Many US-MBA students at BUT are already making strategic decisions in their professional capacities as managers. They can recount – via their own experiences or stories heard from their parents and/or grandparents - important details about the functioning of the economy in the former communist era. This makes for interesting and lively discussion in the classroom, contributing to making knowledge transfer a two-way process.
Competition, private sector development, elasticity of demand in the Czechia and USA and a lot more
The reading list for the class includes articles on various topics - the need to “import competition” [i] in the transition period, private sector development [ii], elasticity of demand for different products in the Czech Republic and how these compare with elasticities in the U.S.[iii], evolution and efficiency of concentration [iv], and market concentrations in different sectors [v],[vi], [vii]. In addition to reading the articles I provide, students are required to complete two article reviews of their choice as well, one in the first week and one in the second. They are expected to choose journal articles related to the topics covered in each week. The single-most important concepts covered in the two weeks are the functioning of the market and the important role of elasticity (Week 1), and market structures and estimation (Week 2). Students also analyze cases requiring them to apply concepts from managerial economics. These cases are curated from various business journals; at least one developed by me.
Elasticity is a very important tool in a manager’s toolkit; it helps measure the impact of factors like price, income, and competitors’ price on the demand for a firm’s product. The case I use for this lesson is one that I developed. It is a compare & contrast case study for two pricing decisions dated 2011, one a subscription plan change by Netflix and the other a proposed debit card fee by Bank of America. The apparently similar pricing moves had led to remarkably different outcomes, with Netflix going ahead with the proposed change while Bank of America dropped its plan within a few days of making the announcement. This stark difference can be explained primarily in terms of differences in elasticities of demand for the services offered by these two companies.
A two-way process of knowledge transfer and intellectual enrichment
When I taught the class in 2017, the Netflix vs. Bank of America case study included a reading list and a set of questions students had to answer. The exceptional level of interest and engagement with which Cohorts 3 and 4 – the class of 2017 - analyzed the case, provided me the motivation to submit it to a journal for publication. By the time I returned to Brno in 2018, the case had been accepted for publication in the Journal of Business Cases and Applications [viii]. Cohorts 5 and 6 – the class of 2018 – analyzed it with as much fervor as their predecessors and rated it among the case studies they had enjoyed the most. I was pleased to have provided students this very important tool that they could apply in their managerial decisions going forward. By motivating me to publish the case and by reaffirming the educational value of the case, students contributed to my professional growth.
How promotional discounts work?
At an earlier point, I mentioned article reviews that students are required to complete. Based on their areas of managerial oversight and/or interest, students choose relevant articles that in turn can get added to the reading list. One such article, reviewed by a student from the class of 2018, is titled “Price Elasticity of Demand as a Tool for Planning Successful Promotional Discounts” [ix]. The article helps relate the otherwise abstract concept of “elasticity changes along a given demand curve” to different elasticities of different products at different price points. Not surprisingly, it concludes that promotional discounts on items with high price elasticity help boost retailers’ revenues. I believe future students will find this an interesting read and have therefore added it to the course reading list with the reviewing student’s permission.
Graphing
Economics relies heavily on graphs to illustrate relationships between variables. At the basic level, demand and supply curves help illustrate the impact of a change in demand and/or supply on equilibrium price and quantity. Graphs are also a very useful construct to illustrate the basic principle of profit maximization, “marginal revenue = marginal cost”, to identify the profit-maximizing quantity and the corresponding price. A student in the class of 2017 had suggested the use of Wolfram|Alpha [x], a graphing utility I was not until then familiar with (I used Graphmatica for most of my graphing needs). It worked so well that I, in turn, introduced the batch of 2018 to Wolfram|Alpha. Many students said this was something they really enjoyed using.
Regression analysis
A fundamental principle in economic analysis is ceteris paribus, the understanding that all other factors must be held constant when one wants to study the impact of one chosen variable. In the real world, this can be difficult to accomplish. The firm may be interested in studying the impact of a price change, but the consumer may also have received a raise in salary at the same time. In addition, the firm may have advertised its new price. The new level of consumer purchase (spending) would reflect the combined effect of all three changes; the challenge for the manager would be to isolate the part that can be attributed to the price change alone.
This can be accomplished using regression analysis. A multiple regression model estimates the impact on several independent variables on one independent variable. Regression analysis using Excel is another very useful tool in a manager’s toolkit, and most students respond very favorably to their first experience using Excel in this class. We use some Czech data so students can better relate to the analysis.
The future
The class of 2018 has suggested that in future, I encourage students to perform analyses on their own data to explore something they believe is important and relevant for their organizations. I am excited to see how students in 2020 will respond to this assignment and how much more we can grow together from that experience. The last three years of teaching at BUT have been very rewarding, and I hope the trend will continue.
Sources:
[i] Thomas, C. R. and Maurice, S. C. (2013). Managerial Economics – Foundations of Business Analysis and Strategy, 11thedition, McGraw-Hill Irwin.
[ii] Text of 8th Gerhard de Kock Memorial Lecture. BIS Review, 25/1997. Retrieved from https://www.bis.org/review/r970310b.pdf.
[iii] Klaus, V. (2006). The Economic Transformation of the Czech Republic: Challenges Faced and Lessons Learned. Economic Development Bulletin No. 6, CATO Institute. Retrieved from https://www.cato.org/publications/economic-development-bulletin/economic-transformation-czech-republic-challenges-faced-lessons-learned.
[iv] Borish, M. S. and Noël, M. (1996). Private Sector Development in the Visegrad Countries. Finance & Development, 33(4), pp. 45-48.
[v] Luňáček, J. and Feldbabel, V. (2011). Elasticity of Demand of the Czech Consumer. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, LIX(7), pp. 225–236.
[vi] Zemplínerová, A. (1995). Evolution and Efficiency of Concentration: manufacturing Industries in the Czech Economy 1989-92. Eastern European Economics, 33(2), pp. 5-37.
[vii] Špička, J. (2016). Market Concentration and Profitability of the Grocery Retailers in Central Europe. Central European Business Review, University of Economics, Prague, vol. 2016(3), pages 5-24.
[viii] Kramaric, T. P. and Kitic, M. (2012). Comparative Analysis of Concentration in Insurance Markets in New EU Member States. International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, 6(6), pp. 1322-1326.
[ix] Repkova, I. (2012). Market Power in the Czech Banking Sector. Journal of Competitiveness, 4(1), pp. 143-155.
[x] Roy, S. (2018). A tale of two pricing missteps: an application of elasticity. Journal of Business Cases and Applications, Volume 21, August 2018.
[xi] Kucerova, V. and Zeman, J. (2013). Price Elasticity of Demand as a Tool for Planning Successful Promotional Discounts, Trends Economics and Management, Vol. VII – Special Issue 17, pp. 101-112.
[xii] https://www.wolframalpha.com/?i=