Economics of Strategic Behavior

Fall 2020

Jacopo Perego
Assistant Professor of Business Economics
Columbia Business School
jacopo.perego@columbia.edu
www.jperego.com
Economics of Strategic Behavior

Jacopo Perego
Tenure-track Assistant Professor @ Columbia Business School
Affiliated Faculty Member @ Columbia Economics
Associate Director @ CELSS

My Expertise:
Microeconomics, Game Theory, Industrial Organization,
Analysis of Strategic Behavior, Information Economics
Economics of Strategic Behavior - The Team

Laura Doval Jacopo Perego Wouter Dessein

Plan for Today

First Segment:

a. Introduction
b. The case of Enterprise

20-minute break

Second Segment:
c. Industry Analysis and Competitive Advantage
Before We Start...

All sections of ESB are offered in HyFlex for the first time

Hyflex will be frustrating at times, but we can nonetheless do great

things together

More than ever, I count on your enthusiasm, your professionalism,

your commitment to learning

These are difficult times, but together we can make this work
introduction
Economics of Strategic Behavior

The dilemma of profitability

A simple fact: Large heterogeneity in firms’ profitability both within

and across industries

Ok, but what determines such sustained profitability?

leadership, capital structure, luck, regulation, suppliers,

replicability, marketing, operational efficiency, corporate culture,
organizational quirks, all of these together and more ….
Economics of Strategic Behavior

In ESB, we attack this question through the lens of economics

- Our framework based on Microeconomics and Game Theory
- Plenty of connections with Managerial Econ

Our goal is to uncover durable economic principles that are

applicable to different strategic situations so that we:
- Gain better understanding of how firms compete and how
markets work
- Develop a more secure foundation for making/judging strategic
decisions
Economics of Strategic Behavior

Our starting point:

Competition is the single most important force to determine the
success or failure of a company
Therefore, we better understand well the external competitive
environment of a firm
competitors, potential entrants, customers and suppliers

Common feature: all actors you don’t control

Strategy is fundamentally about dealing with actors you don’t
control
What this course is about

A list of economic ideas we will cover

What this course is about

We apply all these ideas to concrete business situations

 Map of ESB

Part I: Foundations Part II: Cooperation Part III: Strategic

of Strategy and Price Wars Entry

A. Industry Analysis and A. Managing Strategic A. Differentiation and

Competitive Advantage Interactions Price Competition

B. Platforms and B. Industry Equilibria: B. Different Styles of

Networks Effects Collusion and Entry
Competition
C. Market Power and
Mergers C. Antitrust
What This Course is not About

In this course, less or no emphasis on aspects such as:

- How to implement change within an organization

- Culture and leadership

- How to overcome inertia

- How to maximize efficiency of supply-chain

Beyond the scope of my expertise as economist to say much about

these
What This Course is Not About

Enterprise’s strategy
▪ “Be the best transportation service provider in the world”
▪ “Treat your consumers well, and the bottom line will take care of itself.”

FT on Enterprise’s success
▪ “The short answer is: by focusing obsessively on customers. Enterprise has
developed what it calls its ESQi, a measurement of customer satisfaction.”
Sorry, No Magic Formula
rules of the game
Teaching Method

This class is designed as a hybrid between two styles:

- 40% Lectures
We introduce several foundational ideas from
Microeconomics

- 60% Case Discussions

We apply these ideas to concrete business examples
Teaching Method

Strategy is typically complex and multi-faceted

Less emphasis on the answer, more emphasis on the reasoning

behind answer

Class as intellectual sandbox and a safe environment

Teaching Material

Main Textbook

Competition Demystified: A Radically Simplified Approach to

Business Strategy
B. Greenwald and J. Kahn

Additional Readings

Cases available on Canvas (strictly required)

More readings will be posted when required
Slides posted after end of class
Teaching Assistants

Ignacio Goulu IGoulu21@gsb.columbia.edu

Andrew Iftode AIftode21@gsb.columbia.edu

Jeremy Seah JSeah21@gsb.columbia.edu

Write to them with questions about grading, attendance, writeups,

rules, etc.
Course Requirements & Evaluation

1. Participation (35% of final grade)

2. Write-ups (30%)

3. Exam (35%)
1. Participation

Engagement:

- PollEverywhere: Respond at PollEv.com/esb2020

- One or more per class

- Online Quizzes:
- Due right before the beginning of class
- No grade, just complete/incomplete
- I will often use your answers in class

Mix of the two determines engagement measure

1. Participation

Contributions:
- Be prepared and contribute
- Bring energy, bring clarity, be mindful
- Quality is vastly more important than quantity
- Marathon rather than a sprint

Regular use of random calls

2. Write-ups

Form groups, max 4 students (strict limit)

Each group to submit six write-ups:

A: Aldi, The Economist, Capital One, LinkedIn

B: Albert Heijn, Philip Morris, General Mills, Pratt and Whitney

C: Microsoft, CarMax, S Group, Red Bull

Answer questions in syllabus: one page, short is good

Due day before class (by midnight on Canvas)

3. Final Exam

Individual

Case-based and open-book

Date: Mon Dec 7th, due by midnight

Case-basedC
Interacting in HyFlex

Raise hand to speak

I discourage the use of the chat

Important: Be on mute all the time except when you speak

Video on if you are remote, off if you are in class

Laptop semi closed if you are in class

questions?
Economics of Strategic Behavior

Fall 2020

Competitive Advantage?
Why is Enterprise so successful?

A chicken-and-egg strategic problem:

- Developing a dense network of locations (scale) is very costly

without referrals
Need sufficient market share because of fixed costs!

- Developing a network of referrals (customer captivity) is hard

without scale
Need sufficient presence to receive referrals
Relationships are slow to build
Main Takeaways

Enterprise dominated a market niche

Success in off-airport segment requires different skills, capabilities

and a different organization than on-airport

It had ingeniously differentiated away from competition

Its position protected by economies of scale and customer

captivity

Replicability? Need both of them for each one to exist

Enterprise Today

A success story:

- 9000+ locations (6k in USA) 1.9m cars in service (1.2m USA)

- First car rental company in the World: 20B in revenues

- In USA, 16b revenues, vs 6b Hertz; 5.5b Avis/Budget

- ~ 55% share off-airport (down from 70% in 1997) (~ 15% for Hertz)

- Mkt share On-airport similar to that of Hertz: ~ 35%

- USA market has severely concentrated (E ~ 50%, A + H ~ 40%)

Enterprise Today

▪ Hertz : Aggressive off-airport strategy

- E.g. 44% increase in locations in 2003-2005.
- Expansion mainly in dense metropolitan areas.
- Focused on “leisure” segment (e.g. need car in NYC for weekend trip)
as opposed to referrals (insurers/body shops).

▪ Enterprise: somewhat aggressive on-airport strategy

- Acquired Alamo Rent a Car, National Car Rental.
Discussion Groups

What do you think are the main threats for the future of Enterprise
that could erode its competitive advantage?