Market Imperfections, Policy, and Strategy

Course Number 1275

Associate Professor Hong Luo
Q3, 14 sessions
1.5 credits
Paper

Educational Objectives

This course is designed to help students better tailor a firm’s strategy to its business environment. It develops a novel framework, based on the presence of market imperfections, for understanding the basis upon which firms create and sustain superior performance, potential forces that might undermine it, and formulating effective responses to these changes.

Overall, the course takes a broad perspective on business environment: Apart from competition, it also highlights the role of laws, regulations, and social norms. Additionally, through supplemental readings and targeted discussions, the course encourages students to become effective consumers of academic research.  

Course Content and Structure

The intellectual basis of the course is the economic theory of market imperfections: features of a market that soften effective competition. A wide range of firm strategies depend on the presence of market imperfections to yield long-term above-normal profits, as any excessive return would be eventually competed away in a fully competitive market. 

 Identifying the mechanisms through which a strategy softens competition is, thus, a valuable starting point for analyzing competitive advantage. Apart from value capture, market imperfections are also powerful indicators for opportunities to create value (by mitigating these imperfections in creative ways).  But this analysis is incomplete in isolation. Market imperfections are often reduced by competition. Furthermore, many forms of government intervention also seek to preserve or enhance competition, putting the savvy strategist in tension with the determined regulator.

In Module 1 (“Market imperfections and firm strategy”), we systematically introduce three types of market imperfections: imperfect information, transactions costs (e.g. identifying partners, executing and safeguarding agreements), and market power. This module provides an initial understanding of the mechanisms through which firms create and sustain superior performance, and forces that might undermine it.

In Module 2 (“Competition, entry, and intermediaries”), we explore how market imperfections may create entrepreneurial opportunities, and how new entrants and competition may change the extent and form of imperfections and, in turn, affect firm performance. We also examine the strategy of a particular type of player-the market intermediary-that typically creates value through mitigating market imperfections.

In Module 3 (“Competitive strategy and the rules of the game”), we will focus on how government interventions may undermine the basis of a firm’s superior performance, and how to effectively formulate strategies to respond to these changes and to shape the rules of the game. 

Grading

Grades will be based on Class Participation (50%) and a final paper from a group project (50%). See the description of the final project below.

Separately, I will be happy to advise students for their Independent Projects. The IPs can expand on the project chosen for the course or on other topics that the students are passionate about and better prepare them for the next phase of their career.

 

Class schedule

Introduction

Industry

Module 1: Market imperfections and firm strategy

Flagship Pioneering

Biotech

Goodyear and the Threat of Government Tire Grading

Manufacturing

The New York Times Paywall

Media and publishing

Module 2: Competition, entry, and intermediaries

Redfin: Redefine Real Estate

Real Estate

The Black List

Movie

Getty Images

Digital images

Brighter Smiles for the Masses — Colgate vs. P&G

Consumer products

Amgen Inc.’s Epogen — Commercializing the First Biotech Blockbuster Drug

Biotech

Module 3: Competitive strategy and the rules of the game

Sweet Deal - Self-regulation in Breakfast Cereals

Cereal

Lobbying for Love? Southwest Airlines and the Wright Amendment

Airline

GM and the regulation of driverless cars

Automoblie

Conclusion

 

Project presentations

 

Project presentations and concluding thoughts

 

Final Paper Description

The final paper for MIPS is a strategic analysis of a strategic situation faced by a company either of your choice or provided by the instructor (the options will be available at the beginning of the semester).


The purpose of the paper is to exercise the frameworks and tools that we develop in class regarding market imperfections, how they form the basis of the firm’s value creation and capture, and how they influence competitive and government responses. You will write the paper in a group of 2-4 students. Because the primary purpose of the paper is to apply what you have learned from class, the team is not expected to undertake substantial research to gather facts. Rather, the emphasis should be on the analysis. Reasonable assumptions can be made regarding facts that would be known to the company but are difficult for outsiders to learn.


Your chosen company can either be an incumbent or an entrant. The strategic situation you focus on can be about competitive interactions between the company and a specific rival (such as P&G versus Colgate) or between the company and its larger competitive environment (e.g., New York Times with the presence of digital aggregators, or Goodyear anticipating regulatory changes and their impacts on its positioning relative to its rivals). 


You can study the company’s strategic situation in the past (e.g., Redfin’s mid-2005 entry in real estate) or examine a current situation and look forward into the future (e.g., the potential regulatory environment in the driverless car industry and its implications on GM), or both. Regardless of the setting, having a clear strategic decision from this particular company’s point of view will help you anchor the analysis.

  
The following provides some example questions you might want to ask in your analysis (which questions may apply depends on your specific topic):

  • Are there underlying market imperfections? How does the company’s strategy (its ability to create and to capture value) depend on these imperfections?
  • If you observe a significant improvement or deterioration in the company’s performance, is it likely to be caused by substantial changes in these underlying imperfections, or has the company become better or worse at benefiting from imperfect competition? And why?
  • How would competitive interactions between the rivals and new entrants change imperfections in this market? How would you expect that might affect the company’s performance, and its rivals’? How might that help you formulate the company’s response, anticipating how the rivals might react?
  • What types of government responses are likely? Will they open up new opportunities, affect the company’s competitive advantage (or disadvantage)? What actions can management take to shape the environment in the company’s favor?

Choice of company: Make sure to consider your inherent interest in the company and industry and your ability to access the details necessary to assess the firm’s competitive position relative to its rivals. In completing your analysis, you may use either secondary (i.e., articles, analyst reports, company annual reports) or primary (e.g., interviews, company documents) sources. Inside information is not necessary for you to write an effective paper, nor is it sufficient. The quality and depth of your research and analysis are what matter, not your access to inside information. If you do contact the company, please be respectful of the sensitivities and time constraints of the managers you reach. Please note on the cover if any part of your exercise includes confidential material.


Group work: You will write the paper in a group of 2-4 students. Team collaboration is an important aspect of this project. You are free to select your partners. If you need assistance getting paired with others, let me know, and I will help create groupings.


Format: The format of the paper should be text, exhibits, and a bibliography of sources used. The paper should be no more than 10 pages single-spaced plus exhibits and endnotes. The paper should include a one-page cover sheet that provides an executive summary.


In your paper, you should limit the passive recounting of descriptive information, and instead try and devote the bulk of your paper to the analysis of the situation and the application of the tools and concepts that we have covered.


Presentation: We will reserve the second to last session for the presentation and discussion of a subset of the class projects.


Dates and Deadlines:


Friday, 2 February: Project proposal due by noon. This proposal must include the names of all team members, the firm and its strategic question/situation you will study, and a basic description of the rationale behind your choice (less than a page).


Beginning 2 February: I will be available to meet with each group to discuss your project.


Thursday, 1 March: Presentation day for a subset of the projects.


Friday, 9 March (a week after our final class): Final paper due by 5:00 PM. Please send your paper to Gregory Fortier (gfortier@hbs.edu).