G202 - EXAM 3

The lower the square root of MSE…

more accurate a predictor is the regression line

MC increases when firms in invest in…

Strategic sustainability

How do you calculate gross margin?

revenue — variable costs

How do you calculate profit?

Gross margin — fixed costs

what is mean squared error? (MSE)

average of squared differences between actual and predicted values

What is the profit function?

π(Q) = R(Q) − C(Q)

when is profit maximized?

MR = MC

What is MC?

• derivative of cost function

• equals b in C = a + bQ

What is marginal revenue?

= m + 2nQ

Formula for optimal quantity? (Q*)

= (b - m) / 2n

Formula for optimal price (p*)?

= (b + m) / 2

R’(Q) =

marginal revenue (MR)

C’(Q) =

Marginal Cost (MC)

C =

a + bQ

P =

m + nQ

C =

total cost

a =

Fixed Cost

b =

Marginal Cost

bQ =

Variable Cost

revenue =

P*Q*

Gross Margin =

P*Q* - bQ

π =

Gross margin - Fixed Cost

C’(Q) =

b

PV formula?

= X / (1 + i)^N

Step 1 of social regulator strategy?

Get companies attention through a publicity campaign and maximize how much profit the company perceives is at stake

Step 2 of social regulator strategy?

specify demands that must be met to stop the campaign

what must the company choose when they are facing social regulators?

zero or full compliance

1. Wagner act (1935)

• established national labor relations board

• rights of workers to organize

• required employers to bargain in good faith

Taft-Hartley Act (1947)

• prohibited unions from coercing workers to join

• allowed states to pass right to work laws

Landrum-Griffin Act (1959)

• strengthened worker democracy within unions

• required fairness, transparency, and no corruption in union governance

Health Care Amendments to Wagner Act (1974)

• extended right of workers to unionize to nonprofit healthcare facilities

• which is now the most unionized sector in the economy

How unions check monopsony power?

increase worker bargaining power when few employers exist

How do unions reduce information asymmetry?

help workers understand their market value

How do unions increase productivity?

• training and certifications

• lower turnover

• improve quality of information flow within the company

How do unions increase productivity?

workers don’t negotiate individually

why can unions reduce social welfare?

can act like a cartel controlling labor supply

Downsides of Unions (negatives)

• inefficiently high wages (fewer workers mean a higher wage is paid)

• overinvestment in equipment (does job more efficient than human)

• unnecessary unemployment (union prohibit labor)

What is MRP? (marginal revenue product)

Extra revenue from one more worker

How do you calculate MRP?

= MPL X Price

What is MPL? (marginal product of labor)

additional revenue is the additional output produced by the additional unit of labor

what is labor supply?

reservation wage (minimum workers accept)

what is monopsony? (absence of competition)

when 1 employer controls hiring and sets lower wages

• pays the workers the W’, that maximizes profit

Where does a monopsonist hire workers?

Where MRP = MCL (marginal cost of labor)

How can firms reduce union power?

• build inventory stockpiles

• automate processes

• diversify production locations

• lobby against pro union laws

How can firms avoid union strikes?

• transparent financials

• profit sharing

• longer term contracts

• interest based (win-win) bargaining

what leads to a work stoppage?

• irrational decision making

• misreading payoffs

Both parties have an incentive to? (in a game of chicken)

• signal unflexible resilience

• but no one will flinch

• theory predicts that 1 party initiates negotiations before a business stoppage occurs

Formula to find MRP

MPL x P

Formula to find TCL

WR * L

Hire labor until

MRP = MCL

In a perfectly competitive market MRP = ?

MRP = WR

Formula for R”(Q)

C + 2dQ

Gross margin does not include

FIXED COSTS

These spurred momentum for a union that becomes a national movement

• 1st unionized store in Buffalo in 2021 → successful scaling of social regulation

• workers used peer to peer and social media to solicit union members → tech lowered transaction costs of organizing

• staffing & scheduling frustrations ignited quick spread of sentiment → EMPs place high value on non-wage benefits

Was the local Starbucks store a monopsonist?

YES → dominates local cafe employment, non-wage benefits tied to tenur, average industry pay despite high MPL, low wage elasticity of labor supply

NO → several substitutes, non-cafe emp turnover not much below fast food, pays locally competitive wages, low skill requirements imply flat MCL

sequence of moves in a unions game of credibility

Public statements → buffalo store organized → file unfair labor practice charges → red cup rebellion

Strat → hard resistance (union avoidance)

Advantages:

• preserve control

• maintain wage discipline

• protect shareholder returns

Risks

• high legal exposure

• brand hypocrisy

• worker turnover and distrust

Strat → selective engagement (case by case)

Advantages:

• flexibility with limited cooperation

• adaptation by market and region

• sign openness with less cost risk

Risks:

• seem inconsistent & manipulative

• hard to coordinate messaging

• may prolong uncertainty and conflict

Strat → proactive cooperation (partnership)

Advantages:

• build trust & lower turnover

• strengthen brand

• pre-empt regulation via credibility

Risks:

• raise labor costs & slow decisions

• some investors perceive weakness

• requires cultural realignment

Starbucks → choosed selective engagement

• negotiate with some stores

• appeal ULP cases

• raise wages at non-union stores

• new CEO keeps Shulz’s approach

• slow union until interest wanes

asymmetric information

• knowledge possessed by the seller but not the buyer or vice verse

• underinformed consumers have an inaccurate WTP and generate a mispositioned demand schedule

• regulation closes gaps in information

Consumers pay too much when they do not have full information about product drawbacks (graph)

• market price is at higher price than it should bc consumers over value the product (incomplete information)

• socially inefficient production of Q0-Q1

• uniformed demand curve in higher than true demand curve

• Price and quantity is higher than socially efficient

Producers generate too much output when they have incomplete knowledge of all production costs (graph)

• market price is at a lower price than it should bc producers under cost production (incomplete info)

• generates socially inefficient over production

• true supply curve > uniformed supply curve

• Price is lower and quantity is higher than SE

regulation closes the asymmetric info gap, but 100% closure is rarely socially efficient

• R measures effort to reduce unknown detractors of value or generators of cost

• R is often expressed as a standard that producers must meet, defect rates for tech, disclosure detail for info

• R* occurs where MB = MC

R1 > R* is

overregulation → social benefit of an incrementally stronger standard than R* is not worth the social cost

R0 < R* is

under regulation → markets for private regulation can profitability close the gap between R0 and R* and generate economic net benefit equal to the value of the blue triangle

Ways that government are motivated and funded

• rarely consider costs

• funded through general taxation

• response to bad events

ways that private regulation are motivated and funded

• efficiency generates profit

• funded by regulatory beneficiaries

• motivated by market demand

Non-governmental organizations (NGOs)

• take action when they believe regulation (gov or private) is insufficient

• encourage consumers, investors, emps, to demand more investment by the firm in private regulation

• NGOs successfully motivate investment in more private regulation when firms fear inaction puts profit at risk

Nike first countered public criticism with defensiveness and deflection of blame

• Nike is not a manufacturer

• engage contractors instead of Nike

• invested more in marketing

• “Business as usual” with brand

→ elevated attack on Nike brand and students protested university deals

→ press nagged celeb endorsers

→ protest rallies at store openings

Protestors social lobbying beat counter lobby by bike

→ Nike had to respond with investment in private regulation

• surplus realized by buyers shrank as they learned about abusive labor practices

• industry revenue fell as activists filled in the info gap about overseas labor practices

Nike contractor workers were unaware of unsafe conditions → private regulation restored safety & erased asymmetry

• surplus realized by workers shrank as they learned about higher-than-expected workplace safety risk

• market price clears at a lower price than it should because producers under cost production in presence of incomplete info → socially inefficient overproduction

• EMP would demand higher wage if they had full info on workplace safety risks

Nike lost 400million in profit

→ invested in high visibility response that enabled private regulation

• hired former journalist Dusty Kidd to draft a labor conduct code for Nike contractors

• Hired former Atlanta mayor Andrew Young to evaluate the new labor conduct code

• hired Ernst & Young to conduct internal audits of overseas factories owned by contractors

• Dartmouth business school students surveyed factory workers on pay & benefits

Nike voluntarily adopted private regulation standards → higher than those required by foreign governments

• minimum work ages of 16 for apparel & 18 for shoes

• factories must comply with US workplace healthy air standards

• MAX work hours of 60 per week

• factory managers must learn a local language

• micro loans made available to workers

• led apparel industry partnership & then fair labor association

Nikes bas response to activists increased the firm’s required investment in private regulation

• rebook initially responded with unhesitating embrace of human rights and strict labor practice guidelines

• Nike had to respond with a higher level of investment to save further brand deterioration in brand value

• explains why MB of regulation was ironically higher for nike than rebook

Private regulation kept Nike out of Bangladesh → low safety standards there led to 1100 deaths

• WSJ spotlighted Nike’s decision not to expand lower cost operations in Bangladesh because of bad working condition → only 8 out of its 896 factories were there

• collapse of overcrowded garment manufacturing structure Rana Plaza killed people

• IN RESPONSE → over 200 apparel manufacturers signed on to the Accord on factory & building safety in Bangladesh and donated 1 BILLION to upgrade safety

• NIKE STAYE OUT AND SAVED COSTS

It is a matter of tradeoffs, it must be about profits

• ignore external costs, more future regulations ← Voluntary carbon capture → internalize external costs, less future regulation

• Do not invest in workers, lower FC, higher MC ← public education & training → invest in workers, higher FC, lower MC

Stakeholder engagement

• choice by a company to initiate a positive sum gain with parties directly or indirectly affiliated or impacted by the business model

• a company is either responding to implicit or explicit external pressure

• anticipating future pressure and attempting to get ahead of it

• or pursuing recognition of a new opportunity yet seen by competitors

• Actions seen now are often about profit in the future

Example of stakeholder engagement actions

1. redesigning or launching a new product

2. voluntarily committing to standards set by a 3rd party

3. rebranding the company to embrace a new corporate purpose

4. allocating company resources to achieve a community or social goal

5. collaborating with competitors to overcome an industry challenge

What was BP’s “Beyond Petroleum” campaign

• corporate strategy designed for stakeholder engagement

• BP changed its logo to reflect a change in corporate purpose

• BP adopted a sunflower design they called the Helios → the name given to the sun god in ancient Greece

• signaled a shift to renewable energy & concern about climate change

“Beyond Petroleum” included 2 large acquisitions

• BP acquired Arco → making BP the world’s largest producer of oil & gas

• BP acquired Solarex → making BP the world’s largest producer of solar

“Beyond Petroleum” was not for consumers

• consumers choose oil & gas based upon price and access, very rarely upon brand

“beyond Petroleum” → gov, emp, investors, activist groups

• Government → collude with policy makers to build an energy sector that is responsive to global warming & invests in renewables

• Activist Groups → take initiative away from environmental protestors & offer practical strat for addressing climate change

• Employees → attract the brightest scientists & engineers. they will not work for a company destroying the planet

• Investors → relieve investors of the guilt of investing in carbon emissions & perhaps attract socially conscious investors

Greenpeace accused BP of greenwashing → successful outcomes of BP stakeholder engagement

1. dual acquisition allowed BP to enhance economies of scale & reduce MC of production for both renewable & non

2. shared value with socially responsible investors attracted capital that helped cover the high FC of research & development

3. BP continued to recruit the worlds best scientific & engineering talent

4. contribution to state level renewable energy standards guaranteed demand for output by BP solar