During the course, you are required to complete a formal written assignment highlighting published current economic events or issues and explain how they relate to theories learned in this course. The paper provides you an opportunity to realize, reflect, and explain the economics that exist all around us. The paper must include a graph used as an explanatory tool of the economic principle presented.
Early submissions of written assignments are always accepted, but use the links provided in the respective modules to submit your topic, draft, and final
paper.
Instructions for preparing this assignment are as follows:
1. Each paper is to be an analysis on the recent economic events or economic reports from the supplemental resources or references. The focus of this assignment is to relate and analyze current events to basic principles of macroeconomics covered in this course. It is not acceptable to just regurgitate
statistics. The paper should indicate that you have a clear understanding of theory learned in class and its application/operation in the ‘outside world.’
Page 4 of 9
2. Option – If you come upon an interesting subject relating to your work or any other non- economic publication that can be explained in light of the
theories learned in this class, you may be able to substitute this as the basis article. Discuss the article and ideas with your Instructor prior to
embarking on this option.
3. Use standard file format (.doc or .docx) for all deliverables (topic, draft, and final paper). Standard margins apply. Papers should contain proper
documentation of the article(s) or other references used. If direct quotes are used (not contained in the article), appropriate footnotes, endnotes, or
parenthetical citations must accompany the quotes. Since a part of your paper will come from published sources, Internet references, etc., there should be
sufficient evidence of where the information for your paper originated. Paper length should be a few pages – short enough to qualify as a commentary but long
enough to adequately address the subject. Typically, six to eight double spaced pages are sufficient.
We can write this or a similar paper for you! Simply fill the order form!
a) What two inventions/technologies established during the Civil War increased “efficiency and productivity”?
b) A third of population boom from 1870 to 1900 was caused by what?
c) The government encouraged industrial growth with tariffs [taxes on foreign imports], land grants to railroads and what?
d) By 1913 the US produced what percentage of the world’s entire industrial output?
e) The railroad industry established the four time zones but how did railroads effect shopping/marketing/consumer business? (Hint: it’s part of the “Sears” story)
f) Who was Cornelius Vanderbilt?
g) What was Rockefeller’s industry and how did he create his empire?
h) Consumer prices dropped, which raised standards of living, but now there was more job…what? (starts with s) And what else that hurt the poor most?
i) About how many people died on the job per year on average in this age?
j) What was the first national union?
k) The membership of this union shrank over time because it had become unfortunately associated with what?
l) Who was Samuel L Gompers?
m) Social Darwinism argued the poor should be poor because…why?
n) This was the time when people started to argue that wealth inequality was the opposite of…what?
1) What was “manifest destiny” and how was it applied to the western frontier?
2) Who/what were “robber barons”/”captains of industry”? Give a couple of examples.
3) Who was Andrew Carnegie?
3) What is Social Darwinism?
4) What was Nativism?
5) What is a monopoly and trust?
6) Describe “vertical” and “horizontal” integration.
7) Share/describe an example of labor strife/strike during the Gilded Age, for example a picket or protest or strike. (For example, read about the railroad strike in your texts.)
8) What’s the difference between the Knights of Labor and the American Federation of Labor?
9) What were “political machines” in big cities?
10) What did Bryan mean by a “cross of gold”? What was his political argument?
SAMPLE ANSWER
“Industrial Economy” After the Civil War
a) What two inventions/technologies established during the Civil War increased “efficiency and productivity”? Financial system improvement that affected the national currency leading to improvement/ boost of telegram that improved communication of and construction of transcontinental Railway
b) A third of population boom from 1870 to 1900 was caused by what? Immigration
c) The government encouraged industrial growth with tariffs [taxes on foreign imports], land grants to railroads and what? Putting Native Americans on reservation
d) By 1913 the US produced what percentage of the world’s entire industrial output? One third of industrial output.
e) The railroad industry established the four time zones but how did railroads effect shopping/marketing/consumer business? (Hint: it’s part of the “Sears” story) Allowed shipment of jewelry and watches and other construction materials.
f) Who was Cornelius Vanderbilt? Owners of the company/captain of the industries
g) What was Rockefeller’s industry and how did he create his empire? He started as a clerk of Cleveland merchant and became the richest man in the world. Controlled 90 percent of the US oil industry
h) Consumer prices dropped, which raised standards of living, but now there was more job…what? (starts with s) And what else that hurt the poor most? Security, booms and busts on the economy
i) About how many people died on the job per year on average in this age? 35,000j) What was the first national union? Knights of labor
k) The membership of this union shrank over time because it had become unfortunately associated with what? Haymarket riot in 1886
l) Who was Samuel L Gompers? American federation of labor leader that focused on bread and butter issues such as pay for the workers
m) Social Darwinism argued the poor should be poor because…why? Inherent evolutionary flaws, which enabled tycoons to sleep at night. The reason was that the tycoons owned the means of production and were a monopoly
n) This was the time when people started to argue that wealth inequality was the opposite of…what? Success and failure, wealth and poverty
1) What was “manifest destiny” and how was it applied to the western frontier? Manifest destiny was a term used to express the belief of the Anglo Saxon Americans to expand their civilization and institutions across the North American. It was applied to the western frontier to exemplify the unity of the Americans in its purpose and mission to expand its territories.
2) Who/what were “robber barons”/”captains of industry”? Give a couple of examples. Robber barons were the people that owned industries and means of production in US. They included Cornelius Andrew, Vanderbilt ‘Re Me too’ Carnegie (Mellon), and Leland “I named my University son” Stanford
3) Who was Andrew Carnegie? He was one of the rich men, owners of the company also capital of the industry
3) What is Social Darwinism? It meant that the theory of survival of fitness should be applied to people and corporationss of people. Big companies were fitter because there was nothing to fear of monopoly. Poor people were poor because of evolutionary flaws 4) What was Nativism? Refers to policies or beliefs that protected or favored the interests of the native population at the expense of immigrants
5) What is a monopoly and trust? Monopoly is a situation where, larger industries dominate the market killing smaller companies leading to exploitation due to lack of competition. Trust, on the other hand, are entities established for purposes of investment.6) Describe “vertical” and “horizontal” integration. Vertical integration is where the company owns its supply chain while horizontal integration is where a company acquires production output of other companies in the same industry
7) Share/describe an example of labor strife/strike during the Gilded Age, for example a picket or protest or strike. (For example, read about the railroad strike in your texts.) An example of such strikes was the Great Strike that occurred in the 1877. The strike arose because of the pressures of economic depression. The powerful and big corporations such as railroad reduced the wages of their workers something that resulted to the strike. The strike affected many cities such as Chicago, St. Louis, West Virginia, Martinsburg and Pittsburgh that was highly affected. At least 20 people died and 29 were wounded.
8) What’s the difference between the Knights of Labor and the American Federation of Labor? Knights of labor was the first inclusive movement to be formed as it admitted unskilled workers, women, and children and were damaged in Haymarket 1886. While on the other hand, American Federation of Labor was formed mainly to agitate for pay issues, worker and safety. The movement workers were mostly iron and steel workers. AFL was formal federation as opposed to Knights Labor that was secretive.
9) What were “political machines” in big cities? Corporations (group of organized politicians) that sponsored elective leaders to get avenues to engage in corrupt deals through government contracts.
10) What did Bryan mean by a “cross of gold”? What was his political argument? He meant the suffering of the citizens due to challenges in the currency system. His political argument was that the government was not doing its best to stabilize the economy to ensure that farmers, industrial workers, and miners lead bett
Part A
James Cookie is a ship’s officer employed by Sails International Inc, a company incorporated in Bermuda that owns cruise boats and operates passenger cruises in the Pacific Ocean.
James owns a house in Sydney which was formerly his family home but his estranged wife and children now live in Singapore. James rents the house to his cousin and family. The house is let fully furnished; the furniture belongs to James. Whenever he is in Sydney, James stays in the house and has his own room in which are stored his personal belongings. In the current income year James spent 80 days in the house. The remainder of the time was spent on a cruise ship except for 20 days spent visiting his children in Singapore.
The ship on which James serves visits a variety of ports, mainly in the South Pacific. James’s employment contract was negotiated and signed in Hong Kong.
Required 1: For Taxation purposes, is James a resident of Australia? What is the source of his salary from Sails International? Required 2: If James sold his house, would he be entitled to the main residence exemption in Subdiv 118-B?
Part B
On 1 July 2012 Lee commenced business as an architect. He operated as a sole proprietor from a converted garage at the rear of his residence. Much of his work consisted of preparing building designs and specifications for local council building permits but he quickly gained a reputation for quality drawings prepared within tight timeframes. By the end of 2012/13 he had a small client base of local builders and private referrals and billings (fees) of $75,000.
During the year Lee submitted a design as part of a national competition for the Citadel, the centrepiece of an urban redevelopment. His visionary design and revolutionary use of local materials left the judging panel speechless with admiration and, to national acclaim, he was awarded the prize and commissioned to build the structure. Immediately he borrowed $1 million, rented premises on Main Terrace, acquired state of the art equipment and employed six draughtsmen and two administrative staff. During 2013/14 his billings were $1.75 million.
Required Should Lee return on a cash or accrual basis in 2012/13 and 2013/14?
You must refer to appropriate case law. Your answer must include (but should not be limited to) a discussion of the following: • What factors affect the choice of a cash or accrual basis? • Does Lee have a choice of the basis he adopts? • Does the Commissioner of Taxation have a right to insist on a particular basis? • Should Lee’s basis be the same in both years?
SAMPLE ANSWER
Part A.
Introduction
Income tax is generally payable annually by residents or non residents who are receiving income in Australia provided the income was derived, earned or accrued while living in Australia. The returns earned from a business operated partly in or out of the country i.e. Australia are considered to have accrued in totality from Australia. All the income earned from investments, sale of personal property or any other income is subject to taxation. (Renton, 2005)
The residents of Australia are basically taxed on their global income and from all sources but temporary residents mostly have their income from foreign exempted. Foreign residents are basically taxed on the income whose source is n Australia for example on the income they have earned while working in Australia. The residents of Australia pay lower rates of taxes than their foreign counterparts. (Centrelink website, 2013)
For tax purposes one is considered an Australian resident if one has lived in Australia entirely or has come to live in Australia permanently or if one is an Australian but travelling abroad temporarily and has not built or bought a permanent home in a different country or out of Australia. The other situations refer to students who have travelled to Australia to study for more than six months continuously or if a foreigner has been working in Australia continuously for more six months or even more and mostly living and working in the same place or one has been living in Australia for at least more than half of the financial year unless a person has an oversees home and does not intend or plan to live in Australia. The income tax assessment ruling IT 2650 of permanent place determination which is also related to case IT 2607 under the ATO ID 200/179 puts more emphasis on the place of resident.
It defines a resident as a person who is domiciled in Australia unless the commissioner is convinced and satisfied that the permanent place is not Australia as was illustrated in the case of Henderson v Henderson (1965) 1 All E.R.179.
James Cookie works for a foreign company that has been registered in Bermuda that owns and operates passenger cruises across the Pacific Ocean. He owns a house that he inherited from his parents in Sydney, Australia. By virtue of his inheritance and parentage he is an Australian citizen. But he has rented the family house to his relatives who live in the house but the furniture and one of the rooms belongs to him. In the current year he spent only eighty days in the house while most of the other days he was away. For tax purposes he will be considered as a resident as he has no other permanent home even though the company he works for is foreign based. All his income will be subjected to taxation in Australia together with the rent that he receives from his inherited house that he rents for his relatives. If the salary is taxed by the Bermuda tax authorities then he has to apply to be considered for tax reduction if there are tax treaties under the Australian Treaty Series agreements between the two countries. Australia has tax agreements with close to forty countries globally. If an Australian resident receives income or any kind of benefits from these countries, he can apply for a reduction in his withholding tax or alternatively to be exempted from the payment of tax in these other countries. These can be achieved by supplying the Australian tax office with a tax relief form and or a certificate of the status of residency.
The determination of the permanent place of abode is important. The taxpayer’s permanent, fixed and also habitual place of residence or abode is his home. James home is in Australia and he has no other permanent home. As in the case of F.C. of T v Jenkins (1982) ATC 4098, a permanent abode connotes an enduring relationship that develops as an attachment to a particular place of abode. The residency will determine his tax liability and not the length of stay in Australia for a particular year.
The tax liability is usually determined annually and a person must have a place of permanent residence. James will be taxed by the Australian authorities because his place of abode is in Australia not withstanding that his earnings are from a different country and he hardly lives in Australia. James intentions are to return to Australia eventually at the end of the transitory stay abroad qualifies him to be an Australian resident for tax purposes.
However, if James had been working and living in Bermuda, he would be considered a non resident for tax purposes but his income from the inherited properties that he has rented to his relatives would still be subjected to taxation in Australia as in the case of F.C of T V Applegate (1979) ATC 4307.
The source of his income is from Bermuda and its subject to taxation in that country if he resides their or has some residence in that country.
The circumstances are similar to the case of ATO ID 2005/249 where the taxpayer was present in Australia for less than 183 days. The decision under section 6-5 of the income Tax assessment Act of the year 1997 (ITAA 1997) was that he was not obliged to pay any taxes as he was a non resident.
If James sold his house in Australia then he would be a non resident for tax purposes and he would not be entitled to the main residence exemption in Subdivision 118-B. (ATO, 2005) The case of ABB Australia Pty Ltd V FC of T (2007) ATC 4765 illustrates the withholding of tax by a non resident company which was also a shareholder of resident, the ABB of Australia who was also the applicant. The facts are also similar to the case of Federal Commissioner of Taxation v French (1957) 98 CLR 398. The case emphasized that the exertion of an employee must be at the place where the exertion took place and it’s the source of the earnings where the operations of a business take place. For this case it’s Bermuda.
Part B
Lee should make his returns based on the cash basis for the year 2012/13 and 2013/14.
Taxes collected or even paid can either be reported as cash or accrual to the Australian Tax Office. The major difference between the two is determined or connected with the liability of recording the tax implications and payments.
When receipt of income is reported in cash basis then no taxes will be payable to ATO until all the amounts have been collected from the customers. One will also not be allowed to claim any tax benefits or claims that have been charged by the suppliers until one pays the suppliers. The reported amounts will actually represent 1/11th of the monies paid or even received during the financial or tax period.
Accrual based payments is when the tax liability is recognized when the invoice is received and one has legal obligation to pay all the suppliers and also to receive the payment after supplying goods to the customers.
For example, in cash basis, one is liable to pay the tax after receiving payments from the debtor. If one sells a TV set for ten thousand dollars on credit and the tax is 1000 dollars, the tax will be paid when the client pays for the TV set regardless whether it takes six months or one year. If he doesn’t pay for the TV set then the GST on the TV set will not be paid. The accounting system is based on the receipt system.
On accrual basis is the opposite, one is obliged to make the payments once the invoice has been raised regardless whether the client has paid for the TV set or not also one can claim the GST from the suppliers even if he has not paid them. The accounting system is based on the earnings method.
The factor that may determine is basically the nature of the trade or industry involved. The service industry bases most of their payments on the cash basis especially such fields as engineering and architecture whose payments are materially large and are paid in phases. It’s not practical to use the accrual basis of making the tax payments. Lee may have a choice on what basis to use but the accrual basis is basically not practical. If the money to support his operations have been borrowed it’s not possible for him to pay the tax when he has not received the payments.
The commissioner has a right to insist on the mode of tax payments if the systems as companies in the fast moving consumer goods industry have no reason to use the cash basis as most of their products are paid on delivery or on scheduled periods that can be synchronized to allow the accrual basis to operate effectively. Under sec 29-45 of the Australian GST Act, provides that a person can apply to the commissioner for authority to use the cash basis only after some requirements under the act have been met. The case of Lee is applicable as first, the nature and size of his business cannot allow him to use the accrual basis. He actually had to borrow some money from the bank to facilitate his operations as he is anticipating to be paid in future and as such there is no way he can make the tax payments before he has been paid his monies.. The tax is also on the higher side he cannot afford to make the payment before he has been paid for the work done. The nature of the accounting system applicable is also different.
Lee has little choice on the basis of accounting procedure to adopt unless he applies to the commissioner for approval while also outlining the appropriateness and the need for the change. The commissioner may also find it appropriate to allow him to use the cash basis. The case of ABB Australia Pty Ltd V FC of T (2007) ATC 4765 illustrates the withholding of tax by a non resident company which was also a shareholder of resident, the ABB of Australia who was also the applicant. The commissioner, submitted that for the purposes of identifying the right accounting basis, a company has to be classified as a trading company as in the case of Carapark Holdings Ltd v Commissioner of taxation (1966) 115 CLR 653 and Broken Hill Pty Co. Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5193. A company such as the ABB Zurich that had over 1000 subsidiaries was actually a prima facie type accruals basis taxpayer as the nature of its trading activities are solely conducted for the major purpose of earning dividends which is the major objective of the company. The commissioner contended that the basis of making taxation returns must be the actual appropriateness of business operations and the mode of receiving the income.
The consistency of the accounting method adopted should be upheld until it’s no longer applicable or appropriate. These may occur when the tax payer’s business circumstances reflect that the cash method of accounting is more appropriate for determination of income tax. It may occur mostly because of business expansion or change in the operations or nature of the business.
In the case of FCT v Dunn, Davies J, mentioned that it was the appropriateness of the circumstances of the business operations and how the books and records are maintained that determines the relevant accounting practice to be adopted. The same case applied when Dixon J, in the case of Carden’s case, said that the considerations of each case are important as the nature of the profession or trade have to be considered as to the mode of accounting method to be adopted. The earnings method or the accruals basis largely applies where circumstances are not clear and also where there are conflicting indicators as to the method of accounting to be adopted subject to subsections 6-5(1) to (3) of the ITAA of the year 1997. The weight that should apply to the method of accounting largely depends on the course, appropriateness and the relevance of the specific case as illustrated by the case of Broken Hill Pty Co. Ltd v Federal Commissioner of Taxation (1999) 99 ATC 5193.
The commercial and also the general accounting principles, guidelines and practices that are maintained by companies require all companies to adopt the accrual or the earnings method of accounting or book keeping.
For example, Keith who is a plumber is normally contracted to perform repair broken pipes and drainages in personal homes while at times he has to purchase some materials. He accounts for his income from his business on receipt or cash basis. The material he purchases are not directly bought from his income and does not affect his work so much as his work is mostly from his services and not from the resale of materials. The method of cash basis suits his nature of work. For tax purposes, it’s substantially correct as it reflects the nature of Keith’s business income.
In ATO ID 2014/1 changing from cash basis to accrual basis accounting, the relevant sections of the case where the taxpayers business had grown and it was imperative for him to change the nature of the accounting method as in the case of Arthur Murray (1965) 14 ATD 98.
See attached file for the assignment and all the instructions.
Coursework Assignment Brief
Semester:
Summer 2014
Module Code:
POG 220
Module Title:
Legal Aspects of Oil & Gas
Programme:
BSc (Hons) Oil and Gas Management
Level:
Level 5
Awarding Body:
University of Plymouth
Module Leader:
Vick Krishnan
Format:
An individually written assignment consisting of a written essay/report of 2,500 words.
Presentation:
Yes
Any special requirements:
All written work should be submitted on the Student Portal along with an acceptable Turnitin Report
Word Limit:
2,500 words
YOUR WORK MUST BE SUBMITTED VIA THE STUDENT PORTAL. HARD COPY OR EMAIL SUBMISSION WILL NOT BE MARKED.
Word Limit Penalty for task 1
10% under / excess No Reduction
20% under / excess 5% Reduction
30% under / excess 10% Reduction
40% under / excess 15% Reduction
50% under / excess 20% Reduction
Over 50% under / excess Half the total marks
Deadline date for submission:
The deadline date for submission is 5.00 pm on Wednesday 13th August 2014.
Learning outcomes to be examined in this assessment (please note that this is not the assessment task)
Demonstrate a good understanding of the substantive rules of international law applicable to the oil and gas industry
Evaluate the key principles of contract formation in international commercial transactions and key international law principles and trends in the oil and gas sector
Assess the effectiveness of international law in addressing the environmental impact of oil exploration and exploitation
Demonstrate a critical understanding of the importance of oil and gas law as a distinct subject, studied in a practical and commercial context.
Knowledge and understanding: Demonstration of detailed knowledge of the legal framework of oil and gas industry and the implications of national, regional and international law.
Cognitive/intellectual skills: Ability to analyse a range of information and to synthesise ideas, selecting appropriate techniques of evaluation.
Key/Transferable skills: Ability to manage information towards a given purpose and understand the relevance in the analysis of legal problems.
Practical skills: Ability to apply given techniques to the solution of particular problems.
Percentage of marks awarded for module:
This assignment is worth 50% of the total marks for the module
Assessment Task:
An Individual Essay/Report
What bargaining powers exist between host states and international oil companies at the commencement stages of Exploration and Production. In this respect, critically evaluate the concept of “relative bargaining power” in the contractual relationship between host-governments and international oil companies.
You must support your answer with relevant and appropriate examples.
Assessment criteria
Explanatory comments on the assessment criteria
Maximum marks for each section
Content, style, relevance and originality
Relevant, accurate content, demonstrating academic and literary research, as necessary and required by the Assessment Task.
50%
Format/Structure, Referencing and Bibliography
Full text referencing and bibliography using the Harvard citation method
Demonstrating the ability to critically analyse and/or evaluate the subject area. Emphasis will be placed on the ability to triangulate introduction, discussions and conclusion. Higher marks will be given to those that are able to introduce issues for further contextual exploration.
40%
General Guidance/Structure :-
You are required to develop a well presented and logically structured essay on the concept of ‘relative bargaining power’.
Basically you are evaluating the respective parties (Host States and IOC’s) bargaining powers and how the pre-contractual negotiations subsequently translate into a full blown E & P contract. Evaluate which party has more bargaining power and why is this so? Look at the following issues :-
(1) The asymmetry of information in the hands of the IOCs
(2) Their technical expertise, and
(3) They are financing the project development.
Compare this with concession agreements – how do these differ? Also look at royalty payments and returns, and see how these payments and returns affect the relative bargaining power of the parties.
You should aim to develop a number of competing arguments on the dynamics of the relationship between the host-governments and IOCs.
You are to provide a balanced view of the issues involved and whether contractual relationships are sustainable in the long-term in oil producing countries without strong legal frameworks for enforcing contracts.
A good structure and a coherent analysis which is supported with academic and literary evidence is very essential.
Marking Criteria for Task 1
Indicative Grade
UK% marks
Characteristics.
Distinction
70%+
Very high standard of critical analysis using appropriate conceptual frameworks.
Excellent understanding and exposition of relevant issues.
Clearly structured and logically developed arguments.
Good awareness of nuances and complexities.
Substantial evidence of well-executed independent research.
Excellent evaluation and synthesis of source material.
Relevant data and examples, all properly referenced.
Merit
69-60%
High standard of critical analysis using appropriate conceptual frameworks.
Clear awareness and exposition of relevant issues.
Clearly structured and logically developed argument.
Awareness of nuances and complexities.
Evidence of independent research.
Good evaluation and synthesis of source material.
Relevant data and examples, all properly referenced.
Pass
59-50%
Uses appropriate conceptual frameworks.
Attempts analysis but includes some errors and /or omissions.
Shows awareness of issues but no more than to be expected room attendance at classes.
Arguments reasonably clear but underdeveloped.
Insufficient evidence of independent research.
Insufficient evaluation of source material.
Some good use of relevant data and examples but incompletely referenced.
Pass
49-40%
Adequate understanding of appropriate conceptual frameworks.
Answer too descriptive and or any attempt at analysis is superficial containing errors and omission.
Shows limited awareness of issues but also some confusion.
Arguments not particularly clear.
Limited evidence of independent research and reliance on a superficial repeat of class notes.
Relatively superficial use of relevant data sources and examples and poorly referenced.
PASS MARK=40%
E
39-30%
Weak understanding of appropriate conceptual frameworks. Weak analysis and several errors and omissions.
Establishes a few relevant points but superficial and confused exposition of issues.
No evidence of independent research and poor understanding of class notes or no use of relevant data, sources and examples and no references.
It is recommended that you review the requirements of the assignment before submitting your work.
Students should conform to the conventions of the above assessment format in the preparation of their assignments. The relevant assessment criteria have been stated to enable and guide students in the preparation of their work. Achievement of the learning outcomes and the application of relevant theories to the assessment task should be demonstrated.
SAMPLE ANSWER
Bargaining Power Balance between the Host States and the IOCs
The discovery of the much coveted natural resources such as oil for most countries ignites extremely high national and personal dreams of riches and hopes of prosperous times. This is escalated by the recent dramatic increases in the prices of oil. However, the process of exploiting such prestigious resource is not without challenges to the host countries, most of which are developing (Rassel, 2012, p. 797). The challenges mostly involve overcoming commercial, legal, technical, and expertise requirements required in exploration and development (Guzman, 2010, p. 171). The key hurdles centre mostly on management issues leading to the need to invite international companies with expertise and resources to help in the exploitation and marketing of the energy resource. The major concern arises once the host countries find that the international oil companies (IOC) often possess superior financial resources, superior knowledge of the oil, and even more contract negotiating experience than them (Rassel, 2012, p. 797). For instance, some companies such as Exxon Mobil have more resources ($371 billion) than most of the countries they operate like Saudi Arabia whose entire GDP is $ 281 billion (Peacock, 2010, p. 131). As such, negotiation and maintaining of the contracts can be a heated affair.
Bargaining power is the relative ability of parties involved in a situation to exert influence over each other in which if both parties’ posses equal footing in the involvement, then they have equal bargaining power and unequal bargaining power if otherwise (Guzman, 2010, p. 171). As Rassel (2012, p. 797) notes, in negotiations, bargaining power can be conceptualized as the capacity of one party to dominate the other as a result of its power, size, status, or influence, or even through a combination of the different persuasion tactics. In most cases involving negotiations between host countries and IOCs, unequal bargaining power is manifested by one party, most often the IOCs.
Prospects of Relations between Host States and IOCs
The nature of the oil and gas industry is one in which large returns can be realized since the commodity value in the market above the cost for maintaining the factors of production and for earning profits. Conflicts between the host and the OIC more often emanate from the issue of returns sharing (Shaw and Cooper, 2009, n.p). Bargaining between the host and the IOC determine the division of the rents that each party in the agreement is to receive (Rassel, 2012, p. 797). Although there is a divergent between the goals of the host and those of the IOC, there is equally an array of complementarity and such a platform for each of the two sides to realize their targets through cooperation (Guzman, 2010, p. 171). However, the challenge arises, as a result, of the great discrepancy that exists in terms of resources; financial and expertise, between the two parties whereby more often the IOC are better established than the host countries.
During the negotiation stage, for instance, IOC is highly motivated (Peacock, 2010, p. 131). The companies are likely to overlook the high initial cost involved in the development and exploration even in the instance that they encounter several dry wells. They will, however, be keen to recover all these costs rapidly once they have embarked on a successful production (Shaw and Cooper, 2009, n.p). IOCs have a tendency of tailoring their negotiation style to suit their interpretations of the political environments in countries they operate. Having been accustomed to authoritarian regimes and civil strife in most of the countries they operate in, the oil companies will most likely bring a self-protective, uncompromising, feisty attitude towards negotiations (Guzman, 2010, p. 171). In such cases, the environmental and societal impacts of the projects are ignored during negotiations a result of which is conflicts and breaching of agreements in the after days. Oil contracts are the result of negotiations more so since they are varied and complex.
According to Rassel (2012, p. 797), investors seek and require legal and institutional stability especially in terms of political, societal inexperience in handling resources, and institutional conflicts. Although most companies would wish to avoid such situations, oil companies are more often forced by circumstances to operate in conflict zones since the resources are mostly fond in these countries (Shaw and Cooper, 2009, n.p). These emerging countries normally do not possess sufficient domestic know-how be it financial, legal, or technical, for the development, management, and implementation (Solimene, 2014, n.p). As a result, they have to seek skilled and independent negotiators from the private sector, which is seen as more lucrative and professionally challenging in order to counter this superior experience that IOCs bring to the table.
Types of Contracts used in Oil and Gas production Agreements
Host governments are normally faced with the dilemma of the type of contractual system to use in terms of the concession or license agreement, a joint venture, a PSC, or a service agreement (Solimene, 2014, n.p). In concessions, the contracts grant the IOC a right to explore, develop, and to export the oil extracted in a specific area for which the company has received the exclusive production rights for a prescribed time. Economic and financial advisers and lawyers are needed to structure the bidding system (Peacock, 2010, p. 131). The terms of license are drafted by the host government in compliance with the applicable law. PSCs are agreements signed by the government and the extraction company concerning how much of the resource extracted each will receive (Vivoda, 2009, p. 517). The main difference between concessions and PSCs is that in concessions, the degree of professional support and expertise required is not as extensive as in the case of PSCs. There are also different commercial results achieved by each of the two types of contracts; concession and PSAs. In PSAs, the host nation can earn a signing bonus (Rassel, 2012, p. 797).
The Production-sharing Contract recognizes that ownership of the resource rests with the citizens and not with private parties. Just like in the case of the licenses, the IOC develops, operate, and manage the oil field bearing all the operational and financial risks (Shaw and Cooper, 2009, n.p). In this type of contract, the host state has a number of benefits. For instance, depending on the period of depreciation, the host country can earn a greater share of oil proceeds early. The profits are shared according to the agreed percentages and the IOC is obliged to pay taxes (Vivoda, 2009, p. 517). However, this type of contract presents some challenges especially in developing countries with large number of issues to be addressed and the less reliable legal infrastructure. PSCs demand skilled negotiators and experts in legal, commercial, technical, financial, and environmental areas (Solimene, 2014, n.p). This is a daunting challenge for host countries with their dire lack of data and information than the IOCs. PCAs were introduced in Indonesia in 1966 and have since been adopted by over 40 countries across the globe like India and in Africa (Peacock, 2010, p. 131).
Rassel (2012, p. 797) postulates that a joint venture arises if parties wish to pursue a joint undertaking with agreements on profit sharing as well as operational, financial, and management risk allocations. Service agreements involve the contractor receiving a fixed payment independent of the discoveries or oil prices. Management decisions key to the process tend to remain within the government (Rassel, 2012, p. 797).
Across history the industry has been characterized by cyclical shifts in relation to the balance of power between the host countries and IOCs, a feature that is reflective of the cyclical nature of this industry (Shaw and Cooper, 2009, n.p). The host states were consequently able to earn larger shares of the economic rent. In addition, these periods were characterized by very low degrees of compatibility between the IOCs and the host countries. Besides, during the late 1980s and 1990s, the relationship was more of cooperative with falling market prices, which resulted in the balance of power shifting to the IOCs (Solimene, 2014, n.p). As a result, there was higher compatibility between the hosts and the IOCs and the balance of power now shifting to IOCs. In a nutshell, this implies that the larger the rents for division, the more intensive the bargaining relationship between the two parties becomes.
Arguing from the Vernon’s obsolescing bargaining model (OBM)’s perspective of the relationship between the host and the IOCs, it is clear that the changing nature of the bargaining relations is a function of resources, constraints, and goals on both sides (Pate, 2009, p. 347). As discussed earlier in this paper, the initial stages of bargaining are seen to favour the IOCs, a feature attributed to their established resource base when entering the relationship as opposed to the less versed hosts mostly the developing nations that lack the same (Shaw and Cooper, 2009, n.p). However, as the relationship proceeds the IOC’s assets are turned into captives with the bargaining power consequently shifting to the side of the host countries (Maniruzzaman, 2009, p. 79). Once the bargaining power is on the side of the host country, the government is at a position to impose more conditions on IOCs ranging from higher asset expropriation to taxes.
Notably, the relationship between the host countries and the IOCs has since changed from a confrontational one to a more cooperative (Shaw and Cooper, 2009, n.p). Besides, the shift in the way governments addressed the issue of contracts was followed by the deregulation, and less expropriation, and economic liberalization of the oil industry (Rassel, 2012, p. 797). Rassel, (2012, p. 797) notes that there is another emerging scenario in which the IOCs are seen as struggling to secure new oil reserves in the recent years, as a result, of increased competition.
Factors Affecting Bargaining Power between Host States and IOCs
Largely, several factors that are firm-specific affect the bargaining power of IOCs either as resources or constraints (Vivoda, 2009, p. 517). An IOC that has a reputable international presence is likely to command greater bargaining power that has the potential to achieving favourite investment terms in negotiations with the host state (Rassel, 2012, p. 797). Besides, companies with poor records on environmental conservation, as is the case with the infamous BP oil spill incident at the Gulf of Mexico, are less likely to attract good contracts to drill offshore areas particularly without very adequate regulation in place (Shaw and Cooper, 2009, n.p).
An IOC’s reserve replacement acts s a key indicator of its bargaining power (Pate, 2009, p. 347). Reserve replacement is a good indicator to the ability of the company to sustain and expand their business in the coming days. As such it becomes an important measure of performance and a key factor in showing the value of the company in the financial markets since it measures the ability of the company to continue operating as a viable entity (Solimene, 2014, n.p). In this effect, if the IOC is unable to do stock replacement annually, then it would be perceived as performing poorly both in the market and in terms of its bargaining power (Maniruzzaman, 2009, p. 79). Alternatively, if they are to reproduce all their products and consequently secure access to additional reserves, then their bargaining power is enhanced (Rassel, 2012, p. 797). The five major companies were able to replace 99.7 percent of oil they produced between 1998 and 2002, seen as being at the break-even point while between 2003 and 2007 they were only able to replace 51.7 percent of the oil they produced (Shaw and Cooper, 2009, n.p).
The country of origin of the IOC has a direct impact on their bargaining power relative to a given host country. This is so because of the different political, colonial, historical, and cultural factors. The political climate is likely more accepting for an IOC from a home country with stronger historical ties and greater cultural proximity (Vivoda, 2009, p. 517). Such ties are an important source of better perception of the reputation of the IOC by the host government because of the perceived closer fit between the management approaches of the company with what is common locally. The institutional distance has implications on the company’s legitimacy capacity in the host state (Maniruzzaman, 2009, p. 79). Institutional distance in this effect refers to the similarities or differences between the regulatory, normative and cognitive institutions of the two nations (Shaw and Cooper, 2009, n.p). When the institutional distance is high, the host government is likely to perceive of the IOC stereotypically, which is likely to affect the relationship between the two parties negatively making it difficult for them to reach a consensus (Rassel, 2012, p. 797). For example, in the case when the government of the U.S. engages in negotiations concerning American-based IOCs with host governments, the support tends to weaken the IOCs due to the high institutional distance in terms of the unfriendly anti-American cultural and political context of the host nations (Vivoda, 2009, p. 517).
Legal frameworks governing oil exploration are complex, multi-layered, and in most cases, contain components that are ambiguous. Contractual relationship between the host government and the IOCs is undoubtedly affected by the intertwinement and complexities of the various legal, institutional, constitutional, policy, and agency systems (Rassel, 2012, p. 797). The system of these prerequisite requirements that govern the oil and gas sector policy and exploration consequently impacts on its developement and implementation which entails several aspects and stages each of which has distinct with legislative and legal instruments (Maniruzzaman, 2009, p. 79). There exists a considerable degree of legal uncertainties, disparities, and ambiguities that lower the legal predictability in Oil and Gas contractual arrangements (Solimene, 2014, n.p). This has, in some cases, generated serious rifts and tension between the two parties as is the case in Iraq in 2008/9. The Iraqi oil and gas industry witnessed a period of changes of contracts with new elements in the legal and governing framework (Iraq Oil & Gas Report’ 2013, p. 45). The Iraqi service contracts form an important milestone in shaping future relationship between host countries and IOCs.
Conclusion
Most host states seek IOCs in order to access the managerial and technological skills they have to offer. The degree of managerial and technological skills that an IOC possesses vis-a-vis the host country can be taken as the key factor promoting their bargaining power. The main rationale behind this concept is that the superior and complex managerial and technological skills make it difficult for the hosts to engage with the IOCs because these developing countries have a shortage of the same (Maniruzzaman, 2009, p. 79). In this case, therefore, the host’s bargaining power is more when it has valuable natural resources desired by the IOCs. Notably, countries that have smaller reserves are less likely to attract a lot of IOCs. For instance, the more established IOCs may have more interest to invest in the more established countries such as Saudi Arabia and Russia as compared with Egypt and Malaysia. The rationale in this argument is on the basis of reserve longevity and potential profitability
References
Guzman, AT 2010, ‘International Soft Law’, The Journal Of Legal Analysis, 2, p. 171
‘Iraq Oil & Gas Report’ 2013, Iraq Oil & Gas Report, 1, pp. 1-99
Maniruzzaman, Pm 2009, ‘The Issue Of Resource Nationalism: Risk Engineering And Dispute Management In The Oil And Gas Industry’, Texas Journal Of Oil, Gas, And Energy Law, 5, p. 79.
Pate, TJ 2009, ‘Evaluating Stabilization Clauses in Venezuela’s Strategic Association Agreements for Heavy-Crude Extraction in the Orinoco Belt: The Return of a Forgotten Contractual Risk Reduction Mechanism for the Petroleum Industry’, The University Of Miami Inter-American Law Review, 40, p. 347.
Peacock, B 2010, ”A virtual world government unto itself’: uncovering the rational-legal authority of the IOC in world politics’,Proceedings: International Symposium For Olympic Research, p. 318.
Shaw, T, & Cooper, A 2009, The Diplomacies Of Small States : Between Vulnerability And Resilience, Basingstoke [England]: Palgrave Macmillan.
Solimene, F 2014, ‘Political risk in the oil and gas industry and legal tools for mitigation’, International Energy Law Review, 2
Vivoda, V 2009, ‘Resource Nationalism, Bargaining and International Oil Companies: Challenges and Change in the New Millennium’, New Political Economy, 14, 4, p. 517.
Vivoda, V 2011, ‘Bargaining Model for the International Oil Industry’, Business & Politics, 13, 4, pp. 1-36
We can write this or a similar paper for you! Simply fill the order form!
The final exam is a 3000 words essay. It is strongly advised to start working on it from the beginning of the course.
The aim of this essay is to demonstrate your understand of key concepts in strategic management and your capacity to craft a professional document. It will be a very good preparation for your dissertation.
You are asked to:
First part
. choose a concept/model in strategic management. You can choose this concept among the ones discussed in the course or choose another one. Examples of concepts are: core competencies, generic strategies, mergers and acquisitions, alliances, CSR, blue ocean strategy, etc…
. define this concept
. present the history of the concept: when was it discussed first, how did it evolve?
. discuss how/if the concept is relevant or not to today’s business challenges.
The first part should include a minimum of 10 academic references: books and/or articles from academic journals. It excludes textbooks and articles from business magazines that you can use also if needed.
All sources should be adequately referenced as for any professional academic document.
In the second part, you are asked to:
. present a real life application of the concept. You can use your own company or a company of your choice. This section should be like a mini-case study where you will present the situation of a company, the issues faced and how the concept was used to solve the issues and raise the general performance of the firm.
Approximately 2000 words should be dedicated to the first part and 1000 words to the second part.
SAMPLE ANSWER
Generic strategies concept definition
Companies utilize three types of generic strategies as ways of establishing their competitive advantage. Implementing a pure generic strategy is advocated as the ideal way of attaining sustainable competitive advantage. This paper outlines Wal-Mart’s low cost generic strategy that allows it to maintain its leadership position in the retail industry. Wal-Mart utilizes different tactics in logistics, and operations to make savings that are necessary to maintain a price competitive advantage.
The understanding of sustainable competitive advantage is a central area of focus in strategic management. Strategic management explores different concepts and theories that examine the market environment as well as internal factors of a company in a bid to underscore the best strategy for achieving sustainable competitive advantage. Generic strategies form one of the key concepts in determining a company’s strategic direction (Bordean, Borza, & Glaser-Segura, 2011). Generic strategies are three types of pursuits that organizations engage in to achieve competitive advantage. The pursuits mark the position of a company as a leader in a context of increased competition among business rivals. They include cost advantage, differentiation and focus strategies (Tanwar, 2013).
Porter outlined that companies’ competitive advantage may be defined through an approach on low cost operations where they produce goods and services at the least cost in the industry. The other is differentiating the products and services in a distinct way that sets the company apart from other players in the industry. Companies differentiate through providing unique or superior quality, special features or additional services. Differentiation enhances premium value on products or services resulting in higher profits than their rivals. Cost and differentiation are the two main strategies. Focus is the third strategy that entails companies directing their low cost or differentiated strategy towards a particular customer segment. The products or services are developed to suit a particular niche by customizing them to appeal to only one or a few customer segments in an industry. The focus strategy is used for segments that larger competitors ignore either because of geographic factors, buyer’s special needs, or product specifications. It is pertinent that the chosen segment provides adequate growth potential that is not of central importance to major competitors (Allen, 2006).
History of the concept: when was it discussed first, how did it evolve?
In 1985, Porter proposed the generic strategies through his book titled ‘Competitive Strategy’ (Porter, 1985). The strategies are called generic because they can be applied in any organization in any industry. The discussion evolved from the need to underscore the structures of industries within which companies operate through a model of analysis that evaluates their profit capability and attractiveness in 1980. This structural analysis originated from economic disciplines about environmental relations, organizational behaviour, and performance in the 1950s. The 1950’s approach viewed companies as passive but porter’s work changed this perspective by demonstrating that strategies albeit influenced by the respective sector structures, also had the capacity to influence the structures. Porter’s industry analysis model proposed outlined that generic strategies are beneficial when the associated gains are sustainable in relation to actions of the five forces of competition.
In 1989, porter indicated that generic strategies establish a sustainable profitable position against forces that drive competition in a particular industry. This implied that generic strategies involve a combination of external and internal approaches (Weber & Polo, 2009). Porter also indicated that it is rarely possible for businesses to achieve success by combining different generic strategies. It is because generic strategies require exclusive commitment. He also indicated that a business’ choice of a generic strategy is influenced by the five competitive forces that he identified in industries (Furrer, Sudharshan, Thomas, & alexandre, 2008). Selecting one of Porters generic strategies presents the initial step in formulating a business strategy.
How the concept is relevant or not to today’s business challenges
Company’s main business objective lies in attaining sustainable superior performance. Companies pursue either one of the generic strategies to maximize financial performance. There is contention about using a hybrid of the two main generic strategies. Opponents of a hybrid application indicate that pursuing a single strategy is beneficial in industries where customers display pronounced preferences for either quality or price. A pure low cost strategy is effective where customers are highly sensitive to price and where there is a fighting chance to retain a costs advantage. It may be achieved through proprietary technology or exclusive access to cheap factors of production or channels of distribution (Powers & Hahn, 2014). Companies use this concept to determine the most efficient approach based on their customers sensitivity. They evaluate the different customer segments and scrutinize their sensitivity to either quality or price and then tailor products or services to suit customer preferences.
Companies have used porter’s generic strategies since the 1980s to establish their competitive advantage and register above average returns in the industry. In determining which of the strategies to apply in a particular business to maximize performance, managers require an in-depth understanding of the tactics associated with the three generic strategies. For an organization to successfully pursue a differentiation strategy, there are various tactics that a manager must incorporate in its operations. One of the necessary tactics includes investing in innovation in the company’s marketing technology and methods. It may be operationalized through use of databases to identify customers of particular products that match a particular profile and targeting a marketing event to them. Using technology such as a database and mailing system is effective in generating new sales to the existing customers of a particular type of product or service. Marketing managers require using more technology applications efficiently to sell, as interact with consumers, and track the lifetime value of individual customer relationships. This differentiation tactic follows the recommendation that it is less expensive to market to existing customers than finding new customers (Akan, Allen, Helms, & Sprails, 2006).
Another tactic involves fostering innovation and creativity which is not focused on incremental improvements on existing products but rather, it focuses on building new products or services to achieve holistic innovation. It may involve observing customers daily activities to inform new designs of products and services. Its operationalization may be achieved through computational fluid dynamics to understand product performance. It requires that managers are in sensitive to changes in their market environment and invest in cross-functional teamwork that explores perspectives such as customer attitudes, industry trends and new technologies. It is also very imperative that managers create an environment where teams value innovation and creativity. This way, companies target quality differentiated products and uniquely engineered customer experience to sophisticated and knowledgeable customers that are willing to pay higher prices for the products (Akan, Allen, Helms, & Sprails, 2006).
Building a high market share is another imperative tactic for companies to pursue a successful differentiation strategy. Managers require leveraging diversity as an important way of achieving high market share. Recruitment managers require incorporating diversity in the hiring processes to ensure that a particular company’s workforce has a multicultural composition that matches cultural-ethnic diversity in a particular market. This is particularly relevant in a market such as the US, which has rich multicultural demographics. A diverse workforce provides required cultural intelligence that is necessary in designing strategies to reach target consumers. It informs strategies such as customized advertising and new product launches tailored to suit the buying power of various cultural groups within the industry. For instance, minorities may prefer to buy products or services from persons with similar ethnic or racial background. Leveraging workforce diversity achieves success because buyers form better relationships with salespeople that share their cultural values. They bond better with them because they trust them and it often results in repeat sales. It is also imperative that companies use ethnic media such as newspapers, television and radio to increase sales of their quality and differentiated products (Akan, Allen, Helms, & Sprails, 2006).
Managers also use different tactics in their pursuit of cost leadership strategies. For a successful cost leadership strategy, managers require adding value through replenishment logistics. One of the most successful tactic reducing distribution costs is cross docking. Retailers are renowned for minimizing distribution costs because they use retail cross docking and improve their customer service simultaneously. In this approach, goods move directly from the receiving dock and directly shipping. Sometimes goods are temporarily stored in staging to before being moved to the shipping dock. Retailers often order predictable quantities from vendors and this also helps them to benefit from discounts associated with large volume purchases. It eliminates redundant costs emanating from processes such as warehousing. Cost leadership strategies such as cross docking is therefore very necessary in solving business problems of redundant expenditure.
Managers also use different tactics in pursuit of a focus strategy. A manager may either choose a low-cost focus strategy or a differentiation focus strategy. In the low cost focus strategy, one of the tactics that a manager pursues is providing an outstanding customer experience. The operationalization of excellent service tactic may be accomplished through providing products and services at lower prices as compared to competitors and ensuring that customers shop conveniently by having hands on service to assist customers select their merchandise. It may also involve providing access to free services to adjust certain products to match customer expectations and anticipating and providing other services that go together with certain services. Good examples include having a tailor on site to make adjustments on shoppers merchandise in a clothing store and providing free Wi-Fi in the hospitality industry respectively. These free extras are viewed as customer service components that increase customer turnover to low cost products and services. Excellent service helps the company to save on costs and time that may otherwise be incurred to solve problems.
Companies may also use various systems to improve operational efficiency as a tactic that results in significant costs savings. For instance, health care institutions may invest in a system that reduces the cycle time needed to move medicine to various units. The system configures billing that tracks utilization, inventory and associated expenses. This way the institution keeps proper inventory on the costs per patient correctly and drastically reduces medication loss thereby improving operation efficiency by reducing costs for the health institution. Providing quality products and continuous training for employees is a low cost focus strategy tactic that works to increase customer turnover to products and services. The company saves on costs associated with poorly trained staff and malfunctioning products. The low cost focus strategy is necessary in saving on time and monetary costs that allow companies to sell products at considerably lower prices than competitors (Allen, 2006). A company pursuing this strategy has a delicate task in ensuring that its products and services are cheaper than competitors’ while at the same time providing outstanding service, maintain operational efficiency and offering quality products and availing highly trained personnel.
Pursuing a differentiated focus strategy requires certain tactics. The two tactics include managers must ensuring production of specialty products and services, targeting a high price market niche. To produce specialty products, it is essential that a company defines its main specialization such as furniture and offer other accessories that go hand in hand with furniture’s. It presents a competitive advantage of a company as a place that customers visit to discover new and different products every season. It provides a solution for customers looking for retailers offering a wide range of specialized products through a one stop shopping experience (Pretorius, 2008). This way the quality new entrant takes advantage of a new growing market segment.
The three generic strategies avail a pool of options for companies to utilize and attain long lasting competitive advantage. These strategies define a company’s positioning through an examination of where and how the company competes. The how is the type of strategy and where is the market segments and the business and geographic scope. There is increased support for implementing a pure strategy than combining several generic strategies. It is because doing so results in companies being stuck in the middle or lacking a clearly defined generic strategy (Brenes, Montoya, & Ciravegna, 2014). It is therefore advisable that companies in a particular sector avoid combining all the strategies such as offering unique products at low costs because it is highly delicate and it might present difficulties in performance.
Wal-Mart’s low cost generic strategy case study
Wal-Mart has nearly nine thousand retail stores in fifteen countries and over two million employees worldwide. As one of the largest corporation, globally its turnover in 2010 was four hundred and twenty one billion US dollars. It thus has a significant impact on its suppliers and markets worldwide. Wal-Mart is heralded for using a low cost strategy that informs its competitive advantage. The corporation takes pride in providing products at low prices, which saves customers’ money. It extends the low cost strategy to customers when venturing into both local and international markets. The strategy allows Wal-Mart to clinch a large market share and dominance over competitors locally and internationally. The corporation’s market dominance in the US market allows it the advantage of influencing low prices for a broad range of consumer products. Its strategy is backed through sale of high volumes at discounted costs while simultaneously focusing on well-organized supply chain management (Blanchard, Comm, & Mathaisel, 2008).
Wal-Mart’s low cost strategy results in low profit margins but high consumer turnover coupled with low supply costs. The corporation invests in technology systems that significantly minimizes internal operations costs, benefits from large economies of scale achieved through bargaining and large volume purchasing and improves its customer experience to outstanding levels in its store (Blanchard, Comm, & Mathaisel, 2008). For The Corporation to achieve success with its low cost strategy it works more efficiently than its business rivals. This entails maintaining low salaries for its employees and low prices to suppliers. It also saves on costs through an investment on energy efficient stores (Stankeviciute, Grunda, & Bartkus, 2012).
Wal-Mart’s initial years were characterized by challenges in maintaining low prices for its consumers. To maintain its reputation as a low cost retailer, the founder used tactics such as establishing store in areas with low real estate costs and ensuring that warehouses were less than a day’s travel as a strategy to minimize on costs. It also relied on word of mouth marketing rather than expensive media advertising. In the 70s and 80s, the corporation began combining merchandise and groceries stores under one roof as a way of spreading recurring overhead costs (Mottner & Smith, 2009). It enabled the company to increase its profit margins through realized cost savings.
The corporation strives to continually drive down high logistics costs incurred in transporting its supplies. To address the issue, it is currently retrofitting its hybrid-electric trucks to run on waste cooking grease in partnership with Daimler Trucks North. This project will avail more efficient lower cost transport fleet enabling the corporation to better compete. It is also selling its waste cooking grease from its restaurants to bio-fuel producers for pre-processing and this provides additional income (Stankeviciute, Grunda, & Bartkus, 2012). The savings are extended to consumers and works to maintain its cost leadership sustainable competitive advantage in the retail industry.
Wal-Mart also addresses challenges of competition by accruing savings that result from its investment in technology. It uses barcodes to tag its merchandise during manufacture and instantly relays sale information using its information technology. The corporation integrates its supply chain with Retail Link technology that ensures communication with its supply chain partners. Wal-Mart shares this technology with its suppliers and vendors to inform their shipment and routing activities. Internally, it uses Inforem technology to facilitate its automated replenishment which informs its ordering decisions. This way, it promptly offers the right products at low cost to customers (Crain & Abraham, 2009). Another way in which Wal-Mart succeeds in warding off its competitors is through cross docking. It possesses a large trucks fleet that avails products to the distribution channels at faster speeds than its competitors and its customers access required goods at faster rates. It also eliminates middlemen and reliance on hired transport supply chains. This way, it cuts down on business costs such as warehousing.
The fact that it is the largest retailer in the world allows it to benefit from economies of scale during procurement. It purchases goods in high volume and establish long-term relationships with suppliers. Bulk supplies ensure that it attracts higher discounts than its competitors. It also allows the company to negotiate low interest rates on large loans. It also targets its customers with trusted brands that allow it to further befit from economies of scale through reduced need for expensive advertising. It is nearly impossible for competitors to have bargaining power over suppliers and lenders that that matches Wal-Mart’s. This allows the corporation to maintain its leader position in the retail market of price sensitive consumers (Weber & Polo, 2009).
Wal-Mart also cuts down on costs through reducing personalized services because it pursues a pure low cost strategy. These way price sensitive customers can benefit from low priced products. Understaffing at its retailing units is however attractive to customers that are keen on accessing outstanding customer experience resulting in loss of potential customers to business rivals with better customer service. This however does not affect its profitability because it has established a niche in low-income customers that remain loyal customers owing to their preferences for lower prices. It is necessary for the company to remain committed to its low cost strategy as a way on maintaining long lasting profitability positioning in the sector (Werbach, 2009).
Wal-Mart continues to use its cost leadership strategies as avenues to attain competitive advantage over competitors for price sensitive customers. It is clear demonstration that Porter’s recommendation that companies pursue a pure generic strategy to benefit from its associated balance is accurate (Blanchard, Comm, & Mathaisel, 2008). For Wal-Mart to perpetually remain relevant in the retail market, it is imperative that it maintains its focus on low cost rather than combining it with differentiation strategy to also target consumers interested high quality services. Investing in quality services and providing products at low prices is not financially viable. It would be a failed business unit strategy. Companies must therefore carefully examine their generic strategy to ensure that it results in sustained profitability and superior business performance.
References
Akan, O., Allen, R. S., Helms, M. M. and Sprails, S. A., 2006. Critical Tactics for Implementing Porter’s Generic Strategies. Journal of Business Strategy, 27(1), 43-53.
Allen, R. S., 2006. Linking Strategic practices and Organizational Performance to Porter’s Generic Strategies. Business Process ManagementJournal, 12(4), 433-354.
Blanchard, C., Comm, C. and Mathaisel, D., 2008. Adding Value to Service Providers: Benchmarking Wal-Mart. Benchmarking: An International Journal, 15(2), 166-177.
Bordean, O.-N., Borza, A. and Glaser-Segura, D., 2011. A Comparative Approach of the Generic strategies within the Hotel Indiustry Romania vs USA. Management & Marketing , 6(4), 501-514.
Brenes, E. R., Montoya, D. and Ciravegna, L., 2014. Differentiation Strategies in Emerging Markets: The Case of Latin American Agribusiness. Journal of Business Research, 67, 847-855.
Crain, D. and Abraham, S. 2009. Using Value Chain Analysis to Discover Customers’ Needs. Strategy & Leadership, 36(4), 29-39.
Furrer, O., Sudharshan, D., Thomas, H. and Alexandre, M. T., 2008. Resource Configurations, Generic Strategies and Firm Performance: Exploring Parallels Between Resource-based and Competitive Strategy Theories in a New Industry. Journal of Strategy and Management, 1(1), 15-40.
Mottner, S. and Smith, S., 2009. Wal-Mart: Supplier Perfomance and Market Power. Journal of Business Research, 535-541.
Porter, M., 1985. Competitive Advantage. New york: Free Press.
Powers, T. L. and Hahn, W., 2014. Critical Competitive Methods, Generic Strategies, and Firm Performance. The Interantional Journal of Bank Marketing, 22(1), 43-64.
Pretorius, M., 2008. When Porter’s Generic Strategies are not Enough: Complementary strategies for Turnaround Situations. Journal of Business Strategy, 29(6), 19-28.
examine how macroeconomic factors affect stock returns.
Order Instructions:
The goal of the project: We examine how macroeconomic factors affect stock returns.
Empirically, we can test the following model;
Rt= ?0 + ?1*Market Indext-1+ ?2*Inflationt-1+ ?3*GDP Growtht-1+ ?4*TERMt-1+ ?5*RISKt-1+?
1. Dependent variable: firms’ stock returns
I posted firms’ stock returns in three industries (air, auto, and computer) to Blackboard. You can analyze any firm as you wish. You can pick multiple firms from three different industries, or a single firm from a specific industry.
Variable Explanations
DATE: the end of trading date at each month
COMNAM: Company name
EXCHCD: Exchange code (1: NYSE, 2: AMEX, and 3:NASDAQ)
HSICCD: Industry classification (e.g., The SIC 4512 represents an airline industry.
PRC: Stock price at the end of each month’s trading date
RET: Stock returns at the end of each month’s trading date
SHROUT: shares outstanding
VWRETD: Market index
2. Independent variables: macroeconomic variables
* The Source of data: http://research.stlouisfed.org/fred2/tags/series
Download data as long as we believe that variables may affect stock returns.
There are some candidates for independent variables.
Market Index=VWRETD, and Firm Size= PRC*SHROUT
Inflation= log (CPIt / CPIt-1), and GDP Growth=log (GDPt / GDPt-1)
TERM= 10-year T/B – 3-month T/B, and RISK= BAAt – 10-year T/B?
Questions
1) Report summary statistics (n, mean, median, standard deviation, min, max) of your picked variables.
2)Why do you include such independent variables? Give me a brief explanation.
3) Run a regression and report coefficients and t-statistics for the explanatory variables.
4) Interpret coefficients of each variable. Compare it with your prediction
5) What is your investment strategy based on your findings?
* To obtain full credit (20 points), you need to submit it by July 8th, 2014.Grade below 10 points will be counted as zero.
* The minimum requirement is 5 different firms and 5 independent variables.
* TERM and RISK should be included as independent variables.
* If you need a reference, please look at the paper written by Nai-Fu Chen, Richard Roll, and Stephen A. Ross. The title is “Economic Forces and the Stock Market (Journal of Business, 1986)”.
SAMPLE ANSWER
How macroeconomic factors affect stock returns
Abstract
There are many macroeconomic factors that affect the stock market globally. Inflation and deflation have adverse financial effects on a company’s profitability which subsequently affect the stock market. The rate of increment on the prices of goods and other services constitutes inflation besides the increase in the cost of transportation and manufacturing expenses. (Swann, 2009) The stock market responds powerfully when the rate of inflation is low and weakens when it increases as most companies reduce their expenditures because of high cost of goods and services and the general money in economy reduces which results in reduced activities at the stock market. Deflation in most quarters is regarded as a sign of a weak economy as it also leads to a decrease in the stock market. (Chen, Roll and Ross, 1986)
The interest rates are established and monitored by Federal Reserve Board. Higher rates of interests are caused by the expensive nature of borrowing money. Money becomes too expensive to borrow. To subsidize their high rates of interests, most companies may opt to lay off workers and reduce expenditures on other goods. Higher rates of interests imply that even companies will not be comfortable when borrowing as the rate of interests becomes exorbitant and their income will also be affected. (Cairns, 2004) When the income of listed companies reduces then the investments in the stock market is also affected negatively.
1
Sun Microsystems
PRC
RET
SHROUT
WRETD
n
132
132
133
133
Mean
22.36021
0.001747
2447123
0.002766
Median
114.34
-0.08963
955344.5
-0.184
STD
34.098
0.16257
1201797
0.048607
Min
2.59
-0.39474
385583
-0.18462
Max
132.25
0.564103
3602000
0.110533
FRANKLIN ELCTRONIC PUBLISHS
PRC
RET
SHROUT
WRETD
n
133
133
134
134
Mean
3.182147
0.013589
8063.91
0.003009
Median
9.445006
0.066578
8504.844
0.053974
STD
4.080006
0.21349
402.3438
0.053359
Min
-3.845
-0.46429
7818
-0.18462
Max
11.9375
1.141434
8387
0.110533
SILICON GRAPHICS INC
PRC
RET
SHROUT
WRETD
n
82
82
83
83
Mean
4.081159
0.025353
211362.6
0.003827
Median
14.69741
0.253384
439218.6
0.012599
STD
14.06612
0.521925
57156.86
0.041823
Min
0.44
-0.54676
182872
-0.10253
Max
20.5625
2.782609
268272
0.083911
APPLE COMPUTER INC
PRC
RET
SHROUT
WRETD
n
96
96
96
96
Mean
43.137
0.035008
438980.5
0.004941
Median
63.01375
-0.03415
498318.5
0.024586
STD
30.86698
0.056931
511806
0.019459
Min
14.14
-0.57744
136417
-0.10253
Max
135.8125
0.453782
860220
0.083911
UAL CORP
PRC
RET
SHROUT
WRETD
n
51
51
52
52
Mean
36.4751
-0.05963
56649.73
-0.00232
Median
62.25
0.042932
74327
0.060554
STD
43.42343
0.187492
32795.61
0.019813
Min
0.84
-0.51765
49792
-0.10253
Max
80.75
0.326258
99506
0.083911
FORD MOTOR CO
PRC
RET
SHROUT
WRETD
n
144
144
144
144
Mean
17.04726
0.009958
1961721
0.004096
Median
39.11375
0.054011
2270481
0.053095
STD
31.57055
0.00097
1599931
0.02086
Min
16.79
0.053325
1139159
0.038345
Max
63.9375
1.273764
3401803
0.110533
Independent variables are included as they determine or influence other variables. An independent variable when manipulated determines or influences the change in the other dependent variable. This study seeks to determine if a relationship exists between the returns of the stock market and the macro economic factors that may affect the overall performance of the stock market.
Ford Motor Co
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.4995218
R Square
0.249522
Adjusted R Square
0.244237
Standard Error
0.148835
Observations
144
ANOVA
df
SS
MS
F
Significance F
Regression
1
1.04585
1.04585
47.213
1.849E-10
Residual
142
3.14556
0.02215
Total
143
4.19142
Coefficient
Standard error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
0.0029
0.0124
0.2290
0.8192
-0.0218
0.0275
-0.0218
0.0275
VWRETD
1.7354
0.2526
6.8712
0.0000
1.2361
2.2347
1.2361
2.2347
Franklin Electronic Publish Inc
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.31
R Square
0.09
Adjusted R Square
0.09
Standard Error
0.23
Observations
133.00
ANOVA
df
SS
MS
F
Sig F
Regression
1
0.715
0.715
13.554
0.000
Residual
131
6.915
0.053
Total
132
7.631
Coeff
Std Error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
0.0094
0.019955
0.47106
0.6383832
-0.03
0.048876
-0.03008
0.048876
VWRETD
1.5147
0.411416
3.68157
0.0003377
0.7008
2.328532
0.700776
2.328532
UAL Corp
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.552
R Square
0.304
Adjusted R Square
0.290
Standard Error
0.156
Observations
51.000
ANOVA
df
SS
MS
F
Sign f
Regression
1
0.521
0.521
21.442
0.000
Residual
49
1.191
0.024
Total
50
1.712
Coeff
Std error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
-0.052
0.022
-2.372
0.022
-0.096
-0.008
-0.096
-0.008
VWRETD
1.933
0.418
4.631
0.000
1.094
2.772
1.094
2.772
Sun Microsystems
Regression Statistics
Multiple R
0.664
R Square
0.441
Adjusted R Square
0.437
Standard Error
0.122
Observations
132.000
ANOVA
df
SS
MS
F
Significance F
Regression
1
1.527
1.527
102.6
3.92E-18
Residual
130
1.935
0.015
Total
131
3.462
Coeffici
Std Error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
-0.005
0.011
-0.476
0.635
-0.026
0.016
-0.026
0.016
VWRETD
2.219
0.219
10.130
0.000
1.785
2.652
1.785
2.652
Silicon
Regression Statistics
Multiple R
0.260
R Square
0.067
Adjusted R Square
0.056
Standard Error
0.403
Observations
82.00
ANOVA
df
SS
MS
F
Sig F
Regression
1
0.939
0.939
5.787
0.018
Residual
80
12.97
0.162
Total
81
13.91
Coe
Std error
t Stat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
0.017
0.045
0.391
0.697
-0.071
0.106
-0.071
0.106
VWRETD
2.338
0.972
2.406
0.018
0.404
4.272
0.404
4.272
Interpretation
Ford Motor Co.
The thesis of the study is to establish if a relationship exists between the performance of individual stocks belonging to different companies and the performance of the stock market and if the stock market can be affected by macroeconomic factors such as real GDP growth, inflation, interest rates or unemployment.
P-Value – 0.8192 It indicates that the significant relationship between the returns of the market and the performance of the markets index is very low.
Coefficient – 1.7354 The slope is of the graph is positive which indicates that the stock returns increases relatively to the increase in the stock index.
R square – 0.2495 The R square measures the strength of the relationship, how strong or weak the relationship is. In this case we can conclude that the variability of the stock market index explains only 24.95% of the stock returns.
Franklin Electronic Publish Inc
P-Value – 0.6383 It indicates that the significant relationship between the returns of the market and the performance of the markets index is very low.
Coefficient – 1.514 The slope is of the graph is positive which indicates that the stock returns increases relatively to the increase in the stock index.
R square – 0.09 The R square measures the strength of the relationship, how strong or weak the relationship is. In this case we can conclude that the variability of the stock market index explains only 9 % of the stock returns.
UAL Corp
P-Value – 0.022 It indicates that the significant relationship between the returns of the market and the performance of the markets index is very low.
Coefficient – 1.933 The slope is of the graph is positive which indicates that the stock returns increases relatively to the increase in the stock index.
R square – 0.304 The R square measures the strength of the relationship, how strong or weak the relationship is. In this case we can conclude that the variability of the stock market index explains only 30.4% of the stock returns.
Sun Microsystems
P-Value – 0.635 It indicates that the significant relationship between the returns of the market and the performance of the markets index is very low.
Coefficient – 2.219 The slope is of the graph is positive which indicates that the stock returns increases relatively to the increase in the stock index.
R square – 0.441 The R square measures the strength of the relationship, how strong or weak the relationship is. In this case we can conclude that the variability of the stock market index explains only 44.1% of the stock returns. (Draper & Smith, 1998)
Silicon
P-Value – 0.697 It indicates that the significant relationship between the returns of the market and the performance of the markets index is very low.
Coefficient – 2.338 The slope is of the graph is positive which indicates that the stock returns increases relatively to the increase in the stock index.
R square – 0.067 The R square measures the strength of the relationship, how strong or weak the relationship is. In this case we can conclude that the variability of the stock market index explains only 6.7% of the stock returns.
The Relationship Between RET and WRETD
My findings that are based on the graph above indicate that there is no relationship between the returns on the stock market and the general performance of the stock index. My predictions were that the relationship that exists between the stock market and the performance of the individual stocks is very limited.
The analysis from the above graphs indicate that there is a significant relationship between the returns on company stocks and the macro economic factors such as real GDP growth, unemployment level and inflation rate. When the macro-economic factors in the growing are positively improving then most company stocks post good returns. When the factors are negative, for instance when the rates of inflation and unemployment are so high then the stock returns also post low returns. In the year 2008, during the global economic crisis, most economies registered negative real GDP growth, the unemployment levels were so high and inflation rates were at their peak in most countries. The stock returns for most countries were also affected negatively and they registered a drop in their earnings. When inflation rates are so high most companies lay off workers to reduce expenses and decrease borrowings due to the high cost of borrowing while unemployment levels increases, the real GDP growth also decreases due to reduced circulation of money in the economy. (Swann, 2009) The company stocks are calculated and classified as per its volatility and in accordance with the stock market risks and beta. During the economic crisis of 2008, the volatility of most stocks were at their highest together with the term of most bonds.
My investment strategy would be to invest as per the performance of the individual company stock and not the general performance of the stock market.
References
Cairns, J (2004). Interest Rate Models – An Introduction. Princeton University Press.
Chen, N., Roll, R. and Ross, S.A. (1986) Economic Forces and the Stock Market. Journal of Business.
Draper, N.R., Smith, H. (1998). Applied Regression Analysis (3rd Ed.). John Wiley.
Sullivan, Sheffrin, S (2003). Economics: Principles in action. Upper Saddle River, New Jersey
Pearson, Prentice Hall.
Swann, C. (2009) “GDP and the Economy – Advance Estimates for the Second Quarter of 2009,” Survey of Current Business, August 2009.
I need an essay at least with 5 paragraphs for each point and plus one introduction and one conclusion that in total be 7 paragraphs. The following is what I need to write about it:
3. You have been asked by a local community organization to give a one hour presentation on the development of the American political economy, from 1950 to the present. Outline at least 5 main points and the information you would include to explain those issues to an audience. The focus of your presentation can be any of the following: consumerism, foreign policy, production, military engagements, or views of the citizens of the United States.
Note: focus should just be on one of the followings: (consumerism, foreign policy, production, military engagements, or views of the citizens of the United States) which it should be concluded from 5 main points about that focus.
SAMPLE ANSWER
At the stop of World War II, the American military went back home to a nation rather united from the one they had left behind. Wartime production assisted lift the American economy out of the depression, and from the late 1940s, young adults witnessed outstanding increase in their spending clout. Jobs were abundant, salaries were higher, and since the lack of consumer goods at the time of the war, Americans were keen to spend. At the same time, young couples were marrying and having children at extraordinary levels. Fresh and increased federal systems comprising of the G.I. Bill of Rights, permitted many young families to buy their own homes, frequently situated in fast growing environs. After World War II, consumer spending no longer meant only fulfilling an indulgent material want. In reality, the American consumer was applauded as a patriotic citizen in the 1950s, contributing to the final success of the American means of life (Gindin & Panitch, 2012)
Americans invested in goods found around home and family life. Nowhere in the history of America has consumerism turned out to be prevalent as in the 1950s. The 50s was an age known as the Golden Age of Capitalism, a time of unexpected economic expansion that benefited both the capitalists and employees, as a consequence of higher wages (Gindin & Panitch, 2012). The economic success amounted to an expanding middle class that demanded applications and products that would facilitate them enjoy more leisure. Inventions like the refrigerator, vacuum cleaners, amid others, became household items.
The 1950s witnessed the TV grow in popularity. By the end of the 1950s, almost nine out of ten American households possessed a television set. This radically transformed American life. Individuals began utilizing the television as a basis of information. The work that one time belonged firmly to the newspapers was shifting on to other plans. America as well started utilizing TV as their preferred choice of leisure activity. In the twentieth-century, the advancements in the standards of living of the community and the resultant emergence of the middle class, extensively applies the phrase “conspicuous consumption to all citizens who owned the optional earnings that permitted them to carry out the patterns of economic consumption of goods and services. The years unfolding following World War II were collectively ones of solidity and success for Americans. The state retransformed its war equipment into a consumer culture nearly suddenly and established for 12 million returning veterans (Gindin & Panitch, 2012).
The American economy increased remarkably in the post-war time, increasing at a rate of 3.5 percent per year between 1945 and 1970. At this time of success, many earnings doubled in a generation. The considerable raise in average household earnings inside a generation amounted to millions of office and factory employees being pushed into an increasing middle class. Between 1946 and 1960, the U.S. saw an important growth in the consumption of goods and services (Gindin & Panitch, 2012). Consumption grew by 36 percent and individual consumption expenses by 42 percent. Educational outlays were as well greater than in other nations whilst a higher percent of young individuals were graduating from high school and universities than anywhere in the globe. America produced a progressively increasing demand for better cars, clothing, applications, household vacations, and higher education.
One of the aspects that drove the success of the 50s was the growth in consumer spending. Americans enjoyed a standard of existence that was unimaginable to the rest of the globe. The period was mature for Americans to transform their spending habits. The adults of the 50s had been raised in circumstances of economic deficiency, first as a result of the collective poverty of the Great Depression and then as a result of the rationing of consumer products World War II. During the 1930s, with the lack of jobs and the economy in shambles, most American citizens could merely not afford much beyond the essentials (Gindin & Panitch, 2012).
Consumerism was fueled by advertising. Spending on goods promotion increased from $6 billion yearly in 1959 to more than $13 billion by 1963. There is little skepticism over advertising fueled the buying of new goods, which as result kept the nation’s economic wheels turning. Advertisements were now being witnessed on a mass range, as a result of the amount of television that was being watched throughout the nation. In present day consumption is deflating the environmental bases. Conversely, the nation’s economic wellbeing is calculated more according to how much American’s are ready to spend, the consumer benefit, and less in how much is yielded, the gross national product, or how even we invest (Gindin & Panitch, 2012).
Consumerism these days characterises Americans and as well separates them from one another. A consumer economy functions if consumption of products offers just temporary pleasure such as happiness is infinitely deferred, so that consumers continue to purchase more and more products and services (Gindin & Panitch, 2012). By explanation, the consumer can never be fulfilled. The pursuit of this type of contentment generates a vicious circle of expanding nervousness and displeasure.
Please complete the sections on Monopoly price and MR; and Monopolistic competition price, quantity and costs. For each of these two sections, explain what was the most important concept you learned in that lesson (and why) and please explain how the lesson could be improved.
1. Complete a table for Q, Price, TC, MC, MR and profits. This time start the price at the number of P = 9 combined for Q = 1, and then reduce the price as Q increases. For costs, begin with TC = 4 at Q = 1, then you may use any numbers you like for costs. You may need to play around with the numbers to make this work out. Show that MR = MC at profit maximization. Graph MR, MC and P and show the profit maximizing level of output. (You don’t need to graph ATC and show the profit rectangle).
2. During your next trip to the supermarket (Use this website for the supermarket, https://www.ralphs.com/ ) find two examples of different goods for which the market is oligopolistic. ( Please use breakfast cereals and Soft drinks) Make certain that you have chosen a ‘good’ and not a brand name. Remember that several brand names compete in a market. List all the brand names (or at least four brands if there are dozens) and the parent company for each brand name (check the package carefully so that you don’t confuse brand names with the actual producer.) For each good, what is your evidence that this market is oligopolistic? (Number of producers; shelf space give to each one; identical pricing.)
3. The Prisoner’s Dilemma is a famous game in game theory in which two prisoners must decide whether or not to cooperate with another, that is declares their mutual innocence. If both prisoners cooperate, that is do not confess their mutual guilt, then they both go free. If one prisoner cooperates, but the other does not, then the non-cooperating prisoner receives a lighter sentence and the cooperating prisoner is punished severely for refusing to confess. If both prisoners refuse to cooperate—that is they both say the other is guilty—then they both are punished, but less than if only one declared his innocence.
a. Play the Prisoner’s Dilemma at: http://serendip.brynmawr.edu/playground/pd.html Try one set of rounds for practice.
b. Design a strategy for the game. Describe it and then test the strategy in three rounds of the game. Did it work?
c. How is this game similar to the game theory we discussed in class?
4. Every year there are new and sometimes unexpected lawsuits against US corporations. Choose a case for study at the web site http://www.usdoj.gov/atr/cases.html
You will find many, many antitrust lawsuits listed alphabetically. Please choose two,
a) one involving any aspect of antitrust. Summarize what was the alleged violation and what happened (if anything). Please do so in your own words (that is, not cut and pasting from the site).
b) one involving a merger or acquisition (you may need to look at several to find one.) Again, summarize what was the alleged violation and what happened (if anything). Please do so in your own words (that is, not cut and pasting from the site).
5. Now that we’re at the end of the semester, I’d like you to think about what you have learned in this course. One good measure of learning is the ability to ask good questions. That is: what is it that you would like to understand better about one of the concepts we’ve studied in economics?
a) Specify the question: what is it that you would like to understand better about one of the concepts we’ve studied in economics?
b) Why don’t you fully understand this concept?
c) Why is it important for us to fully understand this concept?
SAMPLE ANSWER
Graph of MR, MC and P and the profit maximizing level of output
Q
1
2
3
4
5
6
7
8
9
P
9
8
7
6
5
4
3
2
1
TC
4
6
7
8
9
10
11
12
13
Q
1
2
3
4
5
6
7
8
9
MR
11
10
9
8
7
6
5
4
3
MC
3
4
5
6
7
8
9
10
11
According to the graph above the maximizing level of output (Q) is 5 units. That’s when Marginal Revenue (MR) is 7 and Marginal Cost (MC) is 7. As the Marginal Cost moves beyond 7 Marginal revenue starts dropping and Q starts increasing whereas P starts reducing. This is because demand starts falling as quantities increase. The company now starts making losses (Ruffin, 30).
2) According to Ciobanu (229), a market that is oligopolistic is whereby sellers in the market are a few large companies, products sold by these companies are relatively homogeneous, entry into the market is difficult because of high entry costs and the firms are essentially interdependent. Oligopolistic markets are also characterized by price rigidity in that firms tend to watch what their competitors do before adjusting prices upwards or downwards. This is because if a firm increases the price of its commodities and its competitors do not follow suit it will experience a marked reduction in sales which will force it to reduce it prices to match what the competitors are offering their products at (Ciobanu, 229). The main drinks identified are coca-cola made by Coca-Cola Company, Dr Pepper made by Dr Pepper/7Up Inc, Fanta and sprite made by Coca-Cola Company, Pepsi and Mountain Dew which is licensed by Pepsi Company. The evidence that this market is oligopolistic is that the products are relatively homogeneous, they are sold by large companies, entry into the market is difficult because of relatively high cost of entry and pricing is relatively identical (Ciobanu, 229).
3) a). The first option that I chose was cooperate all throughout the game and then I chose compete all through, then I chose two thirds of the game to cooperate and a third to compete and lastly compete and cooperate in equal proportions as the last option (http://serendip.brynmawr.edu/playground/pd.html)
b). The strategy that generates the highest points/gold coins is to cooperate. This strategy involves cooperating with Serendip in each round of the game. I tested the strategy and it did work perfectly (http://serendip.brynmawr.edu/playground/pd.html).
c). In this game the actions of one player influences the actions of his opponent in the game. In this game, each player must anticipate the actions of the other player. Game theory primarily involves identification of situations in which making decisions is interdependent with decisions made by the other party. Game theory involves anticipating and in many cases influencing another entity’s choices (Schelling, 26). Game theory is similar to this game because the decisions that I made influenced the decisions that Serendip made. I knew Serendip subscribed to a policy of “tit for tat” and therefore when I chose to co operate Serendip also made the same decision. I anticipated that he will make the same choice as I made. Just like in the game theory I anticipated Serendip’s reactions to the choices I made and I also tried to influence his decisions by my actions (Schelling, 26).
4 (a) One of the antitrust lawsuits listed in http://www.usdoj.gov/atr/cases.html is U.S.v. Ryoji Fukodome and Toshihiko Nagashima. In this antitrust law suit the defendants Ryoji Fukodome and Toshihiko Nagashima with their other undisclosed co-conspirators colluded to suppress and eliminate competition in the automotive parts industry by bid rigging and setting uncompetitive prices for parts sold to Subaru in the United States of America and in other vehicle assembling plants in the world. It was alleged that the accused in meetings held in Japan set prices and rigged bids with the intention of blocking other competitors. It was alleged that the accused parties interfered with trade between states in the US and also foreign trade and commerce by their actions (http://www.usdoj.gov/atr/cases.html).
b) An antitrust lawsuit involving a merger was S. v. Abitibi-Consolidated Inc. and Bowater Incorporated. In this lawsuit it was alleged that Abitibi-Consolidated Inc and Bowater Incorporated had set plans to form a $1.6 billion merger which would have resulted in the largest newsprint company in the North America. It was argued that the merger would have resulted in such a large company that it could limit production of newsprint by reducing its capacity utilization thus pushing prices up and suppressing competition. It was held that the new company had the incentive to do so once the merger was finalized. The company was to be about three times larger than its nearest competitor. In violation of Section 5 of the Clayton Act 15 U.S.C &, 18, the merger would have led to a suppression of competition in the production and sale of newsprint. The merger would also have eliminated competition between the two giant competitors which would have led to an increase in newsprint prices in the USA. The court directed that the companies divest the divestiture assets within a stipulated period which in effect stalled the merger plan (http://www.usdoj.gov/atr/cases.html).
The concept which I would like to understand in a more detailed manner is the various aspects of antitrust behavior. a) What are the different types of antitrust behavior that companies practice?
b) The reason why I have not understood this concept fully is because of the many interpretations and classes of what antitrust behavior and actions constitute c) The reason why it is important to fully understand this concept is to enable me understand how to avoid antitrust behavior and evade huge fines that may lead to the bankruptcy of my company.
Works Cited
Ciobanu, Ramona. “CONSIDERATIONS REGARDING PRICE IN OLIGOPOLISTIC STRUCTURED MARKETS.”Bulletin of the Transilvania University of Brasov.EconomicSciences.Series V 4.2 (2011): 229-38. ProQuest.Web. 30 May 2014.
ASSETS LIABILITIES
Cash $33,000 Demand Deposits $99,000
Loans 66,000
Required:
Now assume that the Fed lowers the reserve requirement to 8%.
1. What is the maximum amount of new loans that this bank can make?
2. Assume that the bank makes these loans. What will the new balance sheet look like?
3. By how much has the money supply increased or decreased?
4. If the money multiplier is 5, how much money will ultimately be created by this event?
5. If the Fed wanted to implement a contractionary monetary policy using reserve requirement, how would that work?
Deliverables:
Address the questions above, showing your calculations. Develop your analysis in Microsoft Excel format. Enter non-numerical responses in the same worksheet using text-boxes.
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