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This International Student Edition is for use outside of the U.S.

TENTH EDITION

MANAGERIAL ECONOMICS
and
BUSINESS STRATEGY

MICHAEL R. ­B AYE / JEFFREY T. PRINCE

TENTH EDITION

Managerial Economics
and Business Strategy
The McGraw-Hill Series Economics
Survey of Economic s Samuelson and Nordhaus Frank
Economics, Microeconomics, and Microeconomics and Behavior
Brue, McConnell, and Flynn Macroeconomics Tenth Edition
Essentials of Economics Nineteenth Edition
Fourth Edition Advanced Economics
Schiller and Gebhardt
Guell The Economy Today, The Micro Economy Romer
Issues in Economics Today Today, and The Macro Economy Today Advanced Macroeconomics
Ninth Edition Sixteenth Edition Fifth Edition
Mandel Slavin
M: Economics: The Basics Money and Banking
Economics, Microeconomics, and
Fourth Edition Macroeconomics Cecchetti and Schoenholtz
Schiller and Gebhardt Twelfth Edition Money, Banking, and Financial Markets
Essentials of Economics Sixth Edition
Eleventh Edition Economics of Social Issues
Urban Economics
Guell
Principles of Economics
Issues in Economics Today O’Sullivan
Asarta and Butters N Edition Urban Economics
Connect Master 2.0: Principles of Economics Ninth Edition
Register and Grimes
Third Edition Economics of Social Issues Labor Economics
Colander Twenty-First Edition
Economics, Microeconomics, and Borjas
Macroeconomics Data Analytics for Economics Labor Economics
Eleventh Edition Eighth Edition
Prince
Frank, Bernanke, Antonovics, and Heffetz Predictive Analytics for Business Strategy McConnell, Brue, and Macpherson
Principles of Economics, Principles First Edition Contemporary Labor Economics
of Microeconomics, Principles of Twelfth Edition
Macroeconomics Managerial Economics
Eighth Edition Public Finance
Baye and Prince
Frank, Bernanke, Antonovics, and Heffetz Managerial Economics and Business Strategy Rosen and Gayer
A Streamlined Approach for: Principles of Tenth Edition Public Finance
Economics, Principles of Microeconomics, Tenth Edition
Brickley, Smith, and Zimmerman
Principles of Macroeconomics Managerial Economics and Organizational
Fourth Edition Environmental Economics
Architecture
Karlan and Morduch Seventh Edition Field and Field
Economics, Microeconomics, and Environmental Economics: An Introduction
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Macroeconomics Eighth Edition
Managerial Economics
Third Edition Thirteenth Edition International Economics
McConnell, Brue, and Flynn
Economics, Microeconomics, and Intermediate Economics Appleyard and Field
Macroeconomics International Economics
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Twenty-Second Edition Ninth Edition
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McConnell, Brue, and Flynn Second Edition Pugel
Brief Editions: Microeconomics and International Economics
Dornbusch, Fischer, and Startz
Macroeconomics Seventeenth Edition
Macroeconomics
Third Edition Thirteenth Edition
TENTH EDITION

Managerial Economics
and Business Strategy

Michael R. Baye
Bert Elwert Professor of Business Economics & Public Policy
Kelley School of Business
Indiana University

Jeffrey T. Prince
Professor of Business Economics & Public Policy
Harold A. Poling Chair in Strategic Management
Kelley School of Business
Indiana University
MANAGERIAL ECONOMICS AND BUSINESS STRATEGY
Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10121. Copyright © 2022 by
McGraw Hill LLC. All rights reserved. Printed in the United States of America. No part of this publication may
be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without
the prior written consent of McGraw Hill LLC, including, but not limited to, in any network or other electronic
storage or transmission, or broadcast for distance learning.
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This book is printed on acid-free paper.
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ISBN 978-1-266-07101-0
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DEDICATION
To Mom.
—Michael R. Baye
To Annie, Kate, Elise, and Henry.
—Jeffrey T. Prince

Source: Federal Trade Commission
Source: The Trustees of Indiana
University
vi
About the Authors
Michael R. Baye is the Bert Elwert Professor of Business Economics & Public Policy at
Indiana University’s Kelley School of Business, and currently serves as the Chairman of the
U.S. Consumer Financial Protection Bureau’s Academic Research Council. He also served as
the Director of the Bureau of Economics at the Federal Trade Commission from July 2007 to
December 2008. He received his BS in economics from Texas A&M University in 1980 and
earned a PhD in economics from Purdue University in 1983. Prior to joining Indiana
University, he taught graduate and undergraduate courses at the Pennsylvania State University,
Texas A&M University, and the University of Kentucky. He has held a variety of editorial
posts in economics, marketing, and business, and currently serves as a co-editor for the
Journal of Economics and Management Strategy.
Professor Baye has won numerous awards for his outstanding teaching and research and
teaches courses in managerial economics and industrial organization at the undergraduate,
MBA, and PhD levels. His research has been published in the American Economic Review,
Journal of Political Economy, Econometrica, Review of Economic Studies, Economic Journal,
and Management Science. It has also been featured in The Wall Street Journal, Forbes, the
New York Times, and numerous other outlets. When he is not teaching or engaged in research,
Mike enjoys activities ranging from camping to shopping for electronic gadgets.
Jeffrey T. Prince is Professor of Business Economics & Public Policy at Indiana
University’s Kelley School of Business. He is also the Harold A. Poling Chair in Strategic
Management and Co-Director of the Institute for Business Analytics at Kelley. From
September 2019 to September 2020, he served as Chief Economist at the Federal
Communications Commission. He received his BA in economics and BS in mathematics and
statistics from Miami University in 1998 and earned a PhD in economics from Northwestern
University in 2004. Prior to joining Indiana University, he taught graduate and undergraduate
courses at Cornell University.
Professor Prince has won top teaching honors as a faculty member at both Indiana
University and Cornell and as a graduate student at Northwestern. He has a broad research
agenda within applied economics, having written and published on topics that include de-
mand in technology markets, Internet diffusion, regulation in health care, risk aversion in in-
surance markets, and quality competition among airlines. He is one of a small number of
economists to have published in both the top journal in economics (American Economic
Review) and the top journal in management (Academy of Management Journal). He currently
serves as a co-editor for the Journal of Economics and Management Strategy and is on the
editorial board for Information Economics and Policy. In his free time, Jeff enjoys activities
ranging from poker and bridge to running and racquetball.
Preface

Thanks to feedback from users around the world, Managerial Economics and Business
Strategy remains the best-selling managerial text in the market. We are grateful to all of you
for allowing us to provide this updated and improved edition. Before highlighting some of the
new features of the tenth edition, we would like to stress that the fundamental goal of the
book—providing students with the tools from intermediate microeconomics, game theory,
and industrial organization that they need to make sound managerial decisions—has not
changed. What has changed are the examples used to make managerial economics come to
life for this generation of students, a stronger integration with data-based decision-making,
and an enriched utilization of new technologies (such as Connect) for enhancing the teaching
and learning experiences of instructors and their students.
This book begins by teaching managers the practical utility of basic economic tools such
as present value analysis, supply and demand, regression, indifference curves, isoquants, pro-
duction, costs, and the basic models of perfect competition, monopoly, and monopolistic com-
petition. Adopters and reviewers also praise the book for its real-world examples and because
it includes modern topics not contained in any other single managerial economics textbook:
oligopoly, penetration pricing, multistage and repeated games, foreclosure, contracting, verti-
cal and horizontal integration, networks, bargaining, predatory pricing, principal–agent prob-
lems, raising rivals’ costs, adverse selection, auctions, screening and signaling, search, limit
pricing, and a host of other pricing strategies for firms enjoying market power. This balanced
coverage of traditional and modern microeconomic tools makes it appropriate for a wide vari-
ety of managerial economics classrooms. An increasing number of business schools are
adopting this book to replace (or use alongside) managerial strategy texts laden with anec-
dotes but lacking the microeconomic tools needed to identify and implement the business
strategies that are optimal in a given situation.
This tenth edition of Managerial Economics and Business Strategy has been revised to
include updated examples and problems, but it retains all of the basic content that made pre-
vious editions a success. The basic structure of the textbook is largely unchanged to ensure a
smooth transition to this edition.

KEY PEDAGOGICAL FEATURES

The tenth edition retains all of the class-tested features of previous editions that enhance stu-
dents’ learning experiences and make it easy to teach from this book.

Headlines
As in previous editions, each chapter begins with a Headline that is based on a real-world
economic problem—a problem that students should be able to address after completing the
chapter. These Headlines are essentially hand-picked “mini-cases” designed to motivate
vii
viii Preface

students to learn the material in the chapter. Each Headline is answered at the end of the relevant
chapter—when the student is better prepared to deal with the complications of real-world
­problems. Reviewers, as well as users, of previous editions praise the Headlines not only because
they motivate students to learn the material in the chapter, but also because the answers at the end
of each chapter help students learn how to use economics to make business decisions.

Learning Objectives
Each chapter includes learning objectives designed to enhance the learning experience.
End-of-chapter problems are denoted with the learning objective(s) to which they relate.

Demonstration Problems
The best way to learn economics is to practice solving economic problems. Every chapter con-
tains Demonstration Problems that provide students with detailed answers to help them verify
that they have mastered the material. Select Demonstration Problems also offer a video walk-
through of the problem, explaining the steps along the way. Students can click the link in their
ebook or key in the URL provided to access the videos and solutions. Videos and solutions are
also provided in the Connect Library, under Instructor Resource for instructors. The goal is in
providing this additional guidance is to minimize time spent with students and instructors
­discussing answers to problems, allowing instructors more time to focus on other concepts.

Inside Business Applications

Most chapters offer Inside Business applications boxes to illustrate how theories explained in
the text relate to a host of different business situations. As in previous editions, this feature is
authored to strike a balance between applications drawn from the current economic literature
and the popular press.

Calculus and Non-Calculus Alternatives

Users can easily include or exclude calculus-based material without losing content or continu-
ity. That’s because the basic principles and formulae needed to solve a particular class of
economic problems (e.g., MR = MC) are first stated without appealing to the notation of cal-
culus. Immediately following each stated principle or formula is a clearly marked Calculus
Alternative. Each of these calculus alternatives states the preceding principle or formula in
calculus notation and explains the relation between the calculus-based and non-calculus-based
formulas. More detailed calculus derivations are relegated to chapter Appendices. Thus, the
book is designed for use by instructors who want to integrate calculus into managerial eco-
nomics and by those who do not require students to use calculus.

Variety of End-of-Chapter Problems

Three types of problems are offered. Highly structured but nonetheless challenging Conceptual
and Computational Questions stress fundamentals. These are followed by Problems and
Applications, which are far less structured and, like real-world decision environments, may
contain more information than is actually needed to solve the problem. Many of these applied
problems are based on actual business events.
Additionally, the new Spectrum case that follows Module Group B includes 13 problems
called Memos that have a “real-world feel” and complement the text. All of these case-based
problems may be assigned on a chapter-by-chapter basis as specific skills are introduced, or as
part of a capstone experience.
 Preface ix

Detailed answers to all problems can be found among the instructor resource material
available via Connect.

Case Study
A case study in business strategy, Spectrum—the Spawn of Time Warner Cable and Charter
Communications—Navigates Challenges from Cord Cutting and Mobile Competition follows
Module Group B and was prepared especially for this text. It can be used either as a capstone
case for the course or to supplement individual chapters. The case allows students to apply core
elements from managerial economics to a remarkably rich business environment. Instructors
can use the case as the basis for an “open-ended” discussion of business strategy, or they can
assign specific “memos” (contained at the end of the case) that require students to apply spe-
cific tools from managerial economics to the case. Teaching notes, as well as solutions to all of
the memos, are provided among the instructor resource material available via Connect.

Flexibility
Instructors of managerial economics have genuinely heterogeneous textbook needs. Reviewers
and users continue to praise the book for its flexibility, and they assure us that sections or even
entire chapters can be excluded without losing continuity. For instance, an instructor wishing
to stress microeconomic fundamentals might choose to cover Chapters 2, 3, 4, 5, 8, 9, 10, 11,
and 12. An instructor teaching a more applied course that stresses business strategy might
choose to cover Chapters 1, 2, 3, 5, 6, 7, 8, 10, 11, and some or all of Module Group A. Each
may choose to include additional content (for example, some or all of Module Group B or the
Time Warner Cable case) as time permits. More generally, instructors can easily omit topics
such as present value analysis, regression, indifference curves, isoquants, or reaction functions
without losing continuity.

CHANGES IN THE TENTH EDITION

We have made every effort to update and improve Managerial Economics and Business
Strategy while assuring a smooth transition to the tenth edition. Following is a summary of
the pedagogical improvements, enhanced supplements, and content changes that make the
tenth edition an even more powerful tool for teaching and learning managerial economics and
business strategy.
∙ New and updated mini-cases on topics such as: Google Search, Netflix Pricing, and a
range of mergers.
∙ New and updated end-of-chapter problems.
∙ New and updated Headlines.
∙ New and updated Inside Business applications.
®

∙ New Excel Exercises in Connect. As denoted in the text with an Excel icon, this
edition offers students the ability to get more hands-on practice using Excel.
Excel
∙ Content from Chapters 13 and 14 in the previous edition are now placed in stand- Exercises
alone modules that permit instructors to easily pick-and-choose topics to include along
with their conventional materials.
∙ Spectrum—the Spawn of Time Warner Cable and Charter Communications—Navigates
Challenges from Cord Cutting and Mobile Competition replaces the old Time Warner
Cable Case.
x Preface

Chapter-by-Chapter Changes
∙ Chapter 1 contains a new section discussing how managers make data-driven deci-
sions, setting the stage to incorporate the use of data to solve managerial problems
throughout the remainder of the text. It also contains new and updated examples and
two new end-of-chapter problems centered on the use of data analysis for managerial
decision-making.
∙ Chapter 2 contains two updated and one new Inside Business applications. The new
application discusses globalization and the supply of automobiles from China.
∙ Chapter 3 contains updated examples and several new elasticity tables. It also con-
tains a new Inside Business about strategy in digital markets. In addition, it has a new
section about data-driven demand curves and another new Inside Business application
about the use of data to estimate demand for gamers.
∙ Chapter 4 contains an updated Inside Business application and updated end-of-
chapter problems.
∙ Chapter 5 contains a new Inside Business application on artificial intelligence and
cost minimization. It also includes new sections on data-driven production and cost
functions, and there are two new end-of-chapter problems based on these new sections.
∙ Chapter 6 offers a new Headline on vertical integration, two updated Inside Business
applications, and a new Inside Business application on outsourcing.
∙ Chapter 7 contains a new Headline on the Sprint/T-Mobile merger along with updated
examples and industry data. It also provides a new Inside Business application on
demand elasticities and a new end-of-chapter problem.
∙ Chapter 8 contains an updated Headline and two new end-of-chapter problems.
∙ Chapter 9 contains an updated Inside Business applications and two new end-of-
chapter problems focused on data-driven decision-making.
∙ Chapter 10 contains a new Inside Business application examining Canadian gaso-
line markets, as well as an updated Inside Business application and Demonstration
Problem. It also contains a new end-of-chapter problem on competition between
Google and Amazon in the smart home market.
∙ Chapter 11 contains a new Inside Business application on bundling telecommuni-
cations services to reduce churn. It also includes an updated Headline and Inside
Business application, as well as two new end-of-chapter problems on data-driven
decision-making.
∙ Chapter 12 contains an updated Inside Business application.
∙ Module Group A (formerly Chapter 13) has been transformed into four self-­
contained, concise and easy-to-navigate modules on entry prevention, lessening
­competition, restructuring game timing, and overcoming network effects.
∙ Module Group B (formerly Chapter 14) has been transformed into three self-­
contained, concise and easy-to-navigate modules on regulatory constraint on
market power; regulation of markets with externalities, public goods, or incomplete
information; and government policy and international markets.

Remote Proctoring & Browser-Locking Capabilities

New remote proctoring and browser-locking capabilities, hosted by Proctorio within Connect,
provide control of the assessment environment by enabling security options and verifying the
identity of the student.
 Preface xi

Seamlessly integrated within Connect, these services allow instructors to control stu-
dents’ assessment experience by restricting browser activity, recording students’ activity, and
verifying students are doing their own work.
Instant and detailed reporting gives instructors an at-a-glance view of potential academic
integrity concerns, thereby avoiding personal bias and supporting evidence-based claims.

ACKNOWLEDGMENTS
We thank the many users of Managerial Economics and Business Strategy who provided both
direct and indirect feedback that has helped improve your book. This includes thousands of
students at Indiana University’s Kelley School of Business and instructors worldwide who
have used this book in their own classrooms, colleagues who unselfishly gave up their own
time to provide comments and suggestions, and reviewers who provided detailed suggestions
to improve this and previous editions of the book. We especially thank the following profes-
sors, past and present, for enlightening us on the market’s diverse needs and for providing
suggestions and constructive criticisms to improve this book.

Contributing reviewers for this edition:

Anthony Paul Andrews, Governors
State University
Kelly Blanchard, Purdue University—
West Lafayette
Larry Chavis, University of North
Carolina—Chapel Hill
Kristen Collett-Schmitt, University of
Notre Dame
James Dana, Northeastern University
Tina Das, Elon University
Brooks Depro, Elon University
David Hudgins, Texas A&M
University—Corpus Christi
Jim Lee, Texas A&M University—
Corpus Christi
Abiodun Ojemakinde, Albany State
University
Mark Pingle, University of
Nevada—Reno
Barbara W. K. Son, Anaheim University
Denise Stanley, California State
University—Fullerton

Contributing reviewers for previous editions:

Fatma Abdel-Raouf, Goldey-Beacom College
Burton Abrams, University of Delaware
Rashid Al-Hmoud, Texas Tech University
Anthony Paul Andrews, Governors
State University
Sisay Asefa, Western Michigan University
Simon Avenell, Murdoch University
Narine Badasyan, Murray State University
Joseph P. Bailey, University of Maryland
Dale G. Bails Christian Brothers University
Dean Baim, Pepperdine University
Sheryl Ball, Virginia Polytechnic University
Klaus Becker, Texas Tech University
Richard Beil, Auburn University
Barbara C. Belivieu, University of
Connecticut
Dan Black, University of Chicago
Louis Cain, Northwestern University
Kerem Cakirer, Indiana University
Leo Chan, University of Kansas
Robert L. Chapman, Florida
Metropolitan University
Joni Charles, Texas State
University—San Marcos
Basanta Chaudhuri, Rutgers
University—New Brunswick
xii Preface
Shuo Chen, State University of New York
at Geneseo
Xiujian Chen, State University of New
York—Binghamton University
Kwang Soo Cheong, Johns Hopkins
University
Christopher B. Colburn, Old Dominion
University
Daniel Patrick Condon, Dominican
University
Michael Conlin, Syracuse University
Cristanna Cook, Husson University
Keith Crocker, Penn State University
Ian Cromb, University of Western Ontario
Dean Croushore, Federal Reserve
Wilffrid W. Csaplar Jr., Bethany College
Shah Dabirian, California State University,
Long Beach
Joseph DaBoll-Lavioe, Nazareth College
of Rochester
Robert Daffenbach, University of Oklahoma
George Darko, Tusculum College
Tina Das, Elon University
Ron Deiter, Iowa State University
Jonathan C. Deming, Seattle Pacific
University
Casey Dirienzo, Appalachian State
University
Eric Drabkin, Hawaii Pacific University
Martine Duchatelet, Barry University
Keven C. Duncan, University of Southern
Colorado
Yvonne Durham, Western Washington
University
Jeffrey Edwards, North Carolina
A&T University
Eugene F. Elander, Brenau University
Ibrahim Elsaify, Goldey-Beacom College
David Ely, San Diego State University
Mark J. Eschenfelder, Robert Morris
University
Li Feng, Texas State University–San
Marcos
David Figlio, University of Florida
Ray Fisman, Graduate School of Business,
Columbia University
Silke Forbes, Case Western Reserve
University
David Gerard, Carnegie Mellon University
Sharon Gifford, Rutgers University
Lynn G. Gillette, Northeast Missouri
State University
Otis Gilley, Louisiana Tech University
Roy Gobin, Loyola University
Stephan Gohmann, University of Louisville
Steven Gold, Rochester Institute of
Technology
Julie Hupton Gonzalez, University of
California—Santa Cruz
Thomas A. Gresik, Mendoza College of
Business (University of Notre Dame)
Andrea Mays Griffith, California
State University
Madhurima Gupta, University of
Notre Dame
Carl Gwin, Pepperdine University
Gail Heyne Hafer, Lindenwood College
Karen Hallows, George Mason University
William Hamlen Jr., SUNY Buffalo
Shawkat Hammoudeh, Drexel University
Mehdi Harian, Bloomsburg University
Nile W. Hatch, Marriott School (Brigham
Young University)
Clifford Hawley, West Virginia University
Ove Hedegaard, Copenhagen Business School
Martin Heintzelman, Clarkson University
Steven Hinson, Webster University
Hart Hodges, Western Washington University
Robert L. Holland, Purdue University
Jack Hou, California State University—
Long Beach
Craig Hovey, Brenau University,
Gainesville
Lowel R. Jacobsen, William Jewell College
Thomas D. Jeitschko, Michigan State
University
Anand Jha, Texas A&M International
University

Jaswant R. Jindia, Southern University
Russell Kashian, University of
Wisconsin—Whitewater
Paul Kattuman, Judge Business School
(Cambridge University)
Brian Kench, University of Tampa
Kimberley L. Kinsley, University of
Mary Washington
Peter Klein, University of Georgia,
University of Missouri—Columbia
Audrey D. Kline, University of Louisville
Robert A. Krell, George Mason University
Paul R. Kutasovic, New York Institute
of Technology
W. J. Lane, University of New Orleans
Daniel Lee, Shippensburg University
Dick Leiter, American Public University
Canlin Li, University of California—Riverside
Chung-Ping Loh, University of North
Florida
Vahe Lskavyan, Ohio University—Athens
Heather Luea, Newman University
Nancy L. Lumpkin, Georgetown College
Thomas Lyon, University of Michigan
Richard Marcus, University of
Wisconsin—Milwaukee
Vincent Marra, University of Delaware
Wade Martin, California State University,
Long Beach
Catherine Matraves, Michigan State
University—East Lansing
John Maxwell, Indiana University
David May, Oklahoma City University
Alan McInnes, California State University,
Fullerton
Christopher McIntosh, University
of Minnesota Duluth
Kimberly L. Merritt, Oklahoma Christian
University
Edward Millner, Virginia Commonwealth
University
John Moran, Syracuse University
Shahriar Mostashari, Campbell University
Preface xiii
John Morgan, Haas Business School
(University of California—Berkeley)
Ram Mudambi, Temple University
Francis Mummery, California State
University—Fullerton
Inder Nijhawan, Fayetteville State University
Albert A. Okunade, University of Memphis
Walton M. Padelford, Union University
Darrell Parker, Georgia Southern University
Harlan Platt, Northeastern University
Stephen Pollard, California State University,
Los Angeles
Dwight A. Porter, College of St. Thomas
Stanko Racic, University of Pittsburgh
Eric Rasmusen, Indiana University
Matthew Roelofs, Western Washington
University
Christian Roessler, National University
of Singapore
Stefan Ruediger, Arizona State University
Bansi Sawhney, University of Baltimore
George L. Schatz, Maine Maritime Academy
Craig Schulman, University of Arkansas
Karen Schultes, University of
Michigan—Dearborn
Peter M. Schwartz, University of North
Carolina
Richard Alan Seals Jr., Oklahoma
City University
Charles Sebuhara, Virginia Technical
University
Edward Shinnick, University College
Ireland
Dean Showalter, Southwest Texas
State University
Chandra Shrestha, Virginia Commonwealth
University
Karen Smith, Columbia Southern University
John Stapleford, Eastern University
Mark Stegeman, University of Arizona
Ed Steinberg, New York University
Barbara M. Suleski, Cardinal Stritch College
Caroline Swartz, University of North
Carolina Charlotte
xiv Preface

Joseph K. Tanimura, San Diego State Thomas White, Fontbonne University

University
Bill Taylor, New Mexico Highlands
University
Roger Tutterow, Kennesaw State College
Nora Underwood, University of
Central Florida
Lskavyan Vahe, Ohio University
Lawrence White, Stern School of Business
(New York University)
Leonard White, University of Arkansas
Keith Willett, Oklahoma State
University—Stillwater
Mike Williams, Bethune Cookman College
Richard Winkelman, Arizona State
University
Laura Youderian, Xavier University
Eduardo Zambrano, University of
Notre Dame
Rick Zuber, University of North Carolina,
Charlotte

We thank Adam Huenecke, Kelly Delso, Tim Vertovec, and Kevin Moran at McGraw Hill for
all they have done to make this project a success. We also thank those whose who contributed
to the development of this edition: Mark Wilson of West Virginia State University and Susan
Bell of Seminole State College for their careful review of Connect content, Patricia Turco of
Milwaukee Area Technical College for her PowerPoint development, and our team of testbank
authors who worked to ensure the content is error free: Archana Dube and Denise Stanley of
California State Fullerton, Casey Dirienzo of Elon University, and Abiodun Ojemakinde of
Albany State University, as well as those who contributions informed the prior edition: Mitchell
Baye, Patrick Scholten, Eric Schmidbauer, Susan Kayser, Kyle Anderson, and Vikram Ahuja
for suggestions and assistance during various stages of the revision, and Ellie Mafi-Kreft,
Haizhen Lin, and Steven Kreft, who graciously agreed to class test the Connect features in their
classrooms. Finally, we thank our families for their continued love and support.
As always, we welcome your comments and suggestions for the next edition. Please feel
free to write to us directly at mbaye@indiana.edu or jeffprin@indiana.edu.

Michael R. Baye
Jeffrey T. Prince

SUPPLEMENTS
We know the content and reliability of new editions and book supplements are of utmost impor-
tance to users of our book. Because of this, and unlike most other managerial economics books,
we personally are involved in crafting and accuracy checking virtually every content update and
supplement for our book. Below we discuss popular features of some of the supplements that
have been greatly expanded for this edition. The following ancillaries are available for quick
download and convenient access via the instructor resource material available through Connect.

Cases
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pricing, third-degree price discrimination, bundling, Herfindahl indices, game theory, and
 Preface xv

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 Brief Contents

1 The Fundamentals of Managerial Economics 1

2 Market Forces: Demand and Supply 40

3 Quantitative Demand Analysis 74

4 The Theory of Individual Behavior 103

5 The Production Process and Costs 137

6 The Organization of the Firm 179

7 The Nature of Industry 206

8  anaging in Competitive, Monopolistic, and Monopolistically

M
Competitive Markets 231

9 Basic Oligopoly Models 274

10 Game Theory: Inside Oligopoly 306

11 Pricing Strategies for Firms with Market Power 345

12 The Economics of Information 378

Module Group A: Strategies to Change the Business Environment 412

Module Group B: Government in the Marketplace 441

CASE STUDY Spectrum—the Spawn of Time Warner Cable and Charter

Communications—Navigates Challenges from Cord Cutting and Mobile
Competition 473

Glossary 503

Additional Readings and References 511

Name Index 530

xx General Index 536

Contents

CHAPTER 1 LEARNING MANAGERIAL ECONOMICS 29

ANSWERING THE HEADLINE 30
The Fundamentals of Managerial
KEY TERMS AND CONCEPTS 30 / CONCEPTUAL AND
Economics 1 COMPUTATIONAL QUESTIONS 30 / PROBLEMS AND
HEADLINE: Amcott Loses $3.5 Million; APPLICATIONS 32 / SELECTED READINGS 37 /
Manager Fired 1 APPENDIX A: THE CALCULUS OF MAXIMIZING NET
INTRODUCTION 2 BENEFITS 37 / APPENDIX B: EVALUATING THE
OVERALL FIT OF THE REGRESSION LINE 38
The Manager 2
Economics 3 INSIDE BUSINESS 1–1: The Goals of Firms in Our Global
Managerial Economics Defined 3 Economy 6

THE ECONOMICS OF EFFECTIVE MANAGEMENT 4 INSIDE BUSINESS 1–2: Profits and the Evolution of the
Computer Industry 9
Identify Goals and Constraints 4
Recognize the Nature and Importance of Profits 4 INSIDE BUSINESS 1–3: Joining the Jet Set 16
Economic versus Accounting Profits 4
The Role of Profits 5
The Five Forces Framework and Industry CHAPTER 2
Profitability 6
Understand Incentives 10 Market Forces: Demand and Supply 40
Understand Markets 11
HEADLINE: Samsung and Hynix Semiconductor to Cut
Consumer–Producer Rivalry 11 Chip Production 40
Consumer–Consumer Rivalry 11
INTRODUCTION 41
Producer–Producer Rivalry 11
Government and the Market 11 DEMAND 41
Recognize the Time Value of Money 12 Demand Shifters 42
Present Value Analysis 12 Income 43
Present Value of Indefinitely Lived Assets 14 Prices of Related Goods 44
Use Marginal Analysis 16 Advertising and Consumer Tastes 45
Discrete Decisions 17 Population 45
Continuous Decisions 19 Consumer Expectations 46
Incremental Decisions 20 Other Factors 46
Make Data-Driven Decisions 21 The Demand Function 46
Obtaining Estimates Using Regression 22 Consumer Surplus 48
Evaluating the Statistical Significance of Estimated SUPPLY 49
Coefficients 24 Supply Shifters 50
Regression for Nonlinear Functions and Multiple Input Prices 50
Regression 26 Technology or Government Regulations 50
A Caveat 29 Number of Firms 50

xxi
xxii Contents

Substitutes in Production 51 CROSS-PRICE ELASTICITY 84

Taxes 51 INCOME ELASTICITY 87
Producer Expectations 53 OTHER ELASTICITIES 88
The Supply Function 53
OBTAINING ELASTICITIES FROM DEMAND
Producer Surplus 54
FUNCTIONS 89
MARKET EQUILIBRIUM 55 Elasticities for Linear Demand Functions 89
PRICE RESTRICTIONS AND MARKET Elasticities for Nonlinear Demand Functions 90
EQUILIBRIUM 57 DATA-DRIVEN DEMAND CURVES 93
Price Ceilings 57
ANSWERING THE HEADLINE 96
Price Floors 61
SUMMARY 96 / KEY TERMS AND CONCEPTS 96 /
COMPARATIVE STATICS 62
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 97 /
Changes in Demand 63 PROBLEMS AND APPLICATIONS 99 / SELECTED
Changes in Supply 64 READINGS 102
Simultaneous Shifts in Supply and Demand 65
INSIDE BUSINESS 3–1: Calculating and Using the Arc
ANSWERING THE HEADLINE 67 Elasticity: An Application to the Housing Market 80
SUMMARY 68 / KEY TERMS AND CONCEPTS 68 / INSIDE BUSINESS 3–2: Inelastic Demand for Prescription
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 68 / Drugs 83
PROBLEMS AND APPLICATIONS 70 / SELECTED
INSIDE BUSINESS 3–3: Using Cross-Price Elasticities to
READINGS 73
Guide Strategies in Digital Markets 86
INSIDE BUSINESS 2–1: Asahi Breweries Ltd. and the
INSIDE BUSINESS 3–4: Using Big Data to Estimate
Asian Recession 44
Demand Elasticities for Millions of Gamers 95
INSIDE BUSINESS 2–2: International Trade Agreements
and the Supply Curve 52
INSIDE BUSINESS 2–3: Unpopular Equilibrium Prices 56 CHAPTER 4
INSIDE BUSINESS 2–4: Price Ceilings and Price Floors
around the Globe 60 The Theory of Individual Behavior 103
INSIDE BUSINESS 2–5: Globalization and the Supply of HEADLINE: Packaging Firm Uses Overtime Pay to
Automobiles 64 Overcome Labor Shortage 103
INSIDE BUSINESS 2–6: Using a Spreadsheet to Calculate INTRODUCTION 104
Equilibrium in the Supply and Demand Model 65 CONSUMER BEHAVIOR 104
CONSTRAINTS 108
The Budget Constraint 108
CHAPTER 3 Changes in Income 110
Changes in Prices 112
Quantitative Demand Analysis 74
CONSUMER EQUILIBRIUM 113
HEADLINE: Walmart Hoping for Another Big Holiday COMPARATIVE STATICS 114
Showing 74 Price Changes and Consumer Behavior 114
INTRODUCTION 75 Income Changes and Consumer Behavior 116
THE ELASTICITY CONCEPT 75 Substitution and Income Effects 118
OWN PRICE ELASTICITY OF DEMAND 76 APPLICATIONS OF INDIFFERENCE CURVE
Elasticity and Total Revenue 77 ANALYSIS 119
Factors Affecting the Own Price Elasticity 80 Choices by Consumers 119
Available Substitutes 81 Buy One, Get One Free 119
Time 81 Cash Gifts, In-Kind Gifts, and Gift Cards 120
Expenditure Share 82 Choices by Workers and Managers 123
Marginal Revenue and the Own Price Elasticity of A Simplified Model of Income–Leisure Choice 123
Demand 82 The Decisions of Managers 124
 Contents xxiii

THE RELATIONSHIP BETWEEN INDIFFERENCE CURVE THE COST FUNCTION 156

ANALYSIS AND DEMAND CURVES 126 Short-Run Costs 157
Individual Demand 126 Average and Marginal Costs 158
Market Demand 127 Relations among Costs 160
ANSWERING THE HEADLINE 128 Fixed and Sunk Costs 162
SUMMARY 129 / KEY TERMS AND CONCEPTS 129 / Algebraic Forms of Cost Functions 163
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 130 Long-Run Costs 164
/ PROBLEMS AND APPLICATIONS 132 / SELECTED Economies of Scale 165
READINGS 135 / APPENDIX: A CALCULUS APPROACH Data-Driven Cost Functions 165
TO INDIVIDUAL BEHAVIOR 135 A Reminder: Economic Costs versus Accounting
INSIDE BUSINESS 4–1: Indifference Curves and Risk Costs 166
Preferences 107 MULTIPLE-OUTPUT COST FUNCTIONS 167
INSIDE BUSINESS 4–2: The Budget Constraint and Credit Economies of Scope 167
Cards 111 Cost Complementarity 167
INSIDE BUSINESS 4–3: Price Changes and Inventory ANSWERING THE HEADLINE 169
Management for Multiproduct Firms 115 SUMMARY 170 / KEY TERMS AND CONCEPTS 170 /
INSIDE BUSINESS 4–4: Income Effects and the Business CONCEPTUAL AND COMPUTATIONAL QUESTIONS 171 /
Cycle 117 PROBLEMS AND APPLICATIONS 173 / SELECTED
INSIDE BUSINESS 4–5: The “Deadweight Loss” of In-Kind READINGS 177 / APPENDIX: THE CALCULUS OF
Gifts 124 PRODUCTION AND COSTS 177
INSIDE BUSINESS 4–6: Public Health Centers and INSIDE BUSINESS 5–1: Where Does Technology Come
Output-Oriented Incentives 128 From? 144
INSIDE BUSINESS 5–2: Artificial Intelligence and
Cost-Minimizing Inputs 154
INSIDE BUSINESS 5–3: The Affordable Care Act,
CHAPTER 5 Employer Mandate, and Input Substitution 157
INSIDE BUSINESS 5–4: International Companies Exploit
The Production Process and Costs 137 Economies of Scale 166
HEADLINE: Boeing Loses the Battle but Wins
the War 137
INTRODUCTION 138
THE PRODUCTION FUNCTION 138
CHAPTER 6
Short-Run versus Long-Run Decisions 139
Measures of Productivity 140 The Organization of the Firm 179
Total Product 140
HEADLINE: AT&T Finalizes Acquisition of Time Warner
Average Product 140
Inc. 179
Marginal Product 140
The Role of the Manager in the Production INTRODUCTION 180
Process 142 METHODS OF PROCURING INPUTS 181
Produce on the Production Function 142 Purchase the Inputs Using Spot Exchange 181
Use the Right Level of Inputs 142 Acquire Inputs under a Contract 181
Algebraic Forms of Production Functions 145 Produce the Inputs Internally 182
Algebraic Measures of Productivity 146 TRANSACTION COSTS 182
Isoquants 148 Types of Specialized Investments 183
Isocosts 150 Site Specificity 183
Cost Minimization 151 Physical-Asset Specificity 183
Optimal Input Substitution 153 Dedicated Assets 184
Data-Driven Production Functions 155 Human Capital 184
xxiv Contents

Implications of Specialized Investments 184 Industry Concentration 208

Costly Bargaining 184 Measures of Industry Concentration 209
Underinvestment 184 The Concentration of U.S. Industry 210
Opportunism and the “Hold-Up Problem” 185 Limitations of Concentration Measures 211
OPTIMAL INPUT PROCUREMENT 186 Technology 212
Spot Exchange 186 Demand and Market Conditions 213
Contracts 187 Potential for Entry 215
Vertical Integration 190 CONDUCT 216
The Economic Trade-Off 191 Pricing Behavior 216
MANAGERIAL COMPENSATION AND THE Integration and Merger Activity 217
PRINCIPAL–AGENT PROBLEM 193 Vertical Integration 218
FORCES THAT DISCIPLINE MANAGERS 195 Horizontal Integration 218
Incentive Contracts 195 Conglomerate Mergers 219
External Incentives 196 Research and Development 219
Reputation 196 Advertising 220
Takeovers 196 PERFORMANCE 220
THE MANAGER–WORKER PRINCIPAL–AGENT Profits 220
PROBLEM 196 Social Welfare 220
Solutions to the Manager–Worker Principal–Agent THE STRUCTURE–CONDUCT–
Problem 196 PERFORMANCE PARADIGM 221
Profit Sharing 196 The Causal View 221
Revenue Sharing 196 The Feedback Critique 221
Piece Rates 197 Relation to the Five Forces Framework 222
Time Clocks and Spot Checks 198 OVERVIEW OF THE REMAINDER OF THE BOOK 223
ANSWERING THE HEADLINE 199 Perfect Competition 223
SUMMARY 199 / KEY TERMS AND CONCEPTS 199 / Monopoly 223
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 200 Monopolistic Competition 223
/ PROBLEMS AND APPLICATIONS 201 / SELECTED Oligopoly 224
READINGS 204 / APPENDIX: AN INDIFFERENCE CURVE ANSWERING THE HEADLINE 225
APPROACH TO MANAGERIAL INCENTIVES 204
SUMMARY 225 / KEY TERMS AND CONCEPTS 226 /
INSIDE BUSINESS 6–1: The Cost of Using an Inefficient CONCEPTUAL AND COMPUTATIONAL QUESTIONS 226
Method of Procuring Inputs 186 / PROBLEMS AND APPLICATIONS 227 / SELECTED
INSIDE BUSINESS 6–2: What Determines Contract Length READINGS 230
in Franchising? 190 INSIDE BUSINESS 7–1: The 2017 North American
INSIDE BUSINESS 6–3: The Role and Growth of Industry Classification System (NAICS) 213
Outsourcing 191 INSIDE BUSINESS 7–2: The Elasticity of Demand at the
INSIDE BUSINESS 6–4: Incentives Matter for Firm and Market Levels 215
Performance 198 INSIDE BUSINESS 7–3: The Evolution of Market Structure
in the Computer Industry 224

CHAPTER 7 CHAPTER 8
The Nature of Industry 206 Managing in Competitive, Monopolistic,
HEADLINE: T-Mobile and Sprint Finalize Merger 206 and Monopolistically Competitive
INTRODUCTION 207 Markets 231
MARKET STRUCTURE 207 HEADLINE: McDonald’s New Buzz: Specialty
Firm Size 207 Coffee 231
 Contents xxv

INTRODUCTION 232 CONDITIONS FOR OLIGOPOLY 275

PERFECT COMPETITION 232 THE ROLE OF BELIEFS AND STRATEGIC
Demand at the Market and Firm Levels 233 INTERACTION 275
Short-Run Output Decisions 234 PROFIT MAXIMIZATION IN FOUR
Maximizing Profits 234 OLIGOPOLY SETTINGS 277
Minimizing Losses 237 Sweezy Oligopoly 277
The Short-Run Firm and Industry Supply Curves 240 Cournot Oligopoly 278
Long-Run Decisions 242 Reaction Functions and Equilibrium 279
MONOPOLY 243 Isoprofit Curves 283
Monopoly Power 243 Changes in Marginal Costs 285
Sources of Monopoly Power 245 Collusion 287
Economies of Scale 245 Stackelberg Oligopoly 289
Economies of Scope 246 Bertrand Oligopoly 292
Cost Complementarity 246 COMPARING OLIGOPOLY MODELS 294
Patents and Other Legal Barriers 246 Cournot 294
Maximizing Profits 247 Stackelberg 295
Marginal Revenue 247 Bertrand 295
The Output Decision 251 Collusion 295
The Absence of a Supply Curve 253 CONTESTABLE MARKETS 296
Multiplant Decisions 254 ANSWERING THE HEADLINE 297
Implications of Entry Barriers 255
SUMMARY 298 / KEY TERMS AND CONCEPTS 299 /
MONOPOLISTIC COMPETITION 257 CONCEPTUAL AND COMPUTATIONAL QUESTIONS 299 /
Conditions for Monopolistic Competition 257 PROBLEMS AND APPLICATIONS 301 / SELECTED
Profit Maximization 258 READINGS 304 / APPENDIX: DIFFERENTIATED-
Long-Run Equilibrium 260 PRODUCT BERTRAND OLIGOPOLY 305
Implications of Product Differentiation 262 INSIDE BUSINESS 9–1: OPEC Members Can’t Help but
OPTIMAL ADVERTISING DECISIONS 263 Cheat 288
ANSWERING THE HEADLINE 265 INSIDE BUSINESS 9–2: Commitment in Stackelberg
SUMMARY 265 / KEY TERMS AND CONCEPTS 266 / Oligopoly 290
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 266 INSIDE BUSINESS 9–3: Price Competition and the
/ PROBLEMS AND APPLICATIONS 268 / SELECTED Number of Sellers: Evidence from Online and
READINGS 272 / APPENDIX: THE CALCULUS OF PROFIT Laboratory Markets 293
MAXIMIZATION 272 / APPENDIX: THE ALGEBRA OF INSIDE BUSINESS 9–4: Using a Spreadsheet to Calculate
PERFECTLY COMPETITIVE SUPPLY FUNCTIONS 273 Cournot, Stackelberg, and Collusive Outcomes 296
INSIDE BUSINESS 8–1: Peugeot-Citroën of France: A
Price-Taker in China’s Auto Market 238
INSIDE BUSINESS 8–2: Patent, Trademark, and Copyright
CHAPTER 10
Protection 248 Game Theory: Inside Oligopoly 306
INSIDE BUSINESS 8–3: Product Differentiation,
Cannibalization, and Colgate’s Smile 258 HEADLINE: Bring Back Complimentary Drinks! 306
INTRODUCTION 307
OVERVIEW OF GAMES AND STRATEGIC THINKING 307
CHAPTER 9 SIMULTANEOUS-MOVE, ONE-SHOT GAMES 308
Basic Oligopoly Models 274 Theory 308
Applications of One-Shot Games 312
HEADLINE: Crude Oil Prices Fall, but Consumers in Pricing Decisions 312
Some Areas See No Relief at the Pump 274 Advertising and Quality Decisions 313
INTRODUCTION 275 Coordination Decisions 314
xxvi Contents

Monitoring Employees 315 INTRODUCTION 346

Nash Bargaining 316 BASIC PRICING STRATEGIES 346
INFINITELY REPEATED GAMES 318 Review of the Basic Rule of Profit Maximization 346
Theory 318 A Simple Pricing Rule for Monopoly and Monopolistic
Review of Present Value 318 Competition 347
Supporting Collusion with Trigger Strategies 318 A Simple Pricing Rule for Cournot Oligopoly 350
Factors Affecting Collusion in Pricing Games 321 STRATEGIES THAT YIELD EVEN GREATER
Number of Firms 321 PROFITS 352
Firm Size 321 Extracting Surplus from Consumers 352
History of the Market 321 Price Discrimination 352
Punishment Mechanisms 322 Two-Part Pricing 356
An Application of Infinitely Repeated Games to Block Pricing 359
Product Quality 323 Commodity Bundling 361
FINITELY REPEATED GAMES 324 Pricing Strategies for Special Cost
Games with an Uncertain Final Period 324 and Demand Structures 363
Repeated Games with a Known Final Period: Peak-Load Pricing 363
The End-of-Period Problem 327 Cross-Subsidies 364
Applications of the End-of-Period Problem 328 Transfer Pricing 365
Resignations and Quits 328 Pricing Strategies in Markets with Intense
The “Snake-Oil” Salesman 329 Price Competition 367
MULTISTAGE GAMES 329 Price Matching 367
Theory 329 Inducing Brand Loyalty 368
Applications of Multistage Games 332 Randomized Pricing 369
The Entry Game 332 ANSWERING THE HEADLINE 370
Innovation 333 SUMMARY 371 / KEY TERMS AND CONCEPTS 371 /
Sequential Bargaining 334 CONCEPTUAL AND COMPUTATIONAL QUESTIONS 372
ANSWERING THE HEADLINE 336 / PROBLEMS AND APPLICATIONS 374 / SELECTED
READINGS 377
SUMMARY 336 / KEY TERMS AND CONCEPTS 337 /
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 337 INSIDE BUSINESS 11–1: Pricing Markups as Rules of
/ PROBLEMS AND APPLICATIONS 340 / SELECTED Thumb 348
READINGS 344 INSIDE BUSINESS 11–2: Is Price Discrimination Bad for
INSIDE BUSINESS 10–1: Hollywood’s (not so) Beautiful Consumers? 357
Mind: Nash or “Opie” Equilibrium? 311 INSIDE BUSINESS 11–3: Bundling to Reduce Churn in
INSIDE BUSINESS 10–2: Cola Wars in India 313 Telecommunications 362
INSIDE BUSINESS 10–3: Collusion in Canadian Gasoline INSIDE BUSINESS 11–4: The Prevalence of
Markets 322 Price-Matching Policies and Other Low-Price
Guarantees 368
INSIDE BUSINESS 10–4: Multimarket Contact and Price
Competition 324 INSIDE BUSINESS 11–5: Kroger Combines Pricing
Strategies 369
INSIDE BUSINESS 10–5: Entry Strategies in International
Markets: Sprinkler or Waterfall? 331 INSIDE BUSINESS 11–6: Randomized Pricing in the
Airline Industry 370

CHAPTER 11
Pricing Strategies for Firms with Market CHAPTER 12
Power 345 The Economics of Information 378
HEADLINE: Mickey Mouse Lets You Ride “for Free” at HEADLINE: Firm Chickens Out in the FCC Spectrum
Disney World 345 Auction 378
 Contents xxvii

INTRODUCTION 379 MODULE GROUP A

THE MEAN AND THE VARIANCE 379
Strategies to Change the Business
UNCERTAINTY AND CONSUMER BEHAVIOR 381
Environment 412
Risk Aversion 381
Managerial Decisions with Risk-Averse INTRODUCTION 412
Consumers 382 MODULE 1: ENTRY PREVENTION 412
Consumer Search 384 Limit Pricing to Prevent Entry 413
UNCERTAINTY AND THE FIRM 386 Theoretical Basis for Limit Pricing 413
Risk Aversion 387 Limit Pricing May Fail to Deter Entry 414
Producer Search 389 Linking the Preentry Price to Postentry Profits 415
Profit Maximization 389 Commitment Mechanisms 415
UNCERTAINTY AND THE MARKET 390 Learning Curve Effects 416
Asymmetric Information 390 Incomplete Information 417
Adverse Selection 392 Reputation Effects 417
Moral Hazard 393 Dynamic Considerations 418
Signaling and Screening 394 KEY TERMS AND CONCEPTS 420 / PRACTICE
AUCTIONS 396 PROBLEMS 420
Types of Auctions 397 INSIDE BUSINESS M1–1: Limit Pricing and the “Southwest
English Auction 397 Effect” 419
First-Price, Sealed-Bid Auction 397 MODULE 2: LESSENING COMPETITION 421
Second-Price, Sealed-Bid Auction 398 Predatory Pricing 422
Dutch Auction 398 Raising Rivals’ Costs 424
Information Structures 399 Strategies Involving Marginal Cost 425
Independent Private Values 399 Strategies Involving Fixed Costs 426
Correlated Value Estimates 400 Strategies for Vertically Integrated Firms 426
Optimal Bidding Strategies for Risk-Neutral KEY TERMS AND CONCEPTS 427 / PRACTICE
Bidders 400 PROBLEMS 427
Strategies for Independent Private Values
INSIDE BUSINESS M2–1: Business Strategy at
Auctions 400
Microsoft 424
Strategies for Correlated Values Auctions 402
Expected Revenues in Alternative Types of MODULE 3: RESTRUCTURING GAME TIMING 429
Auctions 403 First-Mover Advantages 429
ANSWERING THE HEADLINE 405 Second-Mover Advantages 432
SUMMARY 406 / KEY TERMS AND CONCEPTS 406 / KEY TERMS AND CONCEPTS 432 / PRACTICE
CONCEPTUAL AND COMPUTATIONAL QUESTIONS 406 PROBLEMS 432
/ PROBLEMS AND APPLICATIONS 408 / SELECTED INSIDE BUSINESS M3–1: First to Market, First to Succeed?
READINGS 411 Or First to Fail? 431
INSIDE BUSINESS 12–1: Risk Aversion and the Value of MODULE 4: OVERCOMING NETWORK EFFECTS 434
Selling the Firm: The St. Petersburg Paradox 382 What Is a Network? 434
INSIDE BUSINESS 12–2: Obfuscation to Counter Low Network Externalities 435
Internet Search Costs 385 First-Mover Advantages Due to Consumer
INSIDE BUSINESS 12–3: Groucho Marx the Lock-In 436
Economist? 392 Using Penetration Pricing to “Change the Game” 437
INSIDE BUSINESS 12–4: Second-Price Auctions on KEY TERMS AND CONCEPTS 438 / PRACTICE
eBay 398 PROBLEMS 439 / SELECTED READINGS 439
INSIDE BUSINESS 12–5: Auctions with Risk-Averse INSIDE BUSINESS M4–1: Network Externalities and
Bidders 405 Penetration Pricing by Yahoo! Auctions 437
xxviii Contents

MODULE GROUP B BUSINESS AND MARKETS 477

Video Programming 477
Government in the Marketplace 441 Internet Services 479
INTRODUCTION 441 Telephone 479
MODULE 5: REGULATORY CONSTRAINT ON MARKET COMPETITION 480
POWER 441 Cable Companies 480
Market Power 441 Comcast 480
Government Tools to Constrain Market Power 442 Comcast/Time Warner Cable Proposed
Antitrust Policy 443 Acquisition 481
Price Regulation 446 Charter Communications 481
Rent Seeking 449 Other Cable Players 482
KEY TERMS AND CONCEPTS 451 / PRACTICE Satellite 482
PROBLEMS 451 AT&T DirecTV 482
INSIDE BUSINESS M5–1: European Commission Moves Dish Network 483
to Protect Small Businesses 444 Telephone Providers 483
INSIDE BUSINESS M5–2: Electricity Deregulation 448 Verizon 483
MODULE 6: REGULATION OF MARKETS WITH AT&T 483
EXTERNALITIES, PUBLIC GOODS, OR INCOMPLETE Other Companies 484
INFORMATION 454 Online Video Distributors 484
Externalities 454 Netflix 484
The Clean Air Act 456 Amazon Prime Video 485
Public Goods 458 Hulu 485
Incomplete Information 461 Google/YouTube 485
Rules against Insider Trading 462 SUPPLIERS 486
Certification 462 Cable Networks 486
Truth in Lending 463 Broadcast Networks 486
Truth in Advertising 463 Sports Programming 487
Enforcing Contracts 465 Carriage Disputes 487
KEY TERMS AND CONCEPTS 465 / PRACTICE Over-the-Top Content 488
PROBLEMS 465
MARKET TRENDS AND CONSUMER BEHAVIOR 488
INSIDE BUSINESS M6–1: Canada’s Competition Bureau 464 Digital Video Recorders (DVRs) 488
MODULE 7: GOVERNMENT POLICY AND Cutting the Cord 489
INTERNATIONAL MARKETS 467 Going Mobile 489
Quotas 467
REGULATION IN THE CABLE INDUSTRY 489
Tariffs 469
Carriage of Broadcast Television 490
Lump-Sum Tariffs 469
Cable Pricing Regulation 490
Excise Tariffs 470
Net Neutrality 490
KEY TERMS AND CONCEPTS 471 / PRACTICE
Connect America Fund 490
PROBLEMS 471 / SELECTED READINGS 472
CHALLENGES 490
CASE STUDY CASE-BASED EXERCISES 491
MEMOS 491
Spectrum—the Spawn of Time Warner
Cable and Charter Communications— SELECTED READINGS AND REFERENCES 498/
APPENDIX: EXHIBITS 499
Navigates Challenges from Cord Cutting
and Mobile Competition 473 Glossary 503
HEADLINE 474
Additional Readings and References 511
BACKGROUND 475
Time Warner Cable History 475 Name Index 530
Cable Television History 475 General Index 536
Broadband Internet 476
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tragedies that a man can know had beaten upon it; and yet it was so
strong and so calm.... It was all like a dream to me. Then this
wonderful talk with Mr. Routledge at dinner. Afterward, I asked his
name, but he withheld it laughingly—in such a way that I took no
offense—only wondered at it.”
“But you learned his name——”
“Yes, I will tell you. That night after he left me, I went to my room and
thought a long time on the things he had said. I remember one of his
sayings impressed me greatly—that we of the occident had learned
to suffer only through our excesses—but India through her famines.
He intimated that the latter process is better for the soul.... It was too
hot to think of sleep, so I went out to walk in that still, stricken place.
At the far end of the street, I saw a candle-light and heard the voice
of a white man. And that voice I shall never forget—so low was it, so
thrilling and gentle. I remember the words—they were printed on
some inner wall of my brain. This is what the voice said:
“‘... Night and morning, I shall send you my blessing, Routledge, my
brother. Morning and evening, until we meet again in the Leper
Valley, you shall know that there is a heart that longs for the good of
your life and your soul. Good-by.’... I hurried back, lest it be thought
that I was eavesdropping. The man who spoke was the white man in
native garb who had emerged in the afternoon from that hut of
unburied dead. The man whom he addressed as ‘Routledge’—and
thus I learned his name—was the one who had talked to me so
brilliantly at dinner. A third sat in the candle-light—a very aged
Hindu.... It is all very memorable to me, Miss Cardinegh.”
Again and again he told the story, or parts of it, to the woman; also of
the doings of Routledge the next morning, before the English came.
Noreen thanked him brokenly at last and hurried back to her father’s
state-room. Mr. Jasper saw very little of the lady during the rest of
the voyage, and lost her entirely at Shanghai, where in stopping over
he is left behind the movement of the present narrative—a worthy,
growing American who will have much to tell his sister of Madras and
the interior, in spite of missing the illustrious Annie Besant,
pronounced “Bessant” for esoteric reasons.
The incident was like oxygen to the tired woman. Nearing Shanghai,
the Empress steamer nosed the winter zone, and Jerry Cardinegh
was not well enough to go ashore. Noreen had shopping to do, and
took the afternoon launch up the river for an hour in the city. Snow
was falling. On the Bund, Noreen encountered Finacune, who had
come down from Tokyo to get a glance at affairs from the outside. He
declared that little or nothing was to be learned in the Japanese
capital. Already the nation was constructing an impenetrable
atmosphere about her great war. Finacune was going back on the
Empress. As the time was short, they parted to attend their several
errands, planning to meet at the launch later.
With her parcels, Noreen hurried back from the shops to the Bund in
the winter twilight. Finacune, who had not seen her, was fifty feet
ahead, also making for the water-front. She saw him stop short,
stare for an instant at the profile of a huge, gaunt figure—in the great
frieze coat! It was then that the mighty leap of her heart forced a cry
from her throat.... Routledge, staring out over the darkening river,
started at her voice and the touch of her hand. For a moment he
pressed his fingers against his eyes as if trying to shut out some
haunt from his brain. Then he, spoke slowly:
“I did not think that there were substances fine enough in the world
to make a woman so beautiful——”
“Routledge-san! Oh, God, there is only a moment or two!”
“I should not have been here,” he began vaguely. “Some one may
see you talking with me.”
“Don’t speak of that!... Oh, words are such puny things now! I
thought we understood each other about that. Tell me, are you ill?
You look——”
“No, not ill, Noreen. I shall be tiptop when I get up yonder into the
field.... You startled me. I think I was in a kind of dream about you,
and then you——” The old dread returned to his mind. He wondered
if the man who had passed had been Finacune. “Are you alone? I
wouldn’t have anybody see you talking to me.”
All that was in her heart was called forth by the spectacle of her
giant’s pallor and seeming weakness. Proudly she put all this into
words:
“I would not care if the whole world saw me with you. It is the same
with me—as I told you on the way to Charing Cross! What you may
think—does not make me afraid. You have done no wrong. I want to
be with you—but the time is not yet come. It is dreadful. Why do you
forget all that we told each other—all that I told you?”
“I have not forgotten,” he said huskily. “The scars of that hour in the
carriage—leaving you that hour—would not suffer me to forget, but I
should not speak this way. I wrong you speaking this way. I am only
a world-tramp between wars.... And this war I must watch alone—
from the edge where the others do not go. God, what a coward I
should be—to chance your happiness——”
The launch whistled—a tearing in her brain. The call to her father
was instant and inexorable.... But she clung to Routledge—drew him
to the very edge of the stone-pier, blind to the glances of men and
women who brushed by.
“Quick, tell me of Jerry!” he said. “Is he out for the war?”
“My father is dying a slow death out yonder on the ship. I must go to
him. Already he is dead to wars and friends—all but dead to me!”
She added imperiously, “When my work is finished with him, I shall
keep my promise, Routledge-san. I shall come to you!”
“No—I’m going where you could not follow——”
“I shall find you!”
“But I have nothing between wars—no British press now, Noreen—
only a begging-bowl in India. Why, my name is a whispered hate!...
Just a begging-bowl in India, Noreen—and your sweet faith in me.”
She was splendid in the ardor of her answer:
“That begging-bowl in India—I shall carry and share with you! I shall
take for mine—that name of whispered hate!... Routledge-san, you
have done no wrong—but I should love you, if you led the armies of
the world—to burn London!”
He helped her aboard, as the bow was putting out into the river. “In a
time like this there are not big enough words for you, Noreen
Cardinegh.”
“Oh, Routledge-san,—until I come, take care of your life for me!” she
called.... Then, fearless, full-voiced, she added, standing in the
snowy dusk: “And when I come—I shall take care of your life for you
—even in the Leper Valley!”
He watched her through the big, slow-falling flakes, until the launch
disappeared behind the white stern of an American gunboat.
 FIFTEENTH CHAPTER
NOREEN CARDINEGH APPEARS AFTER
MIDNIGHT IN THE BILLIARD-ROOM OF THE
IMPERIAL—AN INEFFABLE REMEMBRANCE

Finacune caught a train for Tokyo, after disembarking at Yokohama,

an hour or two before the Cardineghs. He wanted to prepare the way
at the Imperial for the coming of the dean and his daughter. It was
dark when he reached Shimbashi station and crossed the Ginza to
the now-famous hotel. Certain of the English correspondents were
gathered in the lobby, it being not yet time to dress for dinner. These
Finacune beckoned to the billiard-room, and, standing at the head of
the farthest table, glanced over the faces to be sure that none but
the trusted British were present. Then he whispered impressively:
“Scene: the Bund at Shanghai, snowy twilight; time, five days ago.
Looking out upon the darkening river, ‘... a face thin as a dead
camel’s and yellow-white like coral!’ That’s one of his own
sentences, and God pity or punish the sorrow of his face—as you
like——”
“Cut out the scenario,” ordered Bingley. “Who was it?”
“The great frieze coat.”
Bingley was first to break the silence.
“Nice raw state of affairs,” he remarked savagely. “I s’pose he has
caught on with one of those fluttered newspapers of New York. They
are grabbing up anybody over here, even the remittance-men, so
they won’t have to pay expenses out. Rather raw deal, I call it,—to
be forced to ride with a traitor in this campaign.”
It was the austere Feeney who answered darkly, “Recall, ‘Horse-
killer,’ that Routledge rides alone.”
“I can’t see yet why the secret service doesn’t delegate a man to get
him,” Bingley whispered.
They had not heard that a venture of the kind had failed at Madras.
“There is a time for all things,” Feeney replied. “England never
forgets a man like——”
“Are you quite sure of the face you saw?” inquired Benton Day, the
new man of the Review. His tone was troubled. His work was cut out
for him—to keep up the war-reputation of the old paper of fat
columns.
“Surely,” Finacune said cheerfully, “unless the bottom dropped out of
my brain-pan.”
Trollope sniffed ponderously, and was about to comment when the
little man of the Word resumed:
“Also, I am permitted to say—and this with a great and sweet joy—
that our dean, war’s own favorite, Jerry Cardinegh, came up with me
from Shanghai on the Empress, and that he will be here to-night with
his daughter, Miss Noreen.”
The announcement was acclaimed.
“I heard he was coming,” said Feeney, “but how am I to meet the old
champion—me, holding down his old chair-of-war on the Witness.”
“He’ll never think of it,” said Finacune. “Old Jerry is nearly out of
sight—over the bay. He didn’t leave his state-room coming up—only
let me see him once. His daughter is with him day and night. The old
man thought he’d like to get into the zone of war once more—before
he goes out on the last campaign, where we all ride alone.”
It is to be observed that the little Word man did not tell all he saw on
the Bund at Shanghai.
The men repaired to the buffet to break the strain. Those were heavy
days—those early February days in Tokyo. War was inevitable, but
not declared. Tokyo was sort of pleased at her own forbearance. The
vaccine of European civilization had worked with fullness and
dispatch. Here was proof: the Russian minister had been allowed to
clear, double-eyed and teeth still straight. The mobs in the street did
not profess to understand the value of allowing the enemy to depart
personally intact—but it was being civilized. The world was watching
the young yellow nation’s first venture in humane war; after which, if
she conducted herself prettily, the world would be pleased to admit
her into the first flight of the powers, where all things having to do
with economy, polity, expansion, revenue, and survival are done in a
finished fashion. England was watching—and stood behind her.
Japan must conduct herself in such a way as not to drag England
into the conflict.
Japanese infants played soldiers; Japanese policemen played
soldiers; rickshaw coolies, beneath the contempt of a soldier,
dreamed of future incarnations when they should evolve into
soldiers; Japanese merchants snuffled, rubbed their damp hands
together, and wept internally because the Great Wheel of Fate had
not skited them off into the military class, instead of among the low-
brows of the shops. And the soldiers themselves—how they strutted
and performed in the streets, critically mirroring each other and
bowing profoundly, blind to all glory and sorrow not of the soldier,
and important as a grist of young doctors just turned loose with their
diplomas among the ills of the world.... Aye, funny and pitiful, the
young Power looked in its Western pants and guns.
What did England think—smiling back at the peace of her Indian
borders—of these wee, wet-nosed, scabby-headed Islanders (with
their queer little cruet-stands buckled between their kidneys), in full
cry with “Banzai Niphon” from cape to cape? What England thought
was not what England said, as she reserved the front pages of her
daily press for Japanese victories—whether or no. Not exactly an
ally in spirit was wise old England, but an ally in letterpress—the
veriest Titan of a press-agent.... Funny and pitiable indeed was the
ranting, tramping Japanese infantry in the streets of Tokyo—funnier
than stage infantry—quite like string-pulled marionettes of papier
maché; but let the truth be told, the truth that rises clear from the
final adjustment of objects in the perspective: The oil of all the
chlorates, nitrates, and fulminates filled those queer little kidney-
cruets; and these same little Japanese infantrymen proved packages
—papier maché packages, if you like—of lyddite, bellite, cordite,
romite, hellite, and other boiled-down cyclones.

On one of those ugly gray afternoons of early February, Benton Day

of the Review received a cablegram from his chief in London,
Dartmore. There are few men who would express themselves
ironically by cable at the London-Tokyo rate of toll. Dartmore did it,
and the message follows, with flesh and organs added to the cipher-
skeleton:
The Review thought you would be interested to know that
Japan has declared war and smashed part of the Russian
fleet. This news from New York. Kindly inform Tokyo war-
office, which I understand is just a step from your hotel.
Benton Day had come up from common things by strong, hard, well-
planned work. He had known few defeats, and these cut deeply. The
cable from Dartmore was the worst whipping of his career. Gray with
shame, he sought the billiard-room of the hotel, where he found an
animated group of British and American correspondents who had
just heard the news—ten hours after it had been printed in London
and New York. He found that Dartmore alone had taken pains to be
ironical in the matter. The truth was exactly as ungetatable in Tokyo
as in Mombassa—until the war-office chose to give it up. Benton Day
was only to blame in so far as he was not a telepathist. This
knowledge eased him greatly, but did not detract from his anger at
Dartmore—an emotion which is bad for a young man to take out on
his first big campaign. The little sentence in the cablegram regarding
the fact that London had received the news from New York, held big
interest for Feeney, the saturnine.
“Japan was busy last night,” he communed. “Her Mr. Togo smashed
the Russians off Port Arthur, and her little Mr. Uriu, off Chemulpo. It’s
about time,” he added with a trace of Indiana humor, “Japan was
declaring war. But the thing that gets me is, how did New York
know?... Finacune, my young friend, was it you who suggested
something about the great frieze coat catching on with New York
papers?”

Harrowing weeks at the Imperial followed, while armies augmented,

navies fought in the dark, and the bearers of the light of the world
made newspaper copy out of heathen temples and Japanese street
scenes. Free lances fled to outer ports, there to hearken unto the
tales of refugees and weary the world. And the names of these, the
Japanese carefully ticketed to Failure, and severed from Opportunity
forever.
The Blue Boar, Trollope, wore best of all. He bathed in many springs
throughout the empire, peeked into strange quarters of both capitals,
and ate and drank after the fashion of those who are formed of arcs
and not of angles. From time to time he cabled his paper three words
of hope, and eight words of expense account. Trollope strolled down
the menus in all parts of Niphon—native and European menus—with
fine relish, and waited serenely for the time when he should lean and
harden in the field, his sleeves rolled up—one hand covering the
strategy of armies, the other at a cable-end, and his sweating face
reflecting the pink and pearly flush of fame.
It was not so with the others. Finacune was ragged and restless. The
pale Talliaferro looked twice for his own shadow. Feeney’s dark
fighting-face wasted and hardened, until it seemed hewn from a
block of brown bone; and Trollope’s serene and changeless calm
wrought upon Bingley’s nerves like an active poison.
These two did not pretend to speak at the last. The Horse-killer took
on the look (his gray eyes were cold and immutable as corner
stones, anyway) as if he would spur over a sea of dead men’s faces
to get a big tale and a free cable. It would not have been so bad
except that the London papers, coming in now with the first cables of
the correspondents, showed a consistent garbling and distortion of
their reports. Home writers occupied miles of space, placed Togo
along with Lord Nelson, and Mutsuhito with Gladstone—a deep
planned, conscienceless campaign of fact-mutilation for the extolling
of Japanese character and mettle. New York, young in war-handling,
was inclined to follow London’s diplomatic lead, against the reports
of her own men. February and March ended before the first batch of
the British correspondents were informed that they could take the
field with Kuroki’s first army.
Feeney and Finacune remained in the billiard-room that last night at
the Imperial, long after the rest had gone. These two men had pulled
apart from the others in pulling together—the most florid with the
dullest of writers; the showiest with the deepest. It had been an
evening of rousing festivity. Possibly because these two had drunk
less than the others; or possibly because their hopes for the field had
been prolonged and mangled for such a length of time that they
could not sleep now until they were actually booming down the
Tokaido, Feeney and Finacune were billiarding idly after one o’clock
in the morning and cooling the fever of the night’s stronger spirits
with long, chilled glasses of soda, lightly flavored with Rhenish wine.
Jerry Cardinegh had come down for a moment early in the evening
for a word of parting. For days none had seen him below; and only a
few of his older friends were admitted to the big, dim room,
overlooking the park of the Government buildings—where a woman
lived and moved, lost to light and darkness, and struggled every inch
with the swift encroachments of the inevitable. Noreen’s father relied
upon her, as upon air and a place to lie. God knows what vitality he
drew from the strong fountains of her life to sustain his last days.
Incessantly active, Noreen Cardinegh was worn to a brighter lustre,
as if fatigue brought out the fineness of her human texture—a
superlative woman who held her place and her dreams. Finacune
had loved her for years. He was closer to her own romance than any
of her father’s friends; and the little man perceived with an agony of
which few would have thought him capable, that his own chance was
not worth the embarrassment of telling her. Indeed, Finacune told no
one. This was his best room, and locked. Noreen Cardinegh was the
image there, beyond words, almost an abstraction. This Word man
was rather a choice spirit, if not a great one. He was thinking of
Noreen now, as he knocked the balls around. She had appeared
with her father earlier in the night, and had stood behind him under
the old Moorish arch at the entrance to the billiard-room—darkness
behind her, and a low table-chandelier in front....
Finacune was thinking, too, of the old man whom she had helped
down-stairs to say good-by to the boys. Cardinegh had been his
boyish ideal. He would not be seen again—and what a ghastly
travesty was his last appearance!... Jerry had entered walking rigidly,
his limbs like wood, a suggestion of chaos in the shaking, aimless
hands; the shaven face all fallen about the mouth; all the stirring
history of an earth-wise man, censored and blotted from the flame-
rimmed eyes; the temples blotched with crimson and the mind
struggling with its débris like Gilliat against sea and sand and sky.
And the words the dean had uttered—nothings that meant death.
Feeney had just carefully and neatly made a three-cushion carom,
with the remark that he could do it again on horseback, when there
was a light, swift tread upon the stairway, a rushing in the hall, light
as a blown paper, and Noreen Cardinegh burst upon them—half a
torrent, half a spirit, indescribable altogether. The souls of the two
men divined her message before she spoke, but their brains were
slower. And their eyes were startled. To Finacune, it became an
ineffable portrait—the frightened face, white as pearl and set in gold;
the dark silk waist, unfastened at the throat; the red-gold hair
dressed and wound seemingly in Mother Nature’s winds; the face
refined in the whitest fires of earth; her eyes like twin suns behind
smoked glass; and the lips of Noreen—lips like the mother of a
prophet.
“Oh, come quickly!” she said, and was gone.
Finacune dashed up the stairway three at a stride, but he never
overtook her—a fact for profound speculation afterward. She was
bending over the edge of the bed, sustaining her father, when he
entered. Cardinegh stared at him wildly for a second; then
hearkened to Feeney’s footsteps in the hall. When the latter entered,
the dean turned imploringly to his daughter.
“Where’s Routledge?” he gasped. “He said he’d come back.”
A single jet of gas was burning in the big room. With a nod of her
head, Noreen signified for the men to answer.
“I haven’t heard from him, Jerry,” Feeney faltered.
“Eh, Gawd!—he’d better come quickly—or he won’t see old Jerry. I’m
going out—not with you, boys—but afield. I want to see Routledge.
He said he’d come back and bring his book—done under the
pressure of British hate. I told you, didn’t I—he took the hate from
me?... I told Noreen.... Feeney! Finacune!... It was I who gave the
Russian spies the Shubar Khan papers!... Don’t leave me, Noreen.
Pour me a last drink, Feeney.... Gawd! but I’ve travelled in the
shadow of death for two years—afraid—afraid to tell—afraid of his
coming back! I can see now—he wouldn’t come back!... I’m not
afraid now—but I’ve had my hell two years.... You would have found
it in my papers, Noreen. Show them to the men—cable the truth to
London——”
“Jerry, Jerry,” whispered old Feeney, who was stricken, “did Ireland
get the best of you at the last?”
Finacune nudged him angrily. “Jerry,” he exclaimed, “don’t go out
with this stuff on your lips. We know you’re doing it for Routledge
——”
The woman turned upon him, but did not speak.
“I did it for Ireland—but it failed!” Cardinegh answered. “These brown
mongrels are fighting in Manchuria the Russians that England should
have fought on the Indian border!... Eh, Gawd!—the dark has been
long a-liftin’, deere—but it’s gone—and you know from me, without
the papers!... Ah, Nory, child of my heart——” He was straining
upward toward her face, as if he could not see her well. “... ’Tis your
mother—’tis your mother—I’m off, darlin’——”
“The old toast,” Feeney muttered. “It came true—the toast we all
stood to in Calcutta!”
The woman held but the ashes of a man in her arms, and they drew
her away at last. They thought from the look of her face that she
would fall, but she did not. Instead, she said with sudden swiftness:
“Here are the papers. He told me all, just before I called for you. I
wanted you both to hear. It is true. You must cable to-night to the
war-office in London—to the owners of your papers—to all those
who know the story. Then the secret service must be told—lest they
do Routledge-san further hurt. It must be done now. Tell the other
men to cable before they go out. I will cable, too.... My father is
guilty. We went back to Tyrone before the Bhurpal trouble—to the
little town where he found my mother, in Tyrone. When he saw the
British troops quartered on that starving, sunken little place—his
mind gave way. He had the papers then, which he gave afterward to
the Russian spies!”
All this the woman spoke before she wept.
 SIXTEENTH CHAPTER
CERTAIN CIVILIANS SIT TIGHT WITH KUROKI,
WHILE THE BLOOD-FLOWER PUTS FORTH HER
BRIGHT LITTLE BUDS

They were in a troop-train at last, down the Tokaido, the old cedar-
lined highway of the daimios,—Feeney, Finacune, Trollope, Bingley,
other English and as many more Americans. The road was a brown
streak of troop-laden trains off to embarkation ports. Japan was
sending out her willing wealth of men to a brown and sullen land of
such distances as would balk the short-sighted Japanese eye, so
used to toy sizes in all things—toy trees, terraces, hills, and roads,
whose ends are mostly in view. These men were off to fight now in
the outer court of “the last and the largest empire, whose map is but
half unrolled.”
Bingley was sitting apart as usual, already in puttees and Bedford
cords, a blanket-roll underfoot and a light, travelling type-mill in a
leather-case by his side. Bingley was brimming with the morbid,
moody passion for Bingley triumphs. A great type of the militant
Englishman this, with his stiff jaw and strong-seasoned blood, utterly
painless to almost everything but the spur of ambition; identified
peculiarly, penetratingly, with Bingley and no other; the six feet of
animal named Bingley, in a soft shirt and Bingley cords. He was
sombrely glad this April morning to be started for the field at last.
Presently the Thames, London, the world, would hear the name of
Bingley again—and the name would mean a giant grappling with
“monster heroisms” in the midst of Asia and armies. The revelation
and death of Jerry Cardinegh the night before had a personal aspect
from Bingley’s point of view. It was that Routledge, vindicated, would
have a free hand again. He would probably oust Benton Day from
the Review and seek to regain his old supremacy. Routledge would
require lots of handling, delicate and daring, to be downed and
dimmed.
To Feeney and Finacune, the events of the night before had taken a
place among the great military crises of their experience. They had
cabled the morning hours away, as the other Englishmen had done,
urged by the woman. Indeed, the American correspondents were not
a little disturbed by the unwonted activity of the Londoners at a time
when, to them, all was done. What the confession of Jerry Cardinegh
meant to the English is difficult adequately to express. Routledge
had always been outré and mysterious. The great treachery adjusted
itself to him with a degree of readiness, since it is easier to identify a
brilliant crime with an individual held loftily, than with one in the more
immediate reaches of the public comprehension. But that old Jerry,
their dean, their master of many services, their idol and chief, should
have turned this appalling trick against the British arms which he had
helped to make famous—this was a heart-jolt which bruised the
twinings of a hundred sentiments. Feeney was an Irishman, and
could understand the Cardinegh-passion, probably better than the
others, but he could not understand its expression in treachery. To
him there was only one explanation—madness....
They discerned the Pacific from the Hankone mountains, boomed
through big, strange towns to Kyoto; then Sasebo, the troop-ships,
and the landing at a Korean base, where they learned with bitterness
that a second siege of waiting had just begun. The world outside
now was but a wordless buzzing of voices, as from a locked room.
They were at Anju when the first brush happened at Chengju (a neat
little rout of Cossacks). They were at Chengju when Kuroki occupied
Wiju, regardless of the growling of the Bear. They were at
Yongampho, in the last few hours of April, when Kuroki crossed the
Yalu, ten miles northeast, and fought the first great battle, named
after the river. Always it was this way—a day or two’s march behind
the business-end of the army.
It had been a dead delay in Tokyo; but it was a wait lively with
aggravations now—the wisp of fragrant hay forever dangling in
scent. An English military attaché arriving late from Seoul brought
the word that the cables of the correspondents reached their papers
from seven to fifteen days late; and then with lineaments of the text
effaced by censorship—stale, egoless, costly messages. At this word
one of the American scribes crumpled under the strain and went out
into the Yellow Sea in a junk, a mad dream in his brain to meet the
sea-god, Togo, face to face. Old Feeney, accustomed to discuss
strategies with generals, was spurred to such a distemper that he
cabled to be recalled. It is significant that his message was the first
of the war to go through the Japanese censor untouched by the blue
pencil.
Aye, and when the silent red stream of wounded began to trickle
back from the Yalu fight, it required a man to keep himself reined
down to a fox-trot. It was color, war-color, this back-throw from the
weltering fields. Even this stopped, and Kuroki seemed hung forever
in the hills about Fengwangcheng. The civilians breathed hard those
weeks, and lived in an atmosphere burned from human rage. Always
excepting Trollope, the Blue Boar, who had a feeling for China. He
studied the deep, rutty Chinese roads through the hills (back of the
army), some of them worn into formidable ravines—eroded by bare
human feet and the showers of centuries. There were strange little
shrines and monasteries high in those grim hills, and Trollope filled a
note-book with their names and history. There are strata of mystery
under the cuticle of China of which the raw young mind of the white
man can only conceive a tithe—and then only in the ecstasy of
concentration. And what names he found—Road of the Purple
Emperor; Spring of the Whispering Spirit; Cascade of the Humming-
bird’s Wing; Cataract of the Sombre Clouds; Grotto of the Adulteress’
Death—not names of mere flowery choosing, but names made florid
by the necessities of a people whose history is so long that a poetic
glamour has fallen upon it. And the Blue Boar found much to eat of a
weird flavory sort, and kept his poundage.
What strategy was this which held a big, fat, pompous army inactive
through a golden month of campaigning like this June? Bingley
exclaimed that Kuroki was so inflated by the Yalu victory that he was
content to hunt butterflies for the rest of the summer. The rumble of
real war reached the writers from time to time. Apparently, the other
Japanese generals were not like this gray-haired Fabius—Kuroki of
the first army. A man named Oku, it was reported, had landed a
second army at Pitsewo, half-way down the east coast of Liaotung,
had bored straightway across some devilishly steep passes and cut
off the fortress, Port Arthur, from the mainland. The story of this fight
was insufferable poison to the white men with Kuroki. It had taken
place on a narrow neck of land, where sits high the town of Kinchow,
joining the little peninsula of the fortress to the big Liao peninsula
above. The rock-collared neck of land is memorable now by a hill
called Nanshan—the battle’s name. Oku burned five thousand dead
after the fight, but he had cut off Port Arthur for the siege, and made
possible the landing of one Nogi with a third Japanese army at Dalny
—cheap at twice the price. Japanese gunboats and torpedoes at sea
on the west had helped Oku get the strangle-hold on the neck of
land, while a Russian fleet had bombarded from the bay on the east.
What torture to believe this—that at last in the history of the world
armies and navies had met in a single action! It was almost
unthinkable to be camping with Kuroki in the ancient Chinese hills,
while such a panorama unfolded for the eyes of other men—a battle
such as the gods would put on flesh to witness.
Finally the word was brought in by the Chinese, who knew all things,
that this jumping-bean, Oku, had left the fortress to Nogi and the
third army, and leaped north to join a fourth army, under Nodzu, who
had effected a perfect landing at Takushan. Oku whipped poor
Stackelberg on the journey, Telissu being the historic title of this
incident of his flying march. Thus Yalu, Nanshan, and Telissu were
fought without even a smell of smoke for Bingley, Feeney, Finacune,
Trollope, and others. It is to be noted that even Trollope blanched at
the great war story the world missed by not letting him in on
Nanshan. That was one battle for a Tolstoi. The English civilians sat
together on a breezy, sweet-scented hill and watched the sun go
down on one of those June evenings. Feeney was writing, the pad
resting upon his knee.
“What did you say was the name of your new book?” Finacune
inquired.
“‘Sitting Tight with Kuroki; or, The Wild Flowers of Manchuria,’”
grumbled the old man.
Into the group presently came Major Inuki, the Japanese officer
assigned to watch over the correspondents, to see that none
escaped, to see that none learned anything but generalities, to
furnish unlimited courtesy and apologetic ramifications that stretched
from Kirin to Port Arthur. Inuki also supplied universes of unverifiable
information, having to do with vague Japanese miracles and vast
Russian casualties. He took off his hat now and bowed all around,
inhaled a long breath with a hiss through his sparkling teeth, and
snuffled violently.
“It iss more dan quite possible we will remain here for to-morr’, my
dear fren’s. In such case would it not be of good to instruk your
servan’s to ereck the tents—more stolidity?”
Feeney reached over and gravely clutched the flapping trouser-leg of
his Chinese coolie. “Jean Valjean,” he said, “you are instruk to ereck
tents—more stolidity.”
“Me plentee slabee,” said Jean.
The odor of supper was abroad in the camp of the noncombatants,
and the twilight was deep in the valley of young corn. Feeney and
Finacune ate in silence. These two were closer together—close as
only two male adults can be who have lived long alone in broad
areas, sharing toil and irritation and peril; apart from women, but akin
in memories and ambition. Feeney had ridden with the greatest of
the nineteenth-century generals. He was being herded now close to
war, but out of range of any good to his calling. He was thinking of
Nanshan—what a battle to have added to his string! Finacune was
thinking of the world’s greatest woman—how she had come down
like a spirit to the billiard-room that last night in Tokyo—and with
what exacting zeal she had caused him and the others to cable away
the last vestige of glory from the name she bore.
“Blot up another piece of tea, Feeney,” he muttered, “and cheer up.”
“I was just about to suggest, my vivid young friend, that if you spilled
any more gloom on this outfit, I should burst into tears,” Feeney
replied.
There was a long silence. “What?” said Feeney.
“I’m a hare-lipped cock-roach, if it isn’t wonderful!” Finacune
observed in an awed tone.
“What?”
“Suppose now—just now—suppose a white woman—all in a soft
summer gown and blowing golden hair—should walk through this
camp? Think of it!”
“I did—twenty years ago,” said Feeney.
“Think of it now,” Finacune persisted raptly, leaning back against his
saddle with a pot of tea in his hand. “The mere sight of her would
jam a sweetheart or a wife, or both, into the brain of every man
present—the first kiss or a last, dim light somewhere, a word or a
caress—the unspeakable miracle that comes to every man some
time—that of a woman giving herself to him!... Ah, that’s it, you old
crocodile! It would all come back on live wires—if a woman walked
through here—to each man his romance—hot throats, dry lips, and
burning eyes. The world holds a woman for us all—even for you,
yoked to the war-hag; and if memories were tangible, the right
woman would sweep in upon us to-night from five continents and
seven seas. A woman! The mere name is a pang to us lonely devils
out here in the open, where we blister with hate because we are not
allowed to smell blood. Hell!—one would think I had just broken out
of a gas-house.”
“Twenty years ago——” Feeney remarked.
“Hark, listen to that young American sing——”
“You listen to me, young man,” Feeney said forcefully. “These lines,
with which I am about to cleanse you from carnality are by my young
friend Kipling:
“White hands cling to the tightened rein,
Slipping the spur from the booted heel.
Tenderest voices cry, ‘Turn again,’
Red lips tarnish the scabbarded steel;
High hopes faint on the warm hearthstone—
He travels the fastest who travels alone.”
“‘Sing the heretical song I have made,’” Finacune added, entirely
uncooled.... “I’ve heard fat London club men expatiate for hours on
what they might have done if they hadn’t married—the beasts! They
couldn’t talk that way to us, sons of Hagar, out here in this unsexed
wilderness! I’d tell ’em what it would mean to me—to be married to
one woman! It would mean more to me to be allowed to listen to
whispered revelations from one woman’s lips—than——”
“Dam’ you, quiet down!”
“Guess I better had.”
“Shall we have a hand at crib?” Feeney asked softly.
“Not now—please.”
There was a dusky splash of red in the sky beyond the western hills,
and a faint red foam above. The evening was soft and sweet, and
tobacco as fragrant as tropical islands.
“Gad! I’m red-blooded,” Finacune murmured after a moment. “I could
squeeze milk out of a pound note. I’d like to see a dog-fight. If there’s
a man-fight to-morrow, I’ll throttle Nookie-san, slide down into the
stoke-hold, and see how this new brand of fighter shovels hell.”
“If you leave the woman behind,” Feeney grumbled, “I’ll go with you.”
“A man is an awful animal—when he’s fit as I am,” Finacune added.
“The gang is certainly moonstruck to-night. Listen to that ungodly
American sun-spotter sing.”
“There is an island fair, set in an eastern sea;
There is a maid keeping her tryst with me,
In the shade of the palm, with a lover’s delight,
Where it’s always the golden day or the silvery night—
... My star will be shining, love,
For you in the moonlight calm,
So be waiting for me by the eastern sea
In the shade of the shelt’ring palm.”
“That’s just the point—her star’ll be shining—only, it may not,”
Finacune whispered.