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See attached
– 2 years ago
**files (2)**
– ## FinalAssignmentVIII.docx
– ## UnitVIIIStudyGuide.pdf
**## FinalAssignmentVIII.docx**
This assignment measures your mastery of CLOs 1, 2, 3, 4, 5, and 6 and ULOs 7.3 and 7.4
**A Case Analysis of AMC**
**Assignment objective:** AMC is the largest movie theater operator in the world. AMC recently became a popular meme stock. Take a few minutes to learn more about
[AMC Theaters](https://www.amctheatres.com/).
**Length:** Your submission is required to be at least 5 pages in length and not more than 7 pages, not including the title page and references.
**References:** A minimum of 3 peer-reviewed references are required, any additional resources used are required to be scholarly/academic in nature and found in the CSU Library. APA formatting is required to be used for citations and references. Use this definition to define the term in the instructions.
**Definitions:** Scholarly journals are sometimes called academic journals. The terms are often used interchangeably to describe the same type of publication. These types of publications are published by universities, academic institutions, professional associations, and commercial enterprises and are compiled by scholars, academics, and other subject authorities.
**Details:** In your paper, include the following:
· Introduction
· Analyze the market before the COVID-19 pandemic. Describe how the pandemic affected the movie theater industry.
· Explain price discrimination in the movie theater market.
· Movie theater employees are generally paid hourly. Design an incentive pay structure for AMC Theaters and explain how it would work.
· Apply the concepts of economies of scale and economies of scope to AMC Theater's business model
· Apply the concepts of game theory to short selling and meme stocks as it relates to AMC Theaters
· Assess AMC Theater's potential for international expansion and potential trade policy issues.
· Explain the asymmetric information issues that lead to short selling and meme stocks.
· Apply the concepts of moral hazard to short selling and meme stocks, using AMC as an example.
· Conclusion
**## UnitVIIIStudyGuide.pdf**
ECO 6301, Economics for Managers 1
Course Learning Outcomes for Unit VIII
At the end of this unit, you should be able to:
1. Evaluate the ethical outcomes of free market outcomes using supply and demand models.
2. Apply the different types of elasticity concepts to business scenarios.
3. Analyze how price and output influence profit maximization under different market structures.
4. Evaluate strategic pricing decisions.
5. Apply game theory to pricing and to output decisions in an oligopoly market.
6. Analyze the basis of trade.
7. Explain the implications of uncertainty in managerial decision-making.
7.4 Explain how incentives can affect various relationships in an organization.
Required Unit Resources
Chapter 4: Extent (How Much) Decisions (ULO 7.4)
Chapter 21: Getting Employees to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 22: Getting Divisions to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 23: Managing Vertical Relationships (ULO 7.4)
Unit Lesson
Lesson: Organizational Design and Incentives (ULO 7.4)
This lesson covers the topics introduced in this final unit.
The last unit’s topic on asymmetric information included a section on shirking. Recall that shirking is when
employees do not work hard because the managers are not able to monitor their performance (either because
of ability or cost). Another way to look at the problem of shirking is through the principal-agent problem. In the
principal-agent problem, the principal (typically a business owner) wants their agent (typically the employee)
to act on the principal’s behalf. The problem is that the agent often has different goals than the principal.
Incentives
Incentives are one way to correct shirking and solve the principal-agent problem. Incentives can be tied
directly to performance, such as commissions, as discussed in the last unit. Incentives can also be tied to
specific actions or the overall performance of the company. Basing incentives on company performance can
be dicey though. There are many factors outside the employees’ control that affect company performance.
The less tied incentives are to employee performance, the less likely the incentives will be to promote the
desired performance. Still, tying incentives to company performance does help align the goals of the principal
and the agent.
UNIT VIII STUDY GUIDE
Organizational Design and Incentives
ECO 6301, Economics for Managers 2
UNIT x STUDY GUIDE
Title
As mentioned, employees may not have a lot of control over company performance, which can complicate
attempts to align principal and agent goals. This can be because of large outside influences (demand for the
product) or because of the nature of the job agents have. Perhaps agents have the information to promote the
principal’s goals but lack the decision-making authority to realize them. In cases like this, it is important for
principals to align decision-making power with those who have information.
One model for aligning goals and addressing the principal-agent problem is the franchise model. In a
franchise model, a parent company, or brand, franchises out the opportunity to open additional stores under
the brand name for a percentage of sales. If a brand opened company-owned stores, they would have to rely
on managers who may not be as motivated, or the job may attract unmotivated managers (recall the different
explanation for similar problems with moral hazard and adverse selection). With a franchise model, however,
the individual franchise owner is motivated to make the franchise a success, since that determines the profit.
When companies grow, they are often divided into different divisions. Incentives can be tricky in ensuring the
divisions are working toward the same goal. If the incentives are not structured correctly, the divisions may
make decisions that are best for the division but not best for the company.
Take for example a college admissions department and an academic department. The academic department
might be interested in producing quality graduates that will earn the school a good reputation. The academic
department can help realize those goals with stricter admissions standards. The admissions department,
however, might be interested in reducing admissions standards in order to admit as many people as possible
(or at least enough to meet departmental goals). Stricter admissions standards get in the way of admissions.
Having too many, low quality students in a program can detract from the attention focused to turn the higher
quality students into reputable graduates who will help build the department’s reputation. Sharing information
and aligning the goals of the departments is key to getting both departments to act in the interest of the school
as a whole.
Sometimes there are exchanges between divisions in an organization. Tracking this and crediting each
division is important. Transfer pricing is the price of an intermediate good, made in-house, and then “sold” to
another division. Transfer pricing might be thought of most easily with manufacturing. When making a car, the
engine is built and then put into the frame. Since it is just the car that is ultimately sold at a price, crediting the
division that built the engine can be difficult. Obviously, the car would not be much good without the engine.
Determining the price for the engine, however, is difficult and often controversial between the divisions. The
engine division will want to be credited with a high price for the engine, but the division that built the frame will
want to “pay” a low price for the engine. Each division wants to appear as profitable as possible. Giving one
division an unfair price could hurt morale, and thus productivity, in that division. That would, obviously, hurt
the company overall.
Transfer pricing issues can be addressed by treating different divisions as profit centers or cost centers. Profit
centers are evaluated based on profit or revenue. Cost centers are evaluated based on costs. Using these
different centers and different goals, as long as the divisions are aligned to the proper center, their goals will
align with helping the overall organization be more successful.
Organizations can be ordered based on a variety of plans. Organizations might be organized by function,
such as production and sales. Organizations can also be organized by products or by geographic region. The
best organizational structure will depend on the type of firm and how they approach the market.
Vertical Relationships
Firms can also find profit potential by expanding operations vertically through their supply chain. This strategy
is known as a vertical relationship. For a simple example of this, consider a landlord, particularly one
constrained by rent control laws. The landlord may find him- or herself constrained in what he or she can
charge for rent. There are other services, however, that can be provided to tenants beyond just the living
space. A landlord might, for example, furnish the apartment for an extra fee. Firms can even use exclusions,
forcing buyers to purchase their additional product or service rather than purchasing from a competitor. A
similar approach is taken with movie theaters or ballparks who sell the tickets to the event and then also
require that if customers want to enjoy refreshments, they must do so at the concession stands operated by
the event.
ECO 6301, Economics for Managers 3
UNIT x STUDY GUIDE
Title
Vertical relationships can also be used to manipulate realized profit. A firm may produce an early stage of a
product in a high tax area but transfer the production to another location with lower taxes for finalization. The
transfer can be done at a low price so that the high tax production does not produce much profit and then the
product is sold by the low tax production area with a higher profit realized thanks to the low transfer/purchase
price. The reverse can also be done where firms build in profit all along the production pipeline. This is known
as double marginalization. Of course, if the markups are too much then the price of the product in the market
will be too high.
Sometimes the incentives between links in the supply chain, for example between manufacturers and
retailers, come into conflict. Manufacturers might have an incentive to have the quality of their product
maintained and displayed but the retailer many not have quite the same concern. Have you ever been in a
store that sells high quality stereos and speakers? You might notice a special room set up to listen to the
speakers. This is by the design of the stereo and speaker producer, not necessarily the store. The purpose is
to provide an environment where you can really hear the quality of the higher priced stereos and speakers. In
exchange for providing the fancy displays, the manufacturers put minimum prices on their products wherever
they are sold. The purpose of these minimum prices is to prevent the fancy store from spending money on the
display only to have consumers come in, listen to the stereos and speakers, decide what they want, and go to
Walmart to buy it for a cheaper price.
Similarly, you generally will not see retailers engage in too much advertising. Advertising is mostly handled by
the producers of the product. A retailer advertising for a particular good may end up convincing consumers to
buy the product but not necessarily from their location.
Too much in the way of vertical relationships, however, can raise antitrust concerns. Strong vertical
relationships can have a negative effect on market competition, so many countries have antitrust laws
governing vertical relationships. In Europe, for example, Coke is prohibited from purchasing refrigerators in
their retail locations. The fear is that Coke owning the refrigerators will lead to the exclusion of other soft drink
producers being able to provide their product cold and ready to drink. So, vertical relationships can come with
much potential for firms, but they can also come with risks firms should be aware of before pursuing them.
A final word on vertical relationships—vertical relationships can be pursued through mergers. Simply merging
with another organization in a business’s supply chain does not always work out. In a free market, where
buyers and sellers are rational and have full information, the sellers would only accept a price equal to the
discounted stream of future profits. That means, all else equal, the best the purchasing firm could expect to
do is break even on the purchase. The potential for the merger to work out is based on some type of synergy
to be realized that makes the purchased company/asset more valuable for being part of the purchasing
company. Perhaps the smaller company will benefit from a larger distribution system already in place with the
purchasing company.
Suggested Unit Resources
Article: An Evaluation of Alternative Market-Based Transfer Prices (Optional)
This article further explores the topics covered in this unit.
**## UnitVIIIStudyGuide.pdf**
ECO 6301, Economics for Managers 1
Course Learning Outcomes for Unit VIII
At the end of this unit, you should be able to:
1. Evaluate the ethical outcomes of free market outcomes using supply and demand models.
2. Apply the different types of elasticity concepts to business scenarios.
3. Analyze how price and output influence profit maximization under different market structures.
4. Evaluate strategic pricing decisions.
5. Apply game theory to pricing and to output decisions in an oligopoly market.
6. Analyze the basis of trade.
7. Explain the implications of uncertainty in managerial decision-making.
7.4 Explain how incentives can affect various relationships in an organization.
Required Unit Resources
Chapter 4: Extent (How Much) Decisions (ULO 7.4)
Chapter 21: Getting Employees to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 22: Getting Divisions to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 23: Managing Vertical Relationships (ULO 7.4)
Unit Lesson
Lesson: Organizational Design and Incentives (ULO 7.4)
This lesson covers the topics introduced in this final unit.
The last unit’s topic on asymmetric information included a section on shirking. Recall that shirking is when
employees do not work hard because the managers are not able to monitor their performance (either because
of ability or cost). Another way to look at the problem of shirking is through the principal-agent problem. In the
principal-agent problem, the principal (typically a business owner) wants their agent (typically the employee)
to act on the principal’s behalf. The problem is that the agent often has different goals than the principal.
Incentives
Incentives are one way to correct shirking and solve the principal-agent problem. Incentives can be tied
directly to performance, such as commissions, as discussed in the last unit. Incentives can also be tied to
specific actions or the overall performance of the company. Basing incentives on company performance can
be dicey though. There are many factors outside the employees’ control that affect company performance.
The less tied incentives are to employee performance, the less likely the incentives will be to promote the
desired performance. Still, tying incentives to company performance does help align the goals of the principal
and the agent.
UNIT VIII STUDY GUIDE
Organizational Design and Incentives
ECO 6301, Economics for Managers 2
UNIT x STUDY GUIDE
Title
As mentioned, employees may not have a lot of control over company performance, which can complicate
attempts to align principal and agent goals. This can be because of large outside influences (demand for the
product) or because of the nature of the job agents have. Perhaps agents have the information to promote the
principal’s goals but lack the decision-making authority to realize them. In cases like this, it is important for
principals to align decision-making power with those who have information.
One model for aligning goals and addressing the principal-agent problem is the franchise model. In a
franchise model, a parent company, or brand, franchises out the opportunity to open additional stores under
the brand name for a percentage of sales. If a brand opened company-owned stores, they would have to rely
on managers who may not be as motivated, or the job may attract unmotivated managers (recall the different
explanation for similar problems with moral hazard and adverse selection). With a franchise model, however,
the individual franchise owner is motivated to make the franchise a success, since that determines the profit.
When companies grow, they are often divided into different divisions. Incentives can be tricky in ensuring the
divisions are working toward the same goal. If the incentives are not structured correctly, the divisions may
make decisions that are best for the division but not best for the company.
Take for example a college admissions department and an academic department. The academic department
might be interested in producing quality graduates that will earn the school a good reputation. The academic
department can help realize those goals with stricter admissions standards. The admissions department,
however, might be interested in reducing admissions standards in order to admit as many people as possible
(or at least enough to meet departmental goals). Stricter admissions standards get in the way of admissions.
Having too many, low quality students in a program can detract from the attention focused to turn the higher
quality students into reputable graduates who will help build the department’s reputation. Sharing information
and aligning the goals of the departments is key to getting both departments to act in the interest of the school
as a whole.
Sometimes there are exchanges between divisions in an organization. Tracking this and crediting each
division is important. Transfer pricing is the price of an intermediate good, made in-house, and then “sold” to
another division. Transfer pricing might be thought of most easily with manufacturing. When making a car, the
engine is built and then put into the frame. Since it is just the car that is ultimately sold at a price, crediting the
division that built the engine can be difficult. Obviously, the car would not be much good without the engine.
Determining the price for the engine, however, is difficult and often controversial between the divisions. The
engine division will want to be credited with a high price for the engine, but the division that built the frame will
want to “pay” a low price for the engine. Each division wants to appear as profitable as possible. Giving one
division an unfair price could hurt morale, and thus productivity, in that division. That would, obviously, hurt
the company overall.
Transfer pricing issues can be addressed by treating different divisions as profit centers or cost centers. Profit
centers are evaluated based on profit or revenue. Cost centers are evaluated based on costs. Using these
different centers and different goals, as long as the divisions are aligned to the proper center, their goals will
align with helping the overall organization be more successful.
Organizations can be ordered based on a variety of plans. Organizations might be organized by function,
such as production and sales. Organizations can also be organized by products or by geographic region. The
best organizational structure will depend on the type of firm and how they approach the market.
Vertical Relationships
Firms can also find profit potential by expanding operations vertically through their supply chain. This strategy
is known as a vertical relationship. For a simple example of this, consider a landlord, particularly one
constrained by rent control laws. The landlord may find him- or herself constrained in what he or she can
charge for rent. There are other services, however, that can be provided to tenants beyond just the living
space. A landlord might, for example, furnish the apartment for an extra fee. Firms can even use exclusions,
forcing buyers to purchase their additional product or service rather than purchasing from a competitor. A
similar approach is taken with movie theaters or ballparks who sell the tickets to the event and then also
require that if customers want to enjoy refreshments, they must do so at the concession stands operated by
the event.
ECO 6301, Economics for Managers 3
UNIT x STUDY GUIDE
Title
Vertical relationships can also be used to manipulate realized profit. A firm may produce an early stage of a
product in a high tax area but transfer the production to another location with lower taxes for finalization. The
transfer can be done at a low price so that the high tax production does not produce much profit and then the
product is sold by the low tax production area with a higher profit realized thanks to the low transfer/purchase
price. The reverse can also be done where firms build in profit all along the production pipeline. This is known
as double marginalization. Of course, if the markups are too much then the price of the product in the market
will be too high.
Sometimes the incentives between links in the supply chain, for example between manufacturers and
retailers, come into conflict. Manufacturers might have an incentive to have the quality of their product
maintained and displayed but the retailer many not have quite the same concern. Have you ever been in a
store that sells high quality stereos and speakers? You might notice a special room set up to listen to the
speakers. This is by the design of the stereo and speaker producer, not necessarily the store. The purpose is
to provide an environment where you can really hear the quality of the higher priced stereos and speakers. In
exchange for providing the fancy displays, the manufacturers put minimum prices on their products wherever
they are sold. The purpose of these minimum prices is to prevent the fancy store from spending money on the
display only to have consumers come in, listen to the stereos and speakers, decide what they want, and go to
Walmart to buy it for a cheaper price.
Similarly, you generally will not see retailers engage in too much advertising. Advertising is mostly handled by
the producers of the product. A retailer advertising for a particular good may end up convincing consumers to
buy the product but not necessarily from their location.
Too much in the way of vertical relationships, however, can raise antitrust concerns. Strong vertical
relationships can have a negative effect on market competition, so many countries have antitrust laws
governing vertical relationships. In Europe, for example, Coke is prohibited from purchasing refrigerators in
their retail locations. The fear is that Coke owning the refrigerators will lead to the exclusion of other soft drink
producers being able to provide their product cold and ready to drink. So, vertical relationships can come with
much potential for firms, but they can also come with risks firms should be aware of before pursuing them.
A final word on vertical relationships—vertical relationships can be pursued through mergers. Simply merging
with another organization in a business’s supply chain does not always work out. In a free market, where
buyers and sellers are rational and have full information, the sellers would only accept a price equal to the
discounted stream of future profits. That means, all else equal, the best the purchasing firm could expect to
do is break even on the purchase. The potential for the merger to work out is based on some type of synergy
to be realized that makes the purchased company/asset more valuable for being part of the purchasing
company. Perhaps the smaller company will benefit from a larger distribution system already in place with the
purchasing company.
Suggested Unit Resources
Article: An Evaluation of Alternative Market-Based Transfer Prices (Optional)
This article further explores the topics covered in this unit.
**## FinalAssignmentVIII.docx**
This assignment measures your mastery of CLOs 1, 2, 3, 4, 5, and 6 and ULOs 7.3 and 7.4
**A Case Analysis of AMC**
**Assignment objective:** AMC is the largest movie theater operator in the world. AMC recently became a popular meme stock. Take a few minutes to learn more about
[AMC Theaters](https://www.amctheatres.com/).
**Length:** Your submission is required to be at least 5 pages in length and not more than 7 pages, not including the title page and references.
**References:** A minimum of 3 peer-reviewed references are required, any additional resources used are required to be scholarly/academic in nature and found in the CSU Library. APA formatting is required to be used for citations and references. Use this definition to define the term in the instructions.
**Definitions:** Scholarly journals are sometimes called academic journals. The terms are often used interchangeably to describe the same type of publication. These types of publications are published by universities, academic institutions, professional associations, and commercial enterprises and are compiled by scholars, academics, and other subject authorities.
**Details:** In your paper, include the following:
· Introduction
· Analyze the market before the COVID-19 pandemic. Describe how the pandemic affected the movie theater industry.
· Explain price discrimination in the movie theater market.
· Movie theater employees are generally paid hourly. Design an incentive pay structure for AMC Theaters and explain how it would work.
· Apply the concepts of economies of scale and economies of scope to AMC Theater's business model
· Apply the concepts of game theory to short selling and meme stocks as it relates to AMC Theaters
· Assess AMC Theater's potential for international expansion and potential trade policy issues.
· Explain the asymmetric information issues that lead to short selling and meme stocks.
· Apply the concepts of moral hazard to short selling and meme stocks, using AMC as an example.
· Conclusion
**## UnitVIIIStudyGuide.pdf**
ECO 6301, Economics for Managers 1
Course Learning Outcomes for Unit VIII
At the end of this unit, you should be able to:
1. Evaluate the ethical outcomes of free market outcomes using supply and demand models.
2. Apply the different types of elasticity concepts to business scenarios.
3. Analyze how price and output influence profit maximization under different market structures.
4. Evaluate strategic pricing decisions.
5. Apply game theory to pricing and to output decisions in an oligopoly market.
6. Analyze the basis of trade.
7. Explain the implications of uncertainty in managerial decision-making.
7.4 Explain how incentives can affect various relationships in an organization.
Required Unit Resources
Chapter 4: Extent (How Much) Decisions (ULO 7.4)
Chapter 21: Getting Employees to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 22: Getting Divisions to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 23: Managing Vertical Relationships (ULO 7.4)
Unit Lesson
Lesson: Organizational Design and Incentives (ULO 7.4)
This lesson covers the topics introduced in this final unit.
The last unit’s topic on asymmetric information included a section on shirking. Recall that shirking is when
employees do not work hard because the managers are not able to monitor their performance (either because
of ability or cost). Another way to look at the problem of shirking is through the principal-agent problem. In the
principal-agent problem, the principal (typically a business owner) wants their agent (typically the employee)
to act on the principal’s behalf. The problem is that the agent often has different goals than the principal.
Incentives
Incentives are one way to correct shirking and solve the principal-agent problem. Incentives can be tied
directly to performance, such as commissions, as discussed in the last unit. Incentives can also be tied to
specific actions or the overall performance of the company. Basing incentives on company performance can
be dicey though. There are many factors outside the employees’ control that affect company performance.
The less tied incentives are to employee performance, the less likely the incentives will be to promote the
desired performance. Still, tying incentives to company performance does help align the goals of the principal
and the agent.
UNIT VIII STUDY GUIDE
Organizational Design and Incentives
ECO 6301, Economics for Managers 2
UNIT x STUDY GUIDE
Title
As mentioned, employees may not have a lot of control over company performance, which can complicate
attempts to align principal and agent goals. This can be because of large outside influences (demand for the
product) or because of the nature of the job agents have. Perhaps agents have the information to promote the
principal’s goals but lack the decision-making authority to realize them. In cases like this, it is important for
principals to align decision-making power with those who have information.
One model for aligning goals and addressing the principal-agent problem is the franchise model. In a
franchise model, a parent company, or brand, franchises out the opportunity to open additional stores under
the brand name for a percentage of sales. If a brand opened company-owned stores, they would have to rely
on managers who may not be as motivated, or the job may attract unmotivated managers (recall the different
explanation for similar problems with moral hazard and adverse selection). With a franchise model, however,
the individual franchise owner is motivated to make the franchise a success, since that determines the profit.
When companies grow, they are often divided into different divisions. Incentives can be tricky in ensuring the
divisions are working toward the same goal. If the incentives are not structured correctly, the divisions may
make decisions that are best for the division but not best for the company.
Take for example a college admissions department and an academic department. The academic department
might be interested in producing quality graduates that will earn the school a good reputation. The academic
department can help realize those goals with stricter admissions standards. The admissions department,
however, might be interested in reducing admissions standards in order to admit as many people as possible
(or at least enough to meet departmental goals). Stricter admissions standards get in the way of admissions.
Having too many, low quality students in a program can detract from the attention focused to turn the higher
quality students into reputable graduates who will help build the department’s reputation. Sharing information
and aligning the goals of the departments is key to getting both departments to act in the interest of the school
as a whole.
Sometimes there are exchanges between divisions in an organization. Tracking this and crediting each
division is important. Transfer pricing is the price of an intermediate good, made in-house, and then “sold” to
another division. Transfer pricing might be thought of most easily with manufacturing. When making a car, the
engine is built and then put into the frame. Since it is just the car that is ultimately sold at a price, crediting the
division that built the engine can be difficult. Obviously, the car would not be much good without the engine.
Determining the price for the engine, however, is difficult and often controversial between the divisions. The
engine division will want to be credited with a high price for the engine, but the division that built the frame will
want to “pay” a low price for the engine. Each division wants to appear as profitable as possible. Giving one
division an unfair price could hurt morale, and thus productivity, in that division. That would, obviously, hurt
the company overall.
Transfer pricing issues can be addressed by treating different divisions as profit centers or cost centers. Profit
centers are evaluated based on profit or revenue. Cost centers are evaluated based on costs. Using these
different centers and different goals, as long as the divisions are aligned to the proper center, their goals will
align with helping the overall organization be more successful.
Organizations can be ordered based on a variety of plans. Organizations might be organized by function,
such as production and sales. Organizations can also be organized by products or by geographic region. The
best organizational structure will depend on the type of firm and how they approach the market.
Vertical Relationships
Firms can also find profit potential by expanding operations vertically through their supply chain. This strategy
is known as a vertical relationship. For a simple example of this, consider a landlord, particularly one
constrained by rent control laws. The landlord may find him- or herself constrained in what he or she can
charge for rent. There are other services, however, that can be provided to tenants beyond just the living
space. A landlord might, for example, furnish the apartment for an extra fee. Firms can even use exclusions,
forcing buyers to purchase their additional product or service rather than purchasing from a competitor. A
similar approach is taken with movie theaters or ballparks who sell the tickets to the event and then also
require that if customers want to enjoy refreshments, they must do so at the concession stands operated by
the event.
ECO 6301, Economics for Managers 3
UNIT x STUDY GUIDE
Title
Vertical relationships can also be used to manipulate realized profit. A firm may produce an early stage of a
product in a high tax area but transfer the production to another location with lower taxes for finalization. The
transfer can be done at a low price so that the high tax production does not produce much profit and then the
product is sold by the low tax production area with a higher profit realized thanks to the low transfer/purchase
price. The reverse can also be done where firms build in profit all along the production pipeline. This is known
as double marginalization. Of course, if the markups are too much then the price of the product in the market
will be too high.
Sometimes the incentives between links in the supply chain, for example between manufacturers and
retailers, come into conflict. Manufacturers might have an incentive to have the quality of their product
maintained and displayed but the retailer many not have quite the same concern. Have you ever been in a
store that sells high quality stereos and speakers? You might notice a special room set up to listen to the
speakers. This is by the design of the stereo and speaker producer, not necessarily the store. The purpose is
to provide an environment where you can really hear the quality of the higher priced stereos and speakers. In
exchange for providing the fancy displays, the manufacturers put minimum prices on their products wherever
they are sold. The purpose of these minimum prices is to prevent the fancy store from spending money on the
display only to have consumers come in, listen to the stereos and speakers, decide what they want, and go to
Walmart to buy it for a cheaper price.
Similarly, you generally will not see retailers engage in too much advertising. Advertising is mostly handled by
the producers of the product. A retailer advertising for a particular good may end up convincing consumers to
buy the product but not necessarily from their location.
Too much in the way of vertical relationships, however, can raise antitrust concerns. Strong vertical
relationships can have a negative effect on market competition, so many countries have antitrust laws
governing vertical relationships. In Europe, for example, Coke is prohibited from purchasing refrigerators in
their retail locations. The fear is that Coke owning the refrigerators will lead to the exclusion of other soft drink
producers being able to provide their product cold and ready to drink. So, vertical relationships can come with
much potential for firms, but they can also come with risks firms should be aware of before pursuing them.
A final word on vertical relationships—vertical relationships can be pursued through mergers. Simply merging
with another organization in a business’s supply chain does not always work out. In a free market, where
buyers and sellers are rational and have full information, the sellers would only accept a price equal to the
discounted stream of future profits. That means, all else equal, the best the purchasing firm could expect to
do is break even on the purchase. The potential for the merger to work out is based on some type of synergy
to be realized that makes the purchased company/asset more valuable for being part of the purchasing
company. Perhaps the smaller company will benefit from a larger distribution system already in place with the
purchasing company.
Suggested Unit Resources
Article: An Evaluation of Alternative Market-Based Transfer Prices (Optional)
This article further explores the topics covered in this unit.
**## FinalAssignmentVIII.docx**
This assignment measures your mastery of CLOs 1, 2, 3, 4, 5, and 6 and ULOs 7.3 and 7.4
**A Case Analysis of AMC**
**Assignment objective:** AMC is the largest movie theater operator in the world. AMC recently became a popular meme stock. Take a few minutes to learn more about
[AMC Theaters](https://www.amctheatres.com/).
**Length:** Your submission is required to be at least 5 pages in length and not more than 7 pages, not including the title page and references.
**References:** A minimum of 3 peer-reviewed references are required, any additional resources used are required to be scholarly/academic in nature and found in the CSU Library. APA formatting is required to be used for citations and references. Use this definition to define the term in the instructions.
**Definitions:** Scholarly journals are sometimes called academic journals. The terms are often used interchangeably to describe the same type of publication. These types of publications are published by universities, academic institutions, professional associations, and commercial enterprises and are compiled by scholars, academics, and other subject authorities.
**Details:** In your paper, include the following:
· Introduction
· Analyze the market before the COVID-19 pandemic. Describe how the pandemic affected the movie theater industry.
· Explain price discrimination in the movie theater market.
· Movie theater employees are generally paid hourly. Design an incentive pay structure for AMC Theaters and explain how it would work.
· Apply the concepts of economies of scale and economies of scope to AMC Theater's business model
· Apply the concepts of game theory to short selling and meme stocks as it relates to AMC Theaters
· Assess AMC Theater's potential for international expansion and potential trade policy issues.
· Explain the asymmetric information issues that lead to short selling and meme stocks.
· Apply the concepts of moral hazard to short selling and meme stocks, using AMC as an example.
· Conclusion
**## UnitVIIIStudyGuide.pdf**
ECO 6301, Economics for Managers 1
Course Learning Outcomes for Unit VIII
At the end of this unit, you should be able to:
1. Evaluate the ethical outcomes of free market outcomes using supply and demand models.
2. Apply the different types of elasticity concepts to business scenarios.
3. Analyze how price and output influence profit maximization under different market structures.
4. Evaluate strategic pricing decisions.
5. Apply game theory to pricing and to output decisions in an oligopoly market.
6. Analyze the basis of trade.
7. Explain the implications of uncertainty in managerial decision-making.
7.4 Explain how incentives can affect various relationships in an organization.
Required Unit Resources
Chapter 4: Extent (How Much) Decisions (ULO 7.4)
Chapter 21: Getting Employees to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 22: Getting Divisions to Work in the Firm’s Best Interests (ULO 7.4)
Chapter 23: Managing Vertical Relationships (ULO 7.4)
Unit Lesson
Lesson: Organizational Design and Incentives (ULO 7.4)
This lesson covers the topics introduced in this final unit.
The last unit’s topic on asymmetric information included a section on shirking. Recall that shirking is when
employees do not work hard because the managers are not able to monitor their performance (either because
of ability or cost). Another way to look at the problem of shirking is through the principal-agent problem. In the
principal-agent problem, the principal (typically a business owner) wants their agent (typically the employee)
to act on the principal’s behalf. The problem is that the agent often has different goals than the principal.
Incentives
Incentives are one way to correct shirking and solve the principal-agent problem. Incentives can be tied
directly to performance, such as commissions, as discussed in the last unit. Incentives can also be tied to
specific actions or the overall performance of the company. Basing incentives on company performance can
be dicey though. There are many factors outside the employees’ control that affect company performance.
The less tied incentives are to employee performance, the less likely the incentives will be to promote the
desired performance. Still, tying incentives to company performance does help align the goals of the principal
and the agent.
UNIT VIII STUDY GUIDE
Organizational Design and Incentives
ECO 6301, Economics for Managers 2
UNIT x STUDY GUIDE
Title
As mentioned, employees may not have a lot of control over company performance, which can complicate
attempts to align principal and agent goals. This can be because of large outside influences (demand for the
product) or because of the nature of the job agents have. Perhaps agents have the information to promote the
principal’s goals but lack the decision-making authority to realize them. In cases like this, it is important for
principals to align decision-making power with those who have information.
One model for aligning goals and addressing the principal-agent problem is the franchise model. In a
franchise model, a parent company, or brand, franchises out the opportunity to open additional stores under
the brand name for a percentage of sales. If a brand opened company-owned stores, they would have to rely
on managers who may not be as motivated, or the job may attract unmotivated managers (recall the different
explanation for similar problems with moral hazard and adverse selection). With a franchise model, however,
the individual franchise owner is motivated to make the franchise a success, since that determines the profit.
When companies grow, they are often divided into different divisions. Incentives can be tricky in ensuring the
divisions are working toward the same goal. If the incentives are not structured correctly, the divisions may
make decisions that are best for the division but not best for the company.
Take for example a college admissions department and an academic department. The academic department
might be interested in producing quality graduates that will earn the school a good reputation. The academic
department can help realize those goals with stricter admissions standards. The admissions department,
however, might be interested in reducing admissions standards in order to admit as many people as possible
(or at least enough to meet departmental goals). Stricter admissions standards get in the way of admissions.
Having too many, low quality students in a program can detract from the attention focused to turn the higher
quality students into reputable graduates who will help build the department’s reputation. Sharing information
and aligning the goals of the departments is key to getting both departments to act in the interest of the school
as a whole.
Sometimes there are exchanges between divisions in an organization. Tracking this and crediting each
division is important. Transfer pricing is the price of an intermediate good, made in-house, and then “sold” to
another division. Transfer pricing might be thought of most easily with manufacturing. When making a car, the
engine is built and then put into the frame. Since it is just the car that is ultimately sold at a price, crediting the
division that built the engine can be difficult. Obviously, the car would not be much good without the engine.
Determining the price for the engine, however, is difficult and often controversial between the divisions. The
engine division will want to be credited with a high price for the engine, but the division that built the frame will
want to “pay” a low price for the engine. Each division wants to appear as profitable as possible. Giving one
division an unfair price could hurt morale, and thus productivity, in that division. That would, obviously, hurt
the company overall.
Transfer pricing issues can be addressed by treating different divisions as profit centers or cost centers. Profit
centers are evaluated based on profit or revenue. Cost centers are evaluated based on costs. Using these
different centers and different goals, as long as the divisions are aligned to the proper center, their goals will
align with helping the overall organization be more successful.
Organizations can be ordered based on a variety of plans. Organizations might be organized by function,
such as production and sales. Organizations can also be organized by products or by geographic region. The
best organizational structure will depend on the type of firm and how they approach the market.
Vertical Relationships
Firms can also find profit potential by expanding operations vertically through their supply chain. This strategy
is known as a vertical relationship. For a simple example of this, consider a landlord, particularly one
constrained by rent control laws. The landlord may find him- or herself constrained in what he or she can
charge for rent. There are other services, however, that can be provided to tenants beyond just the living
space. A landlord might, for example, furnish the apartment for an extra fee. Firms can even use exclusions,
forcing buyers to purchase their additional product or service rather than purchasing from a competitor. A
similar approach is taken with movie theaters or ballparks who sell the tickets to the event and then also
require that if customers want to enjoy refreshments, they must do so at the concession stands operated by
the event.
ECO 6301, Economics for Managers 3
UNIT x STUDY GUIDE
Title
Vertical relationships can also be used to manipulate realized profit. A firm may produce an early stage of a
product in a high tax area but transfer the production to another location with lower taxes for finalization. The
transfer can be done at a low price so that the high tax production does not produce much profit and then the
product is sold by the low tax production area with a higher profit realized thanks to the low transfer/purchase
price. The reverse can also be done where firms build in profit all along the production pipeline. This is known
as double marginalization. Of course, if the markups are too much then the price of the product in the market
will be too high.
Sometimes the incentives between links in the supply chain, for example between manufacturers and
retailers, come into conflict. Manufacturers might have an incentive to have the quality of their product
maintained and displayed but the retailer many not have quite the same concern. Have you ever been in a
store that sells high quality stereos and speakers? You might notice a special room set up to listen to the
speakers. This is by the design of the stereo and speaker producer, not necessarily the store. The purpose is
to provide an environment where you can really hear the quality of the higher priced stereos and speakers. In
exchange for providing the fancy displays, the manufacturers put minimum prices on their products wherever
they are sold. The purpose of these minimum prices is to prevent the fancy store from spending money on the
display only to have consumers come in, listen to the stereos and speakers, decide what they want, and go to
Walmart to buy it for a cheaper price.
Similarly, you generally will not see retailers engage in too much advertising. Advertising is mostly handled by
the producers of the product. A retailer advertising for a particular good may end up convincing consumers to
buy the product but not necessarily from their location.
Too much in the way of vertical relationships, however, can raise antitrust concerns. Strong vertical
relationships can have a negative effect on market competition, so many countries have antitrust laws
governing vertical relationships. In Europe, for example, Coke is prohibited from purchasing refrigerators in
their retail locations. The fear is that Coke owning the refrigerators will lead to the exclusion of other soft drink
producers being able to provide their product cold and ready to drink. So, vertical relationships can come with
much potential for firms, but they can also come with risks firms should be aware of before pursuing them.
A final word on vertical relationships—vertical relationships can be pursued through mergers. Simply merging
with another organization in a business’s supply chain does not always work out. In a free market, where
buyers and sellers are rational and have full information, the sellers would only accept a price equal to the
discounted stream of future profits. That means, all else equal, the best the purchasing firm could expect to
do is break even on the purchase. The potential for the merger to work out is based on some type of synergy
to be realized that makes the purchased company/asset more valuable for being part of the purchasing
company. Perhaps the smaller company will benefit from a larger distribution system already in place with the
purchasing company.
Suggested Unit Resources
Article: An Evaluation of Alternative Market-Based Transfer Prices (Optional)
This article further explores the topics covered in this unit.