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, which we believe will be beneficial in the long run.  

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 supra-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).  In Module 1 (“Market Imperfections as Sources of Strategic Success”), we systematically introduce three types of market imperfections: imperfect information, transactions costs (e.g. identifying partners, executing and safeguarding agreements), and market power. The analysis helps identify entrepreneurial opportunities and understand the mechanisms through which firms create and sustain superior performance.

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 2 (“Competitive and Government Responses to Market Imperfections”), we explore how competitive forces and government interventions may undermine the very basis of a firm’s superior performance, and how to effectively formulate strategies to respond to these changes.  

In Module 3 (“Informal Rules of the Business Environment”), we will touch on norms and social concerns that informally shape the environment where firms compete and how they influence a firm’s strategy.

Grading

Grades will be based on Class Participation and a short essay based on a project

Separately, we will also 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.

 

Table 1: Course Syllabus (tentative)

Introduction

Industry

Module 1: Market imperfections as sources of strategic success

Brighter smiles for the masses-Colgate vs. P&G

Pharmaceutical

Flagship Pioneering (case in progress)

Venture Capital

Getty Images

Digital Images

Redfin (case in progress)

Real Estate

Intellectual Property Strategy at North Technology Group "Sailing Downwind

Sporting Goods

Change at Whirlpool Corp

Consumer Electronics

New York Times Paywall

Media and Publishing

Module 2: Competitive and government responses to market imperfections

Goodyear and the Threat of Government Tire Grading

Automobile

Amgen Inc’s Epogen

Pharmaceutical

Calvin Klein and Warnaco Group: Negotiating a Trademark License

Fashion

Lobbying for Love? Southwest Airlines and the Wright Amendment

Airline

Free the Grapes-- Direct-to-Consumer Shipping in the Wine Industry

Wine

Sweet Deal - Self-Regulation in Breakfast Cereals

Food, manufacturing

Module 3: Informal rules of the business environment

Wal-Mart's Business Environment

Retail

UBS and Climate Change--Warming Up to Global Action?

Banking

Conclusion