrality”
 Rysman (2009): “The Economics of Two-Sided Markets”

Week 10 – Network Effects II: Standards Wars

Cases
 British Satellite Broadcasting vs. Sky Television
 App Stores (articles posted online)
Readings: Cabral
 Ch. 17
Readings: Online
 Klemperer (2003): “Why Every Economist Should Learn Some Auction Theory”
 Klemperer (2002): “What Really Matters in Auction Design”