TAILIEUCHUNG - Microeconomics for MBAs 22

Microeconomics for MBAs 22. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 6. Reasons for Firm Incentives 29 and rents it to the supplier can benefit from the fact that less threatened suppliers will charge lower prices. This consideration may also be a motivation for auto manufacturers to own the equipment that some of their suppliers use. It also provides a very good incentive-based explanation and justification for a business arrangement that has been widely criticized. An arrangement that reduced the threat of opportunistic behavior on the part of firms against workers was the much-criticized company town. In the past it was common for companies typically mining companies to set up operations in what were at the time very remote locations. In the company towns the company owned the stores where employees shopped and the houses where they lived. The popular view of these company stores and houses is that they allowed the companies to exploit their workers with outrageous prices and rents often charging them more for basic necessities than they earned from backbreaking work in the mines. The late Tennessee Ernie Ford captured this popular view in his famous song Sixteen Tons. 44 Without denying that the lives of nineteenth-century miners were tough company stores and houses can be seen as a way for the companies to reduce but not totally eliminate their ability to exploit their workers by behaving opportunistically. Certainly workers would be reluctant to purchase a house in a remote location with only one employer. The worker who committed to such an investment would be far more vulnerable to opportunistic wage reductions by the employer than would the worker who rented company housing. Similarly few merchants would be willing to establish a store in such a location knowing that once the investment was made they would be vulnerable to opportunistic demands for price reductions that just covered their variable costs leaving no return on their capital cost. Again in an ideal world without transaction costs - and without .

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