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The Theory of Industrial Organization

Strategic management Management means manage and past tense of mend which emphasizes the resources should be ready to use. Manage means to operate with justified utilization of resources for profit maximization and growth. The organization may be profit-making or nonprofit making. If we disintegrate the word it will mean manage, me, n and t that enforces everybody‘s contribution and team spirit (forming, storming, norming and performing). It also means man, age, me, n and t that include experiences/ ego state in workers. All the organization operates in business wheel, hierarchy intent and system management. The business wheel concentrates on resources (7MsMoney, Machine, Materials, Manpower, Methods, Minutes & Meters), production, distribution and sales & marketing. Hierarchy intent encircles around vision along with mission, SBU, goals, objectives, policy, procedures and program. And budget. According to strategic System Management, strategic input is processed (strategic actions) for the output (products and services) with proper, constant and continuous feedback (information provision like nervous system) to take care of resource based internal environment (micro/ resources/ assettangibles and intangibles) and industry oriented external environment (PPolitical-legal, EEconomical, SSociocultural, TTechnological/ macro).

Strategic management

ONE PARTY TO AN EXCHANGE often knows something relevant to the transaction that the other party does not know. Such asymmetries of information are pervasive in economic activity: for example, in the relationship between employer and employee when the employee's effort cannot be monitored perfectly; between the stockholders and the manager of a firm; between insurer and insured; between a regulated firm and the regulatory agency; between the supplier and the consumers of a public good; between a socialist firm and the central planner; or (as is the subject of this paper) between buyer and seller when the value of the item is uncertain. Forty years ago, F. A. Hayek criticized theories that purport to describe the price system but start from the assumption that individuals have symmetric information: The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate "given" resources-if "given" is taken to mean given to a single mind which deliberately solves the problem set by these "data." It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality. (Hayek 1945, p. 519)

Auctions and Bidding

Most investment expenditures have two important characteristics: First, they are largely irreversible; the firm cannot disinvest, so the expenditures are sunk costs. Second, they can be delayed, allowing the firm to wait for new information about prices, costs, and other market conditions before committing resources. An emerging literature has shown that this has important implications for investment decisions, and for the determinants of investment spending. Irreversible investment is especially sensitive to risk, whether with respect to future cash flows, interest rates, or the ultimate cost of the investment. Thus if a policy goal is to stimulate investment, stability and credibility may be more important than tax incentives or interest rates. This paper presents some simple models of irreversible investment, and shows how optimal investment rules and the valuation of projects and firms can be obtained from contingent claims analysis, or alternatively from dynamic programming. It demonstrates some strengths and limitations of the methodology, and shows how the resulting investment rules depend on various parameters that come from the market environment. It also reviews a number of results and insights that have appeared in the literature recently, and discusses possible policy implications.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w3307.pdf?abstractid=226671&mirid=1

Irreversibility, Uncertainty, and Investment

Despite its importance to economic growth and the evolution of market structure, the investment behavior of firms, industries, and countries remains poorly understood. This paper has several objectives. First, it reviews some basic models of irreversible investment to illustrate the option-like characteristics of investment opportunities, and to show how optimal investment rules can be obtained from methods of option pricing, or alternatively from dynamic programming. Second, it discusses the implication of irreversibility for the empirical analysis of investment behavior. Finally, it discusses briefly some of the implications that the irreversibility of investment may have for policy. For example, policies that stabilize prices or exchange rates may be effective ways of stimulating investment.

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This paper extends financial option theory by developing a methodology for the valuation of claims on a real asset: an offshore petroleum lease. Several theoretical and practical problems, not present in applying option pricing theory to financial assets, are addressed. Most importantly, we show the necessity of combining option pricing techniques with a model of equilibrium in the market for the underlying asset (petroleum reserves). The advantages of this approach over conventional discounted cash flow techniques are emphasized. The methodological development provides important insights for both company behavior and government policy. Promising empirical results are reported.

Option Valuation of Claims on Real Assets: The Case of Offhsore Petroleum Leases

/pdf/option-valuation-of-claims-on-real-assets-the-case-of-44u5orl4p8.pdf

Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases

The authors model entry incentives in auctions with risk-neutral bidders and characterize a symmetric equilibrium in which the number of entrants is stochastic. The presence of too many potential bidders raises coordination costs that detract from welfare. The authors show that the seller and society can benefit from policies that reduce market thickness (i.e., the relative abundance of buyers). Their analysis extends well-known revenue-equivalence and ranking theorems but also demonstrates that variations in the auction environment affect optimal policies (e.g., reservation prices) in ways not anticipated by models that ignore entry. Copyright 1994 by American Economic Association.

Equilibrium in auctions with entry

The world oil market is regarded by many as a puzzle. Why are oil prices so volatile? What is OPEC and what does OPEC do? Where are oil prices headed in the long run? Is “peak oil” a genuine concern? Why did oil prices spike in the summer of 2008, and what role did speculators play? Any attempt to answer these questions must be informed and disciplined by economics. Such is the purpose of this essay: to illuminate recent developments in the world oil market from the perspective of economic theory.

https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.23.3.145

World Oil: Market or Mayhem?

The risk-neutral independent-private-values (IPV) auction model produces curious results regarding the use of reservation prices: no matter how many bidders, the seller should announce a fixed reservation price above his true value. This is notable since the seller gains by adopting an inefficient institution, and puzzling because it conflicts with common practice. The authors relax the IPV assumption; characterize optimal reservation prices in a richer class of auctions; and show that, when information is correlated, the seller's optimal reservation price converges to his true value, often monotonically and rapidly, as the number of bidders grows. Copyright 1996 by Royal Economic Society.

James L. Smith

Papers

Option Valuation of Claims on Real Assets: The Case of Offhsore Petroleum Leases

Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases

Equilibrium in auctions with entry

World Oil: Market or Mayhem?

Optimal Reservation Prices in Auctions