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Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Preface xix 13 Best-Practice Tactics: Game Theory 446
...
About the Authors XXlll 13A Entry Deterrence and Accommodation
Games 497
14 Pricing Techniques and Analysis 508
PART I 14A The Practice of Revenue Management 545

INTRODUCTION 1
1 Introduction and Goals of the Firm 2
PARTV
2 Fundamental Economic Concepts 28
ORGANIZATIONAL ARCHITECTURE
AND REGULATION 557
PART II 15 Contracting, Governance, and
DEMAND AND FORECASTING 63 Organizational Form 558
15A Auction Design and Information
3 Demand Analysis 64
Economics 594
4 Estimating Demand 101
16 Government Regulation 623
4A Problems in Applying the Linear
17 Long-Term Investment Analysis 660
Regression Model 129
5 Business and Economic Forecasting 141
APPENDICES
6 Managing in the Global Economy 178
6A Foreign Exchange Risk Management 232 A The Time Value of Money A-1
B Differential Calculus Techniques
in Management B-1
PART Ill C Tables C-1
D Check Answers to Selected
PRODUCTION AND COST 235 End-of-Chapter Exercises D-1
7 Production Economics 236 Glossary G-1
7A Production Economics of Renewable and Index I-1
Exhaustible Natural Resources, Advanced Notes
Material 272
8 Cost Analysis 282 WEB APPENDICES
9 Applications of Cost Theory 307 A Consumer Choice Using Indifference
Curve Analysis
B International Parity Conditions
PART IV C Linear- Programming Applications
D Capacity Planning and Pricing against a
PRICING AND OUTPUT DECISIONS: Low-Cost Competitor: A Case Study of
STRATEGY AND TACTICS 333 Piedmont Airlines and People Express
10 Prices, Output, and Strategy: Pure and E Pricing of Joint Products and Transfer Pricing
Monopolistic Competition 334 F Decisions under Risk and Uncertainty
11 Price and Output Determination: G Maximization of Production Output Subject
Monopoly and Dominant Firms 384 to a Cost Constraint, Advanced Material
12 Price and Output Determination: H Long-Run Costs with a Cobb-Douglas
Oligopoly 411 Production Function, Advanced Material
••
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
VII
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
Preface xix Case Exercise: Designing a Managerial
About the Authors
... Incentives Contract
XXlll 23
Case Exercise: Shareholder Value of Renewable
Energy from Wind Power at Hydro Co.:
PART I Is RE < C? 24

INTRODUCTION 1 2 Fundamental Economic Concepts 28

Chapter Preview 28
1 Introduction and Goals of the Firm 2 Managerial Challenge: Why Charge
Chapter Preview 2 $25 per Bag on Airline Flights? 28
Managerial Challenge: How to Achieve 2-1 Demand and Supply: A Review 29
Sustainability: Southern Company 2-1a The Diamond-Water Paradox and the
Electric Power Generation 2 Marginal Revolution 31
1-1 What Is Managerial Economics? 4 2-1 b Marginal Utility and Incremental Cost
1-2 The Decision-Making Model 5 Simultaneously Determine Equilibrium
1-2a The Responsibilities of Management 5 Market Price 32
2-1c Individual and Market Demand Curves 33
What Went Right/What Went Wrong: 2-1d The Demand Function 34
Saturn Corporation 6 2-1e Import-Export Traded Goods 36
1-2b Moral Hazard in Teams 6
1-3 The Role of Profits 8 International Perspectives: Exchange Rate
1-3a Risk-Bearing Theory of Profit 8 Impacts on Demand: Cummins Engine
1-3b Temporary Disequilibrium Theory of Profit 9 Company 36
1-3c Monopoly Theory of Profit 9 2-1f Individual and Market Supply Curves 37
1-3d Innovation Theory of Profit 9 2-1g Equilibrium Market Price of Gasoline 38
1-3e Managerial Efficiency Theory of Profit 9 2-2 Marginal Analysis 43
1-4 Objective of the Firm 9 2-2a Total, Marginal, and Average Relationships 44
1-4a The Shareholder Wealth-Maximization 2-3 The Net Present Value Concept 48
Model of the Firm 10 2-3a Determining the Net Present Value of an
1-5 Separation of Ownership and Control: Investment 48
The Principal-Agent Problem 11 2-3b Sources of Positive Net Present Value
1-Sa Divergent Objectives and Agency Conflict 11 Projects 50
1-Sb Agency Problem 13 2-3c Risk and the NPV Rule 51
1-6 Implications of Shareholder Wealth 2-4 Meaning and Measurement of Risk 52
2-4a Probability Distributions 52
Maximization 15
2-4b Expected Values 53
What Went Right/What Went Wrong: Eli 2-4c Standard Deviation: An Absolute
Lilly Depressed by Loss of Prozac Patent 15 Measure of Risk 54
1-6a Caveats to Maximizing Shareholder Value 17 2-4d Normal Probability Distribution 54
1-6b Residual Claimants 19 2-4e Coefficient of Variation: A Relative
1-6c Goals in the Public Sector and Measure of Risk 56
Not-for-Profit Enterprises 19
What Went Right/What Went Wrong:
1-6d Not-for-Profit Objectives 20
1-6e The Efficiency Objective in
Long-Term Capital Management (LTCM) 56
Not-for-Profit Organizations 20 2-5 Risk and Required Return 57
Summary 21 Summary 59
Exercises 22 Exercises 59
•
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
IX
x Contents

Case Exercise: Revenue Management at 4-2 A Simple Linear Regression Model 105
American Airlines 61 4-2a Assumptions Underlying the Simple
Linear Regression Model 106
4-2b Estimating the Population Regression
PART II Coefficients 107
4-3 Using the Regression Equation to Make
DEMAND AND FORECASTING 63 Predictions 110
4-3a Inferences about the Population
3 Demand Analysis 64 Regression Coefficients 112
Chapter Preview 64 4-3b Correlation Coefficient 115
4-3c The Analysis of Variance 116
Managerial Challenge: Health Care
4-4 Multiple Linear Regression Model 118
Reform and Cigarette Taxes 64 4-4a Use of Computer Programs 118
3-1 Demand Relationships 66 4-4b Estimating the Population Regression
3-1 a The Demand Schedule Defined 66 Coefficients 118
3-1 b Constrained Utility Maximization and 4-4c Using the Regression Model to Make
Consumer Behavior 67 Forecasts 118
What Went Right/What Went Wrong: 4-4d Inferences about the Population
Chevy Volt 71 Regression Coefficients 119
3-2 The Price Elasticity of Demand 72 4-4e The Analysis of Variance 121
3-2a Price Elasticity Defined 73 s~m~ 122
3-2b Interpreting the Price Elasticity: The Exercises 122
Relationship between the Price Elasticity Case Exercise: Soft Drink Demand Estimation 126
and Sales Revenue 76
3-2c The Importance of Elasticity-Revenue
4A Problems in Applying the Linear
Relationships 82 Regression Model 129
3-2d Factors Affecting the Price Elasticity of 4A-1 Introduction 129
Demand 84 4A-1a Autocorrelation 129
4A-1b Heteroscedasticity 131
International Perspectives: Free Trade 4A -1c Specification and Measurement Errors 132
and the Price Elasticity of Demand: 4A-1d Multicollinearity 133
Nestle Yogurt 86 4A-1e Simultaneous Equation Relationships
3-3 The Income Elasticity of Demand 87 and the Identification Problem 133
3-3a Income Elasticity Defmed 87 4A-2 Nonlinear Regression Models 136
3-4 Cross Elasticity of Demand 90 4A-2a Semilogarithmic Transformation 136
3-4a Cross Price Elasticity Defined 90 4A-2b Double-Log Transformation 136
3-4b Interpreting the Cross Price Elasticity 90 4A-2c Reciprocal Transformation 137
3-4c Antitrust and Cross Price Elasticities 90 4A-2d Polynomial Transformation 137
3-4d An Empirical Illustration of Price, Summary 138
Income, and Cross Elasticities 92 Exercises 138
3-5 The Combined Effect of Demand
Elasticities 92 5 Business and Economic Forecasting 141
Summary 93 Chapter Preview 141
Exercises 94 Managerial Challenge: Excess Fiber Optic
Case Exercise: Polo Golf Shirt Pricing 97 Capacity at Global Crossing Inc. 141
Case Exercise: Fifty Years of Sales 5-1 The Significance of Forecasting 143
Maximization at Volkswagen 98 5-2 Selecting a Forecasting Technique 143
5-2a Hierarchy of Forecasts 143
4 Estimating Demand 101 5-2b Criteria Used to Select a Forecasting
Chapter Preview 101 Technique 144
5-2c Evaluating the Accuracy of Forecasting
Managerial Challenge: Demand for
Models 144
Whitman's Chocolate Samplers 101
4-1 Statistical Estimation of the Demand What Went Right/What Went Wrong:
Function 102 Crocs Shoes 144
~nec::iBc~tion of the Morlel
4-1a C'dpyrTgh"t HH t;-3 Alternative ForecastinQ Techniaues 145
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 Contents xi

5-4 Deterministic Trend Analysis 145 6-5a Import-Export Flows and Transaction
5-4a Components of a Time Series 145 Demand for a Currency 192
5-4b Some Elementary Time-Series Models 146 6-5b The Equilibrium Price of the U.S. Dollar 193
5-4c Secular Trends 147 6-5c Speculative Demand, Government
5-4d Seasonal Variations 150 Transfers, and Coordinated Intervention 193
5-5 Smoothing Indicators 152 6-5d Short-Term Exchange Rate Fluctuations 194
5-5a Moving Averages 153 6-6 Determinants of Long-Run Trends in
5-5b First-Order Exponential Smoothing 155 Exchange Rates 195
5-6 Barometric Techniques 158 6-6a The Role of Real Growth Rates 195
5-6a Leading, Lagging, and Coincident 6-6b The Role of Real Interest Rates 198
Indicators 158 6-6c The Role of Expected Inflation 198
5-7 Survey and Opinion-Polling Techniques 159 6-7 Purchasing Power Parity 199
5-7a Forecasting Macroeconomic Activity 160 6-7a PPP Offers a Better Yardstick of
5-7b Sales Forecasting 161 Comparative Size of Business Activity 200
5-8 Macroeconometric Models 161 What Went Right/What Went Wrong:
5-Ba Advantages of Econometric Forecasting Big Box U.S. Retailers in China 202
Techniques 161 6-7b Relative Purchasing Power Parity 202
5-Bb Single-Equation Models 161 6-7 c Qualifications of PPP 203
5-Bc Multi-Equation Models 163 6-7d The Appropriate Use of PPP: An
5-Bd Consensus Forecasts: Livingston and Overview 204
Blue Chip Forecaster Surveys 164
What Went Right/What Went Wrong: GM,
5-9 Forecasting with Input-Output Tables 165
Toyota, and the Celica GT-S Coupe 205
International Perspectives: Long-Term 6-7e Trade-Weighted Exchange Rate Index 206
Sales Forecasting by General Motors 6-8 International Trade: A Managerial
in Overseas Markets 165 Perspective 209
5-10 Advanced Material: Stochastic 6-Ba Shares of World Trade and Regional
Time-series Analysis 166 Trading Blocs 209
Summary 169 6-Bb Comparative Advantage and Free Trade 211
Exercises 169 6-Bc Import Controls and Protective Tariffs 214
Case Exercise: Cruise Ship Arrivals in Alaska 173 6-Bd The Case for Strategic Trade Policy 215
Case Exercise: Lumber Price Forecast 174 6-Be Increasing Returns 218
Case Exercise: Forecasting in the Global 6-Bf Network Externalities 218
Financial Crisis 175 6-9 Free Trade Areas: The European Union
and NAFTA 219
6 Managing in the Global Economy 178 6-9a Optimal Currency Areas 219
Chapter Preview 178 6-9b Intraregional Trade 220
6-9c Mobility of Labor 220
Managerial Challenge: The Role of the 6-9d Correlated Macroeconomic Shocks 221
FX Rate in Assessing Foreign Business 6-10 Largest U.S. Trading Partners:
Opportunity 178 The Role of NAFTA 222
6-1 Introduction 181 6- lOa A Comparison of the EU and NAFTA 224
What Went Right/What Went Wrong: 6-1Ob Gray Markets, Knockoffs, and Parallel
Export Market Pricing at Toyota 181 Importing 225
6-2 Import-Export Sales and Exchange What Went Right/What Went Wrong:
Rates 182 Ford Motor Co. and Exide Batteries:
6-2a Foreign Exchange Risk 183 Are Country Managers Here to Stay? 226
International Perspectives: Collapse 6-11 Perspectives on the U.S. Trade Deficit 227
of Export and Domestic Sales Summary 229
at Cummins Engine 184 Exercises 230
6-3 Outsourcing 185 Case Exercise: Predicting the Long-Term
6-4 China Trade Blossoms 187 Trends in Value of the U.S. Dollar and
6-4a China Today 189 the Euro 231
6-5 The Market for U.S. Dollars as Foreign Case Exercise: Elaborate the Debate on
Copyr;§~<;\}.~~gage Learning. All Rights Reserved. May not b}~o~ied, scanned, or &~JJ,\n whole or in part. WCN 02-200-202 231
xii Contents

6A Foreign Exchange Risk Management 232 7-Bd Empirical Studies of the Cobb-Douglas
International Perspectives: Toyota and Production Function in Manufacturing 263
7-Be A Cross-Sectional Analysis of U.S.
Honda Buy U.S. Assembly Capacity 233
Manufacturing Industries 263
Summary 266
PART Ill Exercises 267
Case Exercise: The Production Function
PRODUCTION AND COST 235 for Wilson Company 2 70

7 Production Economics 236 7A Production Economics of Renewable and

Chapter Preview 236 Exhaustible Natural Resources, Advanced
Managerial Challenge: Green Power Material 272
Initiatives Examined: What Went 7A-1 Renewable Resources 272
Wrong in California's Deregulation 7A-2 Exhaustible Natural Resources 276
of Electricity? 236 Exercises 281
7- 1 The Production Function 238
7-1 a Fixed and Variable Inputs 239 8 Cost Analysis 282
7-2 Production Functions with One Chapter Preview 282
Variable Input 241 Managerial Challenge: Can a Leaner
7-2a Marginal and Average Product Functions 241 General Motors Compete Effectively? 282
7-2b The Law of Diminishing Marginal 8-1 The Meaning and Measurement of Cost 283
Returns 242 8-1 a Accounting versus Economic Costs 284
What Went Right/What Went Wrong: 8-1 b Three Contrasts between Accounting
Factory Bottlenecks at a Boeing and Economic Costs 284
Assembly Plant 243 8-2 Short-Run Cost and Product Functions 288
7-2c Increasing Returns with Network Effects 243 8-2a Average and Marginal Cost Functions 288
7-2d Producing Information Services under 8-3 Long-Run Cost Functions 293
Increasing Returns 245 8-3a Optimal Capacity Utilization: Three
7-2e The Relationship between Total, Concepts 293
Marginal, and Average Product 246 8-4 Economies and Diseconomies of Scale 294
7-3 Determining the Optimal Use of the 8-4a The Percentage of Learning 295
Variable Input 248 8-4b Diseconomies of Scale 298
7-3a Marginal Revenue Product 249 8-4c The Overall Effects of Scale Economies
7-3b Marginal Factor Cost 249 and Diseconomies 298
7-3c Optimal Input Level 249 International Perspectives: How Japanese
7-4 Production with Multiple Variable Inputs 250 Companies Deal with the Problems
7-4a Production (Output Constant) Isoquants 250 of Size 299
7-4b The Marginal Rate of Technical Summary 301
Substitution 252
Exercises 302
7-5 Determining the Optimal Combination Case Exercise: Cost Analysis of Patio Furniture 304
of Inputs 254
Case Exercise: Profit Margins on the
7-Sa Isocost Lines 255
Amazon Kindle 306
7-Sb Minimizing Cost Subject to an Output
Constraint 256
7-6 A Fixed Proportions Optimal 9 Applications of Cost Theory 307
Production Process 257 Chapter Preview 307
7-6a Production Processes and Process Rays 258 Managerial Challenge: How Exactly Have
7-7 Measuring the Efficiency of a Computerization and Infonnation
Production Process 259 Technology Lowered Costs at Chevron,
7-8 Returns to Scale 260 Timken, and Merck? 307
7-Ba Measuring Returns to Scale 261 9-1 Estimating Cost Functions 308
7-Bb Increasing and Decreasing Returns to 9-1a Issues in Cost Definition and
Scale 262 Measurement 309
7-Be ctAAi~~7Q~-Ll?.r~q~9J.~~J\Wk~d. ~Qf not be copied, sc~nJJa, o~tmUiJ,lg t<M>Irull.ct:pa\l.aW~W#§-200-202 309
 •••
Contents XIII

9-1c The Form of the Empirical Cost-Output 10-3c The Power of Buyers and Suppliers 346
Relationship 310 10-3d The Intensity of Rivalrous Tactics 347
What Went Right/What Went Wrong: 10-3e The Myth of Market Share 351
I0-4 A Continuum of Market Structures 351
Boeing: The Rising Marginal Cost
10-4a Pure Competition 352
of Wide-Bodies 3II 10-4b Monopoly 353
9-1d Statistical Estimation of Short-Run 10-4c Monopolistic Competition 354
Cost Functions 312 10-4d Oligopoly 354
9-1 e Statistical Estimation of Long-Run I0-5 Price-Output Determination under
Cost Functions 313
Pure Competition 355
9-1f Determining the Optimal Scale of an 10-Sa Short Run 355
Operation 313 10-Sb Profit Maximization under Pure
9-1g Economies of Scale versus Economies Competition (Short Run): Adobe
ofScope 316 Corporation 358
9-1h Engineering Cost Techniques 316 10-Sc Long Run 359
9-1i The Survivor Technique 318 I 0-6 Price-Output Determination under
9-1j A Cautionary Tale 318
Monopolistic Competition 362
9-2 Break-Even Analysis 319
9-2a Graphical Method 320
What Went Right/What Went Wrong:
9-2b Algebraic Method 320 The Dynamics of Competition at
9-2c Some Limitations of Break-Even Analysis 323 Amazon.com 363
9-2d Doing a Break-Even versus a 10-6a Short Run 363
Contribution Analysis 323 10-6b Long Run 363
9- 2e A Limitation of Contribution Analysis 325 I 0-7 Selling and Promotional Expenses 365
9-2f Operating Leverage 325 10-7a Detennining the Optimal Level
9-2g Inherent Business Risk 327 of Selling and Promotional Outlays 366
Summary 327
10-7b Optimal Advertising Intensity 367
10-7c The Net Value of Advertising 368
Exercises 328
I 0-8 Competitive Markets under
Case Exercise: Cost Functions 329
Asymmetric Information 369
Case Exercise: Charter Airline Operating
10-Ba Incomplete versus Asymmetric
Decisions 330
Information 369
10-Bb Search Goods versus Experience Goods 370
PART IV 10-Bc Adverse Selection and the Notorious
Finn 370
PRICING AND OUTPUT DECISIONS: 10-Bd Insuring and Lending under Asymmetric
STRATEGY AND TACTICS 333 Information: Another Lemons Market 372
I 0-9 Solutions to the Adverse Selection
10 Prices, Output, and Strategy: Pure and Problem: Advanced Material 373
Monopolistic Competition 334 10-9a Mutual Reliance: Hostage Mechanisms
Chapter Preview 334 Support Asymmetric Information
Managerial Challenge: Resurrecting Exchange 373
10-9b Brand-Name Reputations as Hostages 374
Apple in the Tablet World 334
10-9c Price Premiums with Non-Redeployable
IO-I Introduction 335
Assets 376
I0-2 Competitive Strategy 336
Summary 378
What Went Right/What Went Wrong: Exercises 379
Xerox 337 Case Exercise: Netflix and Redbox Compete
10-2a Generic Types of Strategies 338 for Movie Rentals 381
10-2b Product Differentiation Strategy 338 Case Exercise: Saving Sony Music 382
10-2c Cost-Based Strategy 338
10-2d Information Technology Strategy 339 11 Price and Output Determination:
10-2e The Relevant Market Concept 341 Monopoly and Dominant Firms 384
I0-3 Porter's Five Forces Strategic Chapter Preview 384
Framework 341 Managerial Challenge: Dominant
10-3a The Threat of Substitutes 342 Microprocessor Company Intel
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xiv Contents

11-1 Monopoly Defined 385 12-2 Interdependencies in Oligopolistic

11-2 Sources of Market Power for a Industries 418
Monopolist 386 12-2a The Cournot Model 420
11 -2a Increasing Returns from Network 12-3 Cartels and Other Forms of Collusion 421
Effects 386 12-3a Factors Affecting the Likelihood of
What Went Right/What Went Wrong: Successful Collusion 423
12-3b Cartel Profit Maximization and the
Pilot Error at Palm 389
Allocation of Restricted Output 424
11-3 Price and Output Determination for a
Monopolist 390 International Perspectives: The OPEC
11-3a Spreadsheet Approach: Profit versus Cartel 426
Revenue Maximization for Polo Golf 12-3c Cartel Analysis: Algebraic Approach 431
Shirts 390 12-4 Price Leadership 433
11 -3b Graphical Approach 391 12-4a Barometric Price Leadership 433
11 -3c Algebraic Approach 392 12-4b Dominant Finn Price Leadership 434
11 -3d The Importance of the Price Elasticity 12-5 The Kinked Demand Curve Model 437
of Demand 393 12-6 Avoiding Price Wars 438
11-4 The Optimal Markup, Contribution What Went Right/What Went Wrong:
Margin, and Contribution Margin Good-Better-Best Product Strategy at
Percentage 395 Marriott Corporation and Kodak 441
11 -4a Gross Profit Margins 397
Summ~ 443
11 -4b Components of the Margin 397
Exercises 444
11 -4c Monopolists and Capacity Investments 398
11 -4d Limit Pricing 399 13 Best-Practice Tactics: Game Theory 446
11 -4e Using Limit Pricing to Hamper the Chapter Preview 446
Sales of Generic Drugs 400
Managerial Challenge: Large-Scale Entry
What Went Right/What Went Wrong: Deterrence of Low-Cost Discounters:
Pfizer Sustains Sales of Off-Patent
Southwest Airline/AirTran 446
Lipitor 401 13-1 Oligopolistic Rivalry and Game Theory 448
11-5 Regulated Monopolies 402
11 -Sa Electric Power Companies 402 What Went Right/What Went Wrong:
Nintendo's Wii U 448
What Went Right/What Went Wrong: 13-1a A Conceptual Framework for Game
The Public Service Company of Theory Analysis 449
New Mexico 402 13-1b Components of a Game 450
11-Sb Natural Gas Companies 403 13-1c Cooperative and Noncooperative Games 452
11-6 The Economic Rationale for Regulation 403 13-1d Other Types of Games 452
11-6a Natural Monopoly Argument 403 13-2 Analyzing Simultaneous Games 453
Summary 405 13-2a The Prisoner's Dilemma 453
Exercises 405 13-2b Dominant Strategy Defined 455
Case Exercise: Differential Pricing of 13-3 Nash Equilibrium Strategy Defined 457
Pharmaceuticals: The HIVI AIDS Crisis 409 13-3a Mixed Nash Equilibrium Strategy 460
Case Exercise: Limit Pricing as Strategic 13-4 The Escape from Prisoner's Dilemma 463
Entry Deterrence: Ace Inhibitor 410 13-4a Multiperiod Punishment and Reward
Schemes in Repeated Play Games 463
12 Price and Output Determination: 13-4b Unraveling and the Chain Store Paradox 464
Oligopoly 411 13-4c Mutual Forbearance and Cooperation
Chapter Preview 411 in Repeated Prisoner's Dilemma Games 466
13-4d Winning Strategies in Evolutionary
Managerial Challenge: Google's Android
Computer Tournaments: Tit for Tat 467
and Apple's iPhone Displace Nokia in
13-4e Bayesian Reputation Effects 467
Smart phones? 411 13-4f Price-Matching Guarantees 469
12-1 Oligopolistic Market Structures 413 13-5 Analyzing Sequential Games 471
12-1a Oligopoly in the United States: 13-Sa Industry Standards as Coordination
Relative Market Shares 413 Devices 471
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 Contents xv

13-Sb Importance of the Order of Play 473 14-2c Multiple-Product Pricing Decision 516
13-Sc A Sequential Coordination Game 474 14-2d Differential Pricing and the Price
13-Sd Subgame Perfect Equilibrium in Elasticity of Demand 517
Sequential Games 476 What Went Right/What Went Wrong:
13-6 Business Rivalry as a Self-Enforcing Two-Part Pricing at Disney World 522
Sequential Game 477 14-3 Differential Pricing in Target Market
13-6a First-Mover and Fast-Second Segments 522
Advantages 478 14-3a Direct Segmentation with "Fences" 523
13-7 Credible Threats and Commitments 480 14-3b Optimal Two-Part Tariffs 526
13-8 Mechanisms for Establishing
What Went Right/What Went Wrong:
Credibility 481 Unlimited Data at Verizon Wireless 526
13-9 Replacement Guarantees 483 14-3c Couponing 527
13-9a Hostages Support the Credibility of
Commitments 484
What Went Right/What Went Wrong:
13-9b Credible Commitments of Durable Price-Sensitive Customers Redeem 528
Goods Monopolists 485 14-3d Bundling 528
13-9c Planned Obsolescence 486 14-3e Price Discrimination 531
13-9d Post-Purchase Discounting Risk 487 14-4 Pricing in Practice 533
13-9e Lease Prices Reflect Anticipated Risks 489 14-4a Product Life Cycle Framework 533
14-4b Full-Cost Pricing versus Incremental
Summary 489
Contribution Analysis 535
Exercises 490 14-4c Pricing on the Internet 537
Case Exercise: International Perspectives: Summary 540
The Superjumbo Dilemma 495 Exercises 541
Case Exercise: Partitoning the Price of the
13A Entry Deterrence and Accommodation Chevy Volt 543
Games 497
13A-l Excess Capacity as a Credible 14A The Practice of Revenue Management 545
Threat 497 14A-1 A Cross-Functional Systems
13A-2 Precommitments Using Non- Management Process 546
Redeployable Assets 497 14A-2 Sources of Sustainable Price
13A-3 Customer Sorting Rules 500 Premiums 548
13A-3a A Role for Sunk Costs in Decision 14A-3 Revenue Management Decisions,
Making 501 Advanced Material 548
13A-3b Perfectly Contestable Markets 502 14A-3a Proactive Price Discrimination 549
13A-3c Brinkmanship and Wars of Attrition 503 14A-3b Capacity Reallocation 550
13A-4 Tactical Insights about Slippery 14A-3c Optimal Overbooking 553
Slopes 505 Summary 556
Exercises 556
Summary 506
Exercises 507
PARTV
14 Pricing Techniques and Analysis 508
ORGANIZATIONAL ARCHITECTURE
Chapter Preview 508
AND REGULATION 557
Managerial Challenge: Pricing the
Chevy Volt 508 15 Contracting, Governance, and
14-1 A Conceptual Framework for Proactive, Organizational Fonn 558
Systematic-Analytical, Value-Based Chapter Preview 558
Pricing 509 Managerial Challenge: Controlling the
What Went Right/What Went Wrong: Vertical: Microsoft WebTV versus
Zerex Anticorrosive Antifreeze 510 Google Fiber 558
14-2 Optimal Differential Price Levels 513 15-1 Introduction 559
14-2a Graphical Approach 513 15-2 The Role of Contracting in
14-2b Algebraic Approach 515 Cooperative Games 560
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
xvi Contents

15-2a Vertical Requirements Contracts 561 Case Exercise: Designing a Managerial

15-2b The Function of Commercial Incentive Contract 592
Contracts 562 Case Exercise: The Division of Investment
15-2c Incomplete Information, Incomplete Banking Fees in a Syndicate 593
Contracting, and Post-Contractual
Opportunism 565 15A Auction Design and Information
15-3 Corporate Governance and the Economics 594
Problem of Moral Hazard 565 15A-1 Optimal Mechanism Design 594
15A-1a Queue Service Rules 594
What Went Right/What Went Wrong:
15A-2 First-Come, First-Served versus
Forecasting the Great Recession with
Last-Come, First-Served 595
Workouts and Rollovers 567
15A-2a Stratified Lotteries for Concerts 596
15-3a The Need for Governance
Mechanisms 568
15A-3 Auctions 597
15A-3a Types of Auctions 597
What Went Right/What Went Wrong: 15A-3b Winner's Curse in Asymmetric
Moral Hazard and Holdup at Enron Information Bidding Games 598
and WorldCom 569 15A-3c Information Revelation in
15-4 The Principal-Agent Model 569 Common-Value Auctions 600
15-4a The Efficiency of Alternative Hiring 15A-3d Bayesian Strategy with Open
Arrangements 569 Bidding Design 60 1
15-4b Creative Ingenuity and the Moral 15A-3e Strategic Underbidding in Private-
Hazard Problem in Managerial Value Auctions 603
Contracting 571 15A-3f Second-Highest Sealed-Bid
15-4c Formalizing the Principal-Agent Auctions: A Revelation Mechanism 605
Problem 573 15A-3g Revenue Equivalence of Alternative
15-4d Screening and Sorting Managerial Auction Types 607
Talent with Optimal Incentives 15A-3h Contractual Approaches to
Contracts 574 Asymmetric Information in Online
What Went Right/What Went Wrong: Auctions 609
Why Have Restricted Stock Grants 15A-4 Incentive-Compatible Revelation
Replaced Executive Stock Options at Mechanisms 611
Microsoft? 575 15A-4a Cost Revelation in Joint Ventures
and Partnerships 611
15-5 Choosing the Efficient Organizational
15A-4b Cost Overruns with Simple
Fonn 577
Profit-Sharing Partnerships 612
What Went Right/What Went Wrong: 15A -4c Clarke-Groves Incentive-Compatible
Cable Allies Refuse to Adopt Microsoft's Revelation Mechanism 614
WebTV as an Industry Standard 580 15A-4d An Optimal Incentives Contract 614
International Perspectives: Economies International Perspectives: Joint Venture
of Scale and International Joint in Memory Chips: IBM, Siemens, and
Ventures in Chip Making 581 Toshiba 615
15-6 Prospect Theory Motivates Full-Line 15A-4e Implementation of IC Contracts 616
Forcing 582 International Perspectives: Whirlpool's
15-7 Vertical Integration 584 Joint Venture in Appliances Improves
What Went Right/What Went Wrong: upon Maytag's Outright Purchase of
Dell Replaces Vertical Integration Hoover 617
with Virtual Integration 587 Summary 618
15-7a The Dissolution of Assets in a Exercises 619
Partnership 588 Case Exercise: Spectrum Auction 620
Summary 589 Case Exercise: Debugging Computer
Exercises 591 Software: Versioning at Intel 621
Case Exercise: Borders Books and
Amazon.com Decide to Do Business 16 Government Regulation 623
Together 592 Chapter Preview 623
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 ••
Contents XVII

Managerial Challenge: Cap and Trade, What Went Right/What Went Wrong:
Deregulation, and the Coase Technology Licenses Cost Palm Its
Theorem 623 Lead in PDAs 652
16-1 The Regulation of Market Structure What Went Right/What Went Wrong:
and Conduct 624 Motorola: What They Didn't Know
16-1a Market Performance 625
Hurt Them 653
16-1b Market Conduct 625
16-7b Conclusion on Licensing 653
16-1c Contestable Markets 626
Summary 654
16-2 Antitrust Statutes and Their
Exercises 655
Regulatory Enforcement 627
Case Exercise: Do Luxury Good
16-2a The Sherman Act (1890) 627
16-2b The Clayton Act (1914) 627 Manufacturers Have a Legitimate
16-2c The Robinson-Patman Act (1936) 628 Interest in Minimum Resale Price
16-2d The Hart-Scott-Rodino Antitrust Maintenance: Leegin v. Kay's Kloset? 657
Improvement Act (1976) 629 Case Exercise: Microsoft Tying
16-3 Antitrust Prohibition of Selected Arrangements 658
Business Decisions 630 Case Exercise: Music Recording Industry
16-3a Collusion: Price Fixing 630 Consolidating 659
16-3b Mergers That Substantially Lessen
Competition 632 17 Long-Term Investment Analysis 660
16-3c Merger Guidelines (2010) 633 Chapter Preview 660
16-3d Monopolization 633
Managerial Challenge: Industrial
16-3e Wholesale Price Discrimination 635
Renaissance in America: Insourcing
16-3J Refusals to Deal 636
16-3g Resale Price Maintenance
of GE Appliances 660
Agreements 636 17-1 The Nature of Capital Expenditure
16-4 Command and Control Regulatory Decisions 661
Constraints: An Economic Analysis 63 7 17-2 A Basic Framework for Capital
16-4a The Deregulation Movement 639 Budgeting 662
What Went Right/What Went Wrong: 17-3 The Capital Budgeting Process 662
17-3a Generating Capital Investment
The Need for a Regulated
Projects 663
Clearinghouse to Control Counterparty
17-3b Estimating Cash Flows 663
Risk at AIG 639 17-3c Evaluating and Choosing the
16-5 Regulation of Externalities 640 Investment Projects to Implement 665
16-Sa Coasian Bargaining for Reciprocal
17-4 Estimating the Firm's Cost of
Externalities 641
16-Sb Qualifications of the Coase Theorem 642
Capital 668
17-4a Cost of Debt Capital 669
16-Sc Impediments to Bargaining 643
16-Sd Resolution of Externalities by
17-4b Cost of Internal Equity Capital 669
Regulatory Directive 644
17-4c Cost of External Equity Capital 671
16-Se Resolution of Externalities by Taxes
17-4d Weighted Cost of Capital 671
and Subsidies 645 17-5 Cost-Benefit Analysis 672
16-SJ Resolution of Externalities by Sale of 17-Sa Accept-Reject Decisions 673
Pollution Rights: Cap and Trade 647 17-5b Program-Level Analysis 674
16-6 Governmental Protection of Business 647 17-6 Steps in Cost-Benefit Analysis 674
16-6a Licensing and Permitting 647 17-7 Objectives and Constraints in
16-6b Patents 648 Cost- Benefit Analysis 676
16-7 The Optimal Deployment Decision: 17-8 Analysis and Valuation of Benefits
To License or Not 648 and Costs 677
16-7a Pros and Cons of Patent Protection 17-Ba Direct Benefits 677
and Licensure of Trade Secrets 649 17-Bb Direct Costs 677
17-Be Indirect Costs or Benefits and
What Went Right/What Went Wrong:
Intangibles 677
Delayed Release at Aventis 650

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xviii Contents

17-Bd The Appropriate Rate of Discount 678 D Check Answers to Selected

17-9 Cost-Effectiveness Analysis 679 End-of-Chapter Exercises D-1
17-9a Least-Cost Studies 679 Glossary G-1
17-9b Objective-Level Studies 680 Index I-1
Summary 680 Notes
Exercises 681
Case Exercise: Industrial WEB APPENDICES
Development Tax Relief and A Consumer Choice Using Indifference Curve
Incentives 684 Analysis
Case Exercise: Multigenerational Effects B International Parity Conditions
of Ozone Depletion and Greenhouse c Linear-Programming Applications
Gases 685 D Capacity Planning and Pricing against a Low-Cost
Case Exercise: Can Tidal Power Be Competitor: A Case Study of Piedmont Airlines
Harnessed in the Bay of Fundy 688 and People Express
E Pricing of Joint Products and Transfer Pricing
APPENDICES F Decisions under Risk and Uncertainty
A The Time Value of Money A-1 G Maximization of Production Output Subject to a
B Differential Calculus Techniques in Cost Constraint, Advanced Material
Management B-1 H Long-Run Costs with a Cobb-Douglas Production
c Tables C-1 Function, Advanced Material

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 ORGANIZATION OF THE TEXT
The 14th edition has been thoroughly updated with 45 new applications and dozens of new
figures and tables.
We continue to expand the review of microeconomic fundamentals in Chapters 2 and
3, employing a wide-ranging discussion of the equilibrium price of crude oil and gasoline
as well as the marginal analysis of long-lasting lightbulbs. This new emphasis supports
the use of the book for pre-experience MA in Management and specialized MS programs
in business schools.
The text is structured, like many others, around demand, production, cost and pric-
ing theory in context, but the difference here is the context. We believe students are
motivated to learn analytical tools by first becoming immersed in and motivated by
deep fact situation contexts. Consequently, in each of the first 12 chapters we teach
the students why a new technique is important by first demonstrating what it can be
used to accomplish in business practice. Only then, do we delve into the theory that
applies.
Another distinctive feature of the book is the extensive treatment in Chapter 6 of
global business, import-export trade, exchange rates, free trade areas, and trade policy.
There is more comprehensive material on applied game theory in Chapters 13, 13A, 15,
15A, and the Web Appendix Case Study than in any other managerial economics text-
book. And a unique treatment of revenue (yield) management appears in Chapter 14A.
Part V includes the hot topics of corporate governance, information economics, auction
design, and the choice of organizational architecture. Chapter 16 on Regulation includes
an extensive discussion of market mechanisms for addressing externalities. Chapter 17
now leads off with a capital budgeting decision by GE to return appliance manufacturing
to the United States.
By far the most distinctive feature of the book is its 300 boxed examples, Managerial
Challenges, What Went Right/What Went Wrong explorations of corporate practice,
and mini-case examples on every other page demonstrating what each analytical concept
is used for in practice. This list of concept applications is highlighted on the inside front
and back covers.

STUDENT PREPARATION
The text is designed for use by upper-level undergraduates and first-year graduate stu-
dents in business schools, departments of economics, and professional schools of man-
agement, public policy, and information science as well as in executive training
programs. Students are presumed to have a background in the basic principles of micro-
economics, although Chapter 2 offers an extensive review of those topics. No prior
work in statistics is assumed; development of all the quantitative concepts employed is
self-contained. The book makes occasional use of elementary concepts of differential

•
XIX
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
xx Preface

calculus. In all cases where calculus is employed, at least one alternative approach, such as
graphical, algebraic, or tabular analysis, is also presented. Spreadsheet applications have
become so prominent in the practice of managerial economics that we now address
optimization in that context.

PEDAGOGICAL FEATURES OF THE

14TH EDITION
The 14th edition of Managerial Economics makes extensive use of pedagogical aids to
enhance individualized student learning. The key features of the book are:
1. Managerial Challenges. Each chapter opens with a Managerial Challenge (MC) illumi-
nating a real-life problem faced by managers that is closely related to the topics covered
in the chapter. Instructors can use the discussion questions following each MC to
"hook" student interest at the start of the class or in conjunction with MindTap preclass
preparation assignments.
2. What Went Right/What Went Wrong. This feature allows students to relate
business mistakes and triumphs to what they have just learned, and helps build
that elusive goal of managerial insight.
3. Extensive Use of Boxed Examples. More than 300 real-world applications and
examples derived from actual corporate practice are highlighted throughout the
text. These applications help the analytical tools and concepts to come alive
and thereby enhance student learning. They are listed on the inside front and
back covers to highlight the prominence of this feature of the book.
4. Sustainability and the Environment Symbol. A wind vane symbol highlights
numerous passages that address environmental effects and sustainability issues
throughout the book.
5. Exercises. Each chapter contains a large problem analysis set. Check answers to
selected problems color-coded in blue type are provided in Appendix D at the
end of the book. Problems that can be solved using Excel are highlighted with an
Excel icon. The book's Web site (www.cengage.com/economics/mcguigan) has
answers to all the other textbook problems.
6. Case Exercises. Most chapters include mini-cases that extend the concepts and
tools developed into a deep fact situation context of a real-world company, allow-
ing the students to practice what they encounter on every other page in the 300
boxed examples and applications.
7. Chapter Glossaries. In the margins of the text, new terms are defined as they are
introduced. The placement of the glossary terms next to the location where the
term is first used reinforces the importance of these new concepts and aids in
later studying.
8. International Perspectives. Throughout the book, special International Perspec-
tives sections that illustrate the application of managerial economics concepts
to an increasingly global economy are provided. A globe symbol highlights this
internationally relevant material.
9. Point-by-Point Summaries. Each chapter ends with a detailed, point-by-point
summary of important concepts from the chapter.
10. Diversity of Presentation Approaches. Important analytical concepts are
presented in several different ways, including tabular, spreadsheet, graphical, and
algebraic analysis to individualize the learning process.

Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 •
Preface XXI

ANCILLARY MATERIALS
A complete set of ancillary materials is available to adopters to supplement the text,
including the following:

Instructor's Manual and Test Bank

The instructor's manual and test bank that accompany the book contain suggested
answers to the end-of-chapter exercises and cases. The authors have taken great care to
provide an error-free manual for instructors to use. The manual is available to instruc-
tors on the book's Web site. The test bank, containing a large collection of true-false,
multiple-choice, and numerical problems, is available to adopters and is also available
on the Web site in Word format, as well as on the IRCD.

MindTap
MindTap is an extensive online learning system that includes the ebook, assignments
that bring course concepts to life, supplemental readings, video and discussions ques-
tions, and practice and apply exercises. This cloud-based platform integrates learning
applications ("apps,) into an easy-to-use and easy-to-access tool that supports a person-
alized learning experience. MindTap combines student learning tools-readings, multi-
media, activities and assessments-into a singular Learning Path that guides students
through the course.

Mindtap Support Web Site

When you adopt Managerial Economics: Applications, Strategy, and Tactics, 14e, you and
your students will have access to a rich array of teaching and learning resources that you
won't find anywhere else. Located at www.CengageBrain.com, this outstanding site features
additional instructor and student resources.

PowerPoint Presentation
Available on the product companion Web site, this comprehensive package provides an
excellent lecture aid for instructors. These slides cover many of the most important
topics from the text, and they can be customized by instructors to meet specific course
needs.

ACKNOWLEDGMENTS
A number of reviewers, users, and colleagues have been particularly helpful in providing
us with many worthwhile comments and suggestions at various stages in the development
of this and earlier editions of the book. Included among these individuals are:
William Beranek, J. Walter Elliott, William J. Kretlow, William Gunther, J. William
Hanlon, Robert Knapp, Robert S. Main, Edward Sussna, Bruce T. Allen, Allen Moran,
Edward Oppermann, Dwight Porter, Robert L. Conn, Allen Parkman, Daniel Slate, Richard
L. Pfister, J. P. Magaddino, Richard A. Stanford, Donald Bumpass, Barry P. Keating, John
Wittman, Sisay Asefa, James R Ashley, David Bunting, Amy H. Dalton, Richard D. Evans,
Gordon V. Karels, Richard S. Bower, Massoud M. Saghafi, John C. Callahan, Frank Falero,
Ramon Rabinovitch, D. Steinnes, Jay Damon Hobson, Clifford Fry, John Crockett, Marvin
Frankel, James T. Peach, Paul Kozlowski, Dennis Fixler, Steven Crane, Scott L. Smith,
Edward Miller, Fred Kolb, Bill Carson, Jack W. Thornton, Changhee Chae, Robert
B. Dallin, Christopher J. Zappe, Anthony V. Popp, Phillip M. Sisneros, George Brower,
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
xxii Preface

Carlos Sevilla, Dean Bairn, Charles Callahan, Phillip Robins, Bruce Jaffee, Alwyn du Plessis,
Darly Winn, Gary Shoesmith, Richard J. Ward, William H. Hoyt, Irvin Grossack, William
Simeone, Satyajit Ghosh, David Levy, Simon Hakim, Patricia Sanderson, David P. Ely, Albert
A. O'Kunade, Doug Sharp, Arne Dag Sti, Walker Davidson, David Buschena, George
M. Radakovic, Harpal S. Grewal, Stephen J. Silver, Michael J. O'Hara, Luke M. Froeb, Dean
Waters, Jake Vogelsang, Lynda Y. de la Vifia, Audie R Brewton, Paul M. Hayashi, Lawrence
B. Pulley, Tim Mages, Robert Brooker, Carl Emomoto, Charles Leathers, Marshall Medoff,
Gary Brester, Stephan Gohmann, L. Joe Moffitt, Christopher Erickson, Antoine El Khoury,
Steven Rock, Rajeev K. Goel, LeeS. Redding, Paul J. Hoyt, Bijan Vasigh, Cheryl A. Casper,
Semoon Chang, Kwang Soo Cheong, Barbara M. Fischer, John A. Karikari, Francis
D. Mummery, Lucjan T. Orlowski, Dennis Proffitt, and Steven S. Shwiff.
People who were especially helpful in the preparation of the 14th edition include
Robert F. Brooker, Kristen E. Collett-Schmitt, Simon Medcalfe, Dr. Paul Stock, Shahab
Dabirian, James Leady, Stephen Onyeiwu, and Karl W. Einoff. A special thanks to
B. Ramy Elitzur of Tel Aviv University for suggesting the exercise on designing a manage-
rial incentive contract and to Bob Hebert, Business Librarian at Wake Forest School of
Business, for his tireless pursuit of reference material.
We are also indebted to Wake Forest University and the University of Louisville for the
support they provided and owe thanks to our faculty colleagues for the encouragement and
assistance provided on a continuing basis during the preparation of the manuscript. We wish
to express our appreciation to the members of the Cengage Learning staff for their help in
the preparation and promotion of this book, especially Chris Rader. We are grateful to the
Literary Executor of the late Sir Ronald A. Fisher, F.R.S.; to Dr. Frank Yates, F.R.S.; and to
Longman Group, Ltd., London, for permission to reprint Table III from their book Statistical
Tables for Biological, Agricultural, and Medical Research (6th ed., 1974).
James R. McGuigan
R. Charles Moyer
Frederick H. deB. Harris

Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
 James R. McGuigan
James R. McGuigan owns and operates his own numismatic investment firm. Prior to this
business, he was Associate Professor of Finance and Business Economics in the School of
Business Administration at Wayne State University. He also taught at the University of
Pittsburgh and Point Park College. McGuigan received his undergraduate degree from
Carnegie Mellon University. He earned an M.B.A. at the Graduate School of Business at
the University of Chicago and his Ph.D. from the University of Pittsburgh. In addition to
his interests in economics, he has coauthored books on financial management.
His research articles on options have been published in the Journal of Financial and
Quantitative Analysis.

R. Charles Moyer
R. Charles Moyer earned his B.A. in Economics from Howard University and his M.B.A.
and Ph.D. in Finance and Managerial Economics from the University of Pittsburgh.
Professor Moyer is Dean Emeritus and Professor of Finance and Entrepreneurship at
the College of Business, University of Louisville. Previously, he was GMAC Chair of
Finance and Dean, Babcock Graduate School of Management, Wake Forest University.
He was also Professor of Finance and Chairman of the Department of Finance at Texas
Tech University. Professor Moyer also has taught at the University of Houston, Lehigh
University, and the University of New Mexico, and spent a year at the Federal Reserve
Bank of Cleveland. Professor Moyer has taught extensively abroad in Germany, France,
and Russia. In addition to this text, Moyer has coauthored two other financial management
texts. He has been published in many leading journals, including Financial Management,
Journal of Financial and Quantitative Analysis, Journal of Finance, Financial Review, Journal
of Financial Research, International Journal of Forecasting, Strategic Management Journal and
Journal of Economics and Business. Professor Moyer is a member of the Board of Directors
of Capitala Finance Corporation, US W orldMeds, and Summit Biosciences.

Frederick H. deB. Harris

Frederick H. deB. Harris is Professor of Managerial Economics and Finance at the School of
Business, Wake Forest University. His specialties are pricing tactics and capacity planning.
Professor Harris has taught managerial economics core courses and B.A., B.S., M.S., M.B.A.,
and Ph.D. electives in business schools and economics departments in the United States,
Germany, France, Italy, and Australia. He has won two school-wide Professor of the Year
teaching awards and two Researcher of the Year awards. Other recognitions include Out-
standing Faculty by Inc. magazine (1998), Most Popular Courses by Business Week Online
2000-2001, and Outstanding Faculty by BusinessWeek's Guide to the Best Business Schools,
5th to 9th eds., 1997-2004.
Professor Harris has published widely in leading journals, including the Review of Eco-
nomics and Statistics, Journal of Financial and Quantitative Analysis, Journal of Operations
Management, Journal of Industrial Economics, Journal of Banking and Finance, Journal of
Business Ethics, and Journal of Financial Markets. From 1988 through 1993, Professor
Harris served on the Board of Associate Editors of the Journal of Industrial Economics .
•••
Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-202
XXIII
Another random document with
no related content on Scribd:
 There was no doubt but that the miners had once followed a vein
of quartz through this passage, and had reached what they believed
to be its termination here.
The result of this dampening discovery upon Barney and Frank
was disheartening in the extreme.
“No chance,” said Frank, gloomily. “We are in for it, Barney.”
“Bejabers, that’s so, Misther Frank,” acknowledged the Celt. “Yet,
on me worrud, I hate to give it up.”
“So do I,” agreed Frank. “But what can we do?”
“Shure, I don’t know.”
The pocket lantern burned brightly and illumined the passage.
There was plainly no way to go further. To attempt to dig a way out
would be the height of folly.
A horrible death by starvation seemed to be inevitable.
It was much drier and cleaner however in this passage than at the
bottom of the pit. So it was decided to remain here.
“We are thirty feet nearer the surface,” said Frank. “Oh, if there
was only some way to go the rest of the way.”
“Bejabers, I’m not sure but there is,” cried Barney, as he picked up
the rope. “Av yez only remimber there’s beams acrost the shaft at
intervals all the way up.”
“Yes, but they are beyond our reach.”
“Shure, mebbe I cud get the rope over thim in some way or other.”
The Celt started for the mouth of the passage imbued with this
wild hope.
Frank lighted the way with the pocket lantern.
 In a few moments they had reached the mouth of the passage,
and Barney measured the distance to the beam above.
It was not more than twenty feet.
“Whurroo!” he cried, exultantly. “I tell yez I kin jest do it an’ don’t ye
fergit it. Luk out fer ye’silf.”
Balancing himself upon the beam at the mouth of the passage
Barney made a throw with the coil of rope.
It passed over the upper beam and came down so that the Celt
could grasp the other end of it.
With a cry of triumph he made the two ends fast.
“Shure, Misther Frank!” cried the brave Irishman, “whin I reach the
mouth av the shaft I’ll let the rope down an’ draw yez up.”
Frank’s heart leaped with a wild thrill of hope.
It was not impossible that Barney might succeed in his enterprise.
It was a frightful distance to overcome, but the Celt had full
confidence and any amount of pluck.
Up he went, hand over hand upon the rope.
He stood upon the beam above a moment later.
Frank shot the rays of the lantern up through the darkness of the
shaft.
Barney had overcome over fifty feet of the thousand. But it was
hard to say what obstacles might not be before him.
Yet the plucky Irishman realized that any chance of the sort was
better than lying down to die at the bottom of the shaft.
“Whurroo! Misther Frank!” he cried, with exultation. “Shure, I’m
makin’ out foinely. There’s another beam jist over me head.”
 Frank murmured an inward prayer for the success of his faithful
servitor.
But a moment later all the hopeful plans were dashed.
An end of the rope came tumbling down. A moment later Barney
came down and swung into the passage.
“Shure, Misther Frank, it’s the ind av us!” he said, dismally.
“What?” cried Frank, “couldn’t you go any further?”
“I cudn’t, Misther Frank. Shure the nixt beam was more nor eighty
feet above me head an’ I cudn’t throw the rope over it nohow.”
The last straw seemed to have given way.
Death in its most hideous form certainly seemed to confront the
two prisoners.
A groan of despair escaped Frank’s lips. He covered his face with
his hands.
“I am not a coward,” he said, earnestly, “but truly, Barney, it seems
hard, indeed, to die in this manner.”
“Shure it’s all av that, Misther Frank,” said the brave Celt. “Av it
was not so far, I think we cud dig our way out av the place.”
With an instinctive feeling that this might be possible, they
retreated to the far end of the passage.
But the sober reflection that there were many hundred feet of earth
between them and the outer air, and that they had no tools to dig
with, dispersed this theory like mist.
Both sank down on the ground, overcome with despair.
Frank’s head was near the wall of the passage, and suddenly he
experienced a strange thrill.
An odd sound came from beyond the wall of the passage.
 It was not far distant, either, and as the young inventor listened, he
heard very distinctly the ring of pickaxes and the low hum of voices.
It was an astounding discovery, and caused him to apply his ear
closely to the passage wall.
 CHAPTER XI.
INTO THE GREASERS’ DEN.

There was no disputing the fact.

The sounds which came to Frank’s hearing were plain and
unmistakable.
The ring of pickaxes was quite audible, and could not have been
twenty feet distant through the wall of earth.
The young inventor was dazed with the force of this realization.
Barney had heard the sounds also, and both sat silently gazing at
each other.
What did it mean?
Startling queries and theories flashed through the minds of each.
Was some one coming to their rescue through the earth? Or was it
all a delusion?
The former theory was at once dispelled. If any friends knew of
their presence there they would scarcely go to the trouble of
rescuing them by means of digging through a thousand feet of earth.
A few moments’ pulling at the mouth of the shaft would have
brought them both out of their difficulty.
As for the latter possibility it was at once dismissed.
“Begorra, Misther Frank,” said Barney, in a mystified way,
“phwativer do yez call that?”
“Somebody is digging their way toward us,” said Frank.
 “Shure yez don’t suppose it is fairies?” whispered the superstitious
Celt.
“Nonsense!”
Frank had hit upon what he believed to be the truth in his own
mind.
It had occurred to him that the greasers were conducting mining
operations in these hills.
Might it not be that in their shaft sinking they had followed a vein
dangerously near the old shaft?
In fact, it was not impossible that in a few hours they might not dig
their way actually through into the old mine.
The thought gave Frank a deep thrill of hope.
“Barney,” he said, earnestly, “upon my soul, I believe that we are
bound to make our escape.”
“Shure, Misther Frank, phwat do yez mean?” cried Barney, in
surprise.
“Hush! let us wait and watch.”
For some time the two prisoners listened to the sounds of the
pickaxes, and the voices of the workmen could almost be
distinguished.
Suddenly, however, the sounds ceased.
All was quiet beyond the wall of earth.
What did it mean?
Without doubt the miners had ceased work.
Then Frank recollected the hour, and that without doubt they had
retired for the purpose of gaining sleep.
With an inspiration the young inventor sprang up.
 “Barney!” he cried. “Our time has come!”
The Celt was astonished.
“Shure, phwat do yez mean, Misther Frank?”
“I mean that we must dig our way through and meet that passage.
It will be deserted, and though it will lead us into the camp of the
greasers, we will stand a chance to escape.”
Barney caught the inspiration.
“Bejabers, ye’re right!” he cried. “But how will we do it? Shure, we
’aven’t any pick nor shovel.”
“Somewhere in this mine there must be some old ones!” cried
Frank. “Let us search.”
“It will likely be in the ould mine below, sor.”
“All right.”
“Shall we go down, sor?”
“Yes.”
Barney quickly adjusted the rope and slid down into the old shaft.
Frank followed him.
Then with the pocket lantern they began an exploration of the
place, and with most gratifying results.
In one corner they found part of an old spade and an iron bar.
The bar could be used in lieu of a pickaxe. They quickly returned
to the upper level.
First making sure that they were not likely to be heard, work was
begun.
Frank wielded the bar and Barney the shovel.
 For hours they kept at work in a lively manner.
A deep hole had been excavated.
They had made a distance of full fifteen feet into the solid earth.
Frank guessed from the hollow sounds that they were now not
many feet from the inner mine.
His theory proved correct.
In less than twenty minutes later his bar went through the wall of
earth and he lost it.
But, fortunately, with the shovel they were able to enlarge the
aperture sufficiently to enable him to pass through.
Barney followed quickly.
They were now in the new mine.
All was darkness, but Frank cautiously opened the slide of his
lantern.
The tools of the miners lay about, but none of the latter were in
sight.
The coast was clear apparently, and they moved forward, not,
however, without great caution.
The passage seemed to extend a great ways through the earth.
They followed it for what seemed a good while and yet there was
presented no sign of the main shaft.
“That is curious!” exclaimed Frank, in surprise. “There certainly is
a main shaft somewhere. We must soon find it.”
“Begorra, maybe there’s none at all,” said Barney, logically.
“Perhaps it leads into some koind av a cave or the loikes.”
There was more in Barney’s remark of a pertinent sort than
seemed at the moment likely.
 Suddenly Frank came to a stop.
“Goodness gracious!” he exclaimed. “What does that mean?”
“Pwhat?” asked Barney.
“Why, don’t you see?”
“Begorra, it’s a loight.”
“Certainly.”
Far down the passage the faint gleam of light was seen.
It was not daylight as the prisoners well knew at that hour.
They paused and watched it intently for some time.
At first Frank had been inclined to believe it a lantern carried by
some of the greasers, who were coming back into the mine to work.
But a few moments’ study convinced him that this was not so.
“That is at the end of this passage,” he declared. “Come on,
Barney. Let’s get out of here as quickly as possible.”
They pressed forward at a rapid pace.
Every moment the light grew larger and plainer.
Then Frank saw that it occupied the whole size of the passage
and at once understood that it was a chamber beyond illuminated.
This theory was borne out perfectly well, when, a few moments
later, they came to the mouth of the passage.
A wonderful scene was spread before them.
They came out upon a sort of circular gallery about a deep
amphitheater which lay below them.
The passage was only one of many leading into this gallery, and
there were other galleries of similar sort.
 It was far from being a new mine, as Frank saw at a glance.
Indeed, it might have been older than the mine they had just
escaped from.
The light which illuminated the amphitheater, which was of large
dimensions, was created by a large pitchwood fire burning in the
center of the mine floor below.
Frank looked up and saw patches of the night sky through
apertures in the roof of the mine, which was not far above their
heads.
The fact was, a cave had originally occupied the spot and the
galleries and passages had been added by man.
It was certainly a wonderful spectacle. The floor was full fifty feet
below, and as our adventurers looked down from the gallery they
saw a large number of the greasers lounging about the place.
Many were rolled in blankets and sound asleep.
Others were playing dice or talking and smoking their cheroots,
and the hum of conversation came upon the air.
“By Jove!” exclaimed Frank, with a thrill, “I tell you, Barney, we
have found the den of Costello and his gang.”
“Begorra, that’s thrue,” agreed Barney.
“It is certainly a place well suited for the purpose.”
“I should say so, sor. But however will we get out of here?”
“That is a question.”
“Shure, sor, I think we’d betther get out as soon as possible.”
“Right you are, Barney. If those miners return and discover our
escape from the shaft they will be quickly after us.”
“Shure enough, sor.”
 “Let us move cautiously along and see where this gallery goes to.”
Frank led the way along the gallery.
It terminated in a flight of steps cut in solid rock.
There were none of the greasers, apparently, in any of the
galleries or passages above the floor.
So Frank felt safe in descending these steps.
He went down them until a gallery below was reached.
They were now quite near to the floor. Frank and Barney here
paused.
It was, of course, decidedly unsafe to venture down within the
circle of the firelight.
“If they would only all go to sleep,” said the young inventor, “then
we could be sure of slipping by them.”
But the greasers seemed to have no such idea in view.
There was no doubt but that many of them would remain up all
night. What was to be done?
Frank pondered the question seriously and long.
He saw what he believed was the passage which led out of the
mine.
But men were constantly passing in and out, and it would be
utterly impossible to escape in that direction.
Meanwhile, the risk was great in staying where they were.
At any moment some one of the greasers might come upon them.
It was clear that desperate action had got to be taken at once.
Frank considered every daring move which he could think of.
 He even thought of a break for liberty through the outer passage.
But second thought showed that this was suicidal.
But he noted that there was a line of shadow under the galleries.
Perhaps by keeping in this he could find another outward passage.
It was a terrible risk to take, but Frank did not hesitate.
“Come, Barney!” he said, “let us go down below.”
The Celt, without a word, followed Frank. But they had not
descended three steps when the young inventor came to a startled
halt.
A thrilled exclamation escaped his lips.
 CHAPTER XII.
THE PURSUIT UNDERGROUND.

“Heavens!” he gasped. “We cannot go down now. Back for your

life, Barney.”
The Celt, who would have followed his master anywhere, obeyed
this command.
Back up the stairs they sprang.
They were just in time.
Two of the Mexicans came up the stone steps into the gallery.
They paused by the landing and stood for some time engaged in
conversation.
Of course while they should remain there the way was blocked for
Frank and Barney.
The two fugitives were dismayed.
They knew that at any moment the miners might return to their
work and then their escape from the old shaft would be discovered.
Even as this fear was upon them, Frank heard a commotion in the
gallery above.
A loud cry in the Mexican tongue came down from above.
The effect was startling.
Instantly the greasers below sprang up with loud cries, and made
a rush for the galleries.
Frank turned to Barney.
 The truth had burst upon him with horrible force.
“My God!” he gasped. “We are lost, Barney. They have discovered
our escape!”
“Begorra, that’s thrue enough,” agreed the Celt. “Phwat shall we
do, sor?”
For a moment Frank was in a quandary.
But there was no time to lose.
The Mexicans were swarming up into the galleries.
To retreat into the shaft from which they had emerged would be
folly.
But where else could they go?
It was a serious question.
There was no time to lose.
Suddenly, at that moment, Frank saw a narrow opening in the
gallery wall.
He rushed into it and found that he was in one of the many
passages which made a honeycomb of the hill.
All was darkness, but the young inventor did not care for this, so
long as safety was assured.
Barney was close behind.
They were just in time to avoid being seen by the foe.
Fortunately not one of the Mexicans turned into this passage.
“Thank Heaven, we have given them the slip for a moment,” Frank
breathed.
“Bejabers, I’ve an idea!” exclaimed Barney, with eagerness.
 “Indeed!” said Frank. “What is it, Barney?”
“Shure, sor, let us stay here by the opening. Pretty quick the
blathershites will all be gone by. Shure, thin, we kin slip out av here,
an’ p’r’aps foinde our way out through the main passage. Do yez
see?”
“There is logic in your plan, Barney,” declared Frank. “I think we
will try it.”
Accordingly the two fugitives waited for their pursuers to pass.
Soon they were heard in the upper gallery, and it seemed as if the
coast was clear.
“Bejabers, now’s our toime,” cried Barney.
“All right,” agreed Frank. “Let us try the game.”
“Will yez lead the way, and I’ll folly, if it is to perdition?”
“I will.”
Frank crept out into the gallery.
He cast a glance up the gallery and saw nobody.
But as he looked in the other direction he was given a mighty thrill
of horror and dismay.
There, not twenty feet below, stood half a dozen of the greasers.
They blocked the passage, and what was worse at that moment,
they saw Frank Reade, Jr., and gave a yell of discovery.
It was echoed in the gallery above, and then exciting scenes
followed.
Frank darted back into the passage.
He was not a moment too quick.
 The crack of rifles was heard, and bullets flattened against the
gallery wall.
“My soul! we are discovered!” he cried, wildly. “Come, Barney, we
must follow this passage somewhere—anywhere.”
“That’s the divil’s luck!” cried Barney, in dismay. “But sure, sir, I’m
wid yez foriver. We’ll give the omadhouns the slip yet, or me name
ain’t O’Shea.”
Into the passage they darted.
The sounds of pursuit came in their rear.
All was dense blackness in the shaft and they were obliged to rush
on blindly.
Lights were seen in their rear, and at times it seemed as if their
pursuers must surely overtake them.
But Frank was possessed of a deadly resolution.
He knew that if he was caught it would be certain death.
Of course in the darkness there was imminent danger at any
moment of falling into some dangerous pit or hole.
But the young inventor preferred such a fate to certain capture.
Barney kept at his heels closely.
Thus they rushed on at full speed.
Every moment new passages were encountered. Frank adopted
the tactics of dodging into every one he could come to and keeping
to the right.
In this way he had soon distanced his pursuers.
The sounds of pursuit died out in the rear.
Satisfied of their safety for the moment they came to a halt.
 Both were quite exhausted, and Barney was particularly so. The
Celt flung himself flat upon the floor of the cavern.
“Och hone, Misther Frank,” he cried, in a panting manner, “shure,
it’s all done out I am wid the exertion av the run. But we’ve
disthanced the divils anyhow.”
“That’s true,” agreed Frank, “but in my opinion we are a long ways
from being out of the scrape.”
“Shure, that’s right.”
“I’ve no idea where we are or how we’ll ever get out of this place.”
“Bejabers, I’m sthuck intoirely mesilf an that.”
“But I still cling to a hope that we will yet get out of here all right.”
“I hope so, sor.”
“Of course the greasers are familiar with the passages in this
mine.”
“Yis, sor.”
“They probably will make a very thorough search. In that case they
will be likely to run us down.”
“Shure, I fear that, sor.”
Lying upon the hard floor of the shaft the two fugitives listened
fearfully for sounds of the pursuit.
But none came, and after awhile they felt a renewal of hope.
But to remain where they were was out of the question.
Where to go or what to do was a problem.
Finally Frank decided that the best move was to cautiously work
their way if possible back to the main body of the mine.
 But in the fearful darkness this did not seem likely to be an easy
bit of work.
One passage could not be told from another.
Yet Frank decided upon this as the only feasible move.
He went in advance and Barney followed slowly.
In this manner they crept along in a cautious way. What seemed
an age passed, when a startling incident occurred.
Suddenly Frank heard a muffled voice in what seemed like a long
distance away.
“Misther Frank! Shure, where have yez gone?”
“Barney!” cried Frank, in surprise, “where are you?”
“Shure, I don’t know, sor.”
“Well, that is odd!” exclaimed the young inventor, with a laugh, in
spite of the possible seriousness of the situation. “How did you get
there?”
“I don’t know that, sor.”
Frank was puzzled.
The voice of the Celt seemed to be within a few yards of him, and
yet was dull and muffled.
It occurred to Frank of a sudden that Barney had wandered into a
parallel passage and was now opposite him, beyond a thick wall of
stone.
Satisfied of this, Frank said:
“I thought you were right behind me, Barney.”
“Shure, so I was.”
 “But you are in another passage. You must have deviated back
here a ways.”
“Very loikely, sor. Pwhat shall I do about it?”
“Why, go back, of course, and get into the right passage and come
along with me.”
“All roight, sor.”
“Be sure and take the first turn to the right. Then keep straight
along the wall until you reach me.”
“Will yez wait, sor?”
“Of course I will.”
“All roight. Here goes thin.”
Frank heard a distant shuffling sound and then all was still.
What seemed like an age passed.
Barney did not appear.
Frank listened in vain for some sound of his approach.
All was tomb-like stillness.
“Well,” muttered the young inventor, “that is queer.”
Finally Frank raised his voice and shouted:
“Barney! Where are you?”
Again and again he shouted.
No answer came back. Now Frank was really alarmed. Cold
perspiration burst out upon him.
“My soul!” he gasped. “It cannot be that he is lost.”
Fearful that this was the case Frank lost no time, but started to
retrace his steps.
 He kept carefully and closely to the wall of the passage and at
intervals shouted loudly.
But each time no answer came.
Only the dull, muffled echoes. It was certainly an alarming matter.
Frank did not credit any assumption that Barney had fallen into the
hands of the greasers.
He reckoned, correctly enough, that the Celt had been misled
further away into other passages and was lost.
Indeed, the mine was a veritable labyrinth, akin to the fabled one
of Crete.
Frank was not sure that he would ever find his way out of the
place, and was oppressed with dismay.
On for some distance he went.
It was easy enough to follow the passage wall.
It seemed certain that it must sooner or later bring him into the one
in which Barney had gone astray.
But the darkness was so very thick that any course was rendered
deceptive.
It was almost impossible to tell, with any degree of certainty, just
where any one would come up. For that matter, it would be easy to
keep up a perpetual circuit until death from sheer exhaustion should
come to end the struggle. It was a situation not without grim terrors.