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 Brief
Table of Contents
Preface xix 13 Best-Practice Tactics: Game Theory 444
About the Authors xxiii 13A Entry Deterrence and Accommodation
Games 489
14 Pricing Techniques and Analysis 500
PART I 14A The Practice of Revenue Management 535
INTRODUCTION 1
1 Introduction and Goals of the Firm 2
PART V
2 Fundamental Economic Concepts 28
ORGANIZATIONAL ARCHITECTURE
AND REGULATION 547
PART II 15 Contracting, Governance, and
DEMAND AND FORECASTING 63 Organizational Form 548
15A Auction Design and Information
3 Demand Analysis 64
Economics 583
4 Estimating Demand 99
16 Government Regulation 611
4A Problems in Applying the Linear
17 Long-Term Investment Analysis 648
Regression Model 127
5 Business and Economic Forecasting 139
APPENDICES
6 Managing in the Global Economy 176
6A Foreign Exchange Risk Management 230 A The Time Value of Money A-1
B Differential Calculus Techniques
in Management B-1
PART III C Tables C-1
D Check Answers to Selected
PRODUCTION AND COST 233 End-of-Chapter Exercises D-1
7 Production Economics 234 Glossary G-1
7A Production Economics of Renewable and Index I-1
Exhaustible Natural Resources, Advanced Notes
Material 270
8 Cost Analysis 280 WEB APPENDICES
9 Applications of Cost Theory 305 A Consumer Choice Using Indifference
Curve Analysis
B International Parity Conditions
PART IV C Linear-Programming Applications
D Capacity Planning and Pricing against a
PRICING AND OUTPUT DECISIONS: Low-Cost Competitor: A Case Study of
STRATEGY AND TACTICS 331 Piedmont Airlines and People Express
10 Prices, Output, and Strategy: Pure and E Pricing of Joint Products and Transfer Pricing
Monopolistic Competition 332 F Decisions under Risk and Uncertainty
11 Price and Output Determination: G Maximization of Production Output Subject
Monopoly and Dominant Firms 382 to a Cost Constraint, Advanced Material
12 Price and Output Determination: H Long-Run Costs with a Cobb-Douglas
Oligopoly 409 Production Function, Advanced Material
vii
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 Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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 Contents
Preface xix Summary 21
About the Authors xxiii Exercises 22
Case Exercise: Designing a Managerial
Incentives Contract 23
Case Exercise: Shareholder Value of Renewable
PART I
Energy from Wind Power at Hydro Co.:
INTRODUCTION 1 Is RE < C? 24

1 Introduction and Goals of the Firm 2 2 Fundamental Economic Concepts 28

Chapter Preview 2 Chapter Preview 28
Managerial Challenge: How to Achieve Managerial Challenge: Why Charge
Sustainability: Southern Company $25 per Bag on Airline Flights? 28
Electric Power Generation 2 Demand and Supply: A Review 29
What Is Managerial Economics? 4 The Diamond-Water Paradox and the
The Decision-Making Model 5 Marginal Revolution 31
The Responsibilities of Management 5 Marginal Utility and Incremental Cost
Simultaneously Determine Equilibrium
What Went Right/What Went Wrong: Market Price 32
Saturn Corporation 6 Individual and Market Demand Curves 33
Moral Hazard in Teams 6 The Demand Function 34
The Role of Profits 8 Import-Export Traded Goods 36
Risk-Bearing Theory of Profit 8 Individual and Market Supply Curves 37
Temporary Disequilibrium Theory of Profit 9 Equilibrium Market Price of Gasoline 38
Monopoly Theory of Profit 9 Marginal Analysis 43
Innovation Theory of Profit 9 Total, Marginal, and Average Relationships 44
Managerial Efficiency Theory of Profit 9
The Net Present Value Concept 48
Objective of the Firm 9 Determining the Net Present Value of an
The Shareholder Wealth-Maximization Investment 48
Model of the Firm 10 Sources of Positive Net Present Value Projects 50
Separation of Ownership and Control: Risk and the NPV Rule 51
The Principal-Agent Problem 11 Meaning and Measurement of Risk 52
Divergent Objectives and Agency Conflict 11 Probability Distributions 52
Agency Problem 13 Expected Values 53
Implications of Shareholder Wealth Standard Deviation: An Absolute Measure
Maximization 15 of Risk 54
What Went Right/What Went Wrong: Normal Probability Distribution 54
Eli Lilly Depressed by Loss of Prozac Coefficient of Variation: A Relative Measure
of Risk 56
Patent 15
Caveats to Maximizing Shareholder Value 17 What Went Right/What Went Wrong:
Residual Claimants 19 Long-Term Capital Management (LTCM) 56
Goals in the Public Sector and Not-for-Profit Risk and Required Return 57
Enterprises 19 Summary 59
Not-for-Profit Objectives 20 Exercises 59
The Efficiency Objective in Not-for-Profit Case Exercise: Revenue Management at
Organizations 20 American Airlines 61

ix
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x Contents

The Analysis of Variance 114

PART II Multiple Linear Regression Model 116
DEMAND AND FORECASTING 63 Use of Computer Programs 116
Estimating the Population Regression
3 Demand Analysis 64 Coefficients 116
Chapter Preview 64 Using the Regression Model to Make Forecasts 116
Inferences about the Population Regression
Managerial Challenge: Health Care Coefficients 117
Reform and Cigarette Taxes 64 The Analysis of Variance 119
Demand Relationships 66 Summary 120
The Demand Schedule Defined 66 Exercises 120
Constrained Utility Maximization and Case Exercise: Soft Drink Demand Estimation 124
Consumer Behavior 67
4A Problems in Applying the Linear
What Went Right/What Went Wrong: Regression Model 127
Chevy Volt 71 Introduction 127
The Price Elasticity of Demand 72 Autocorrelation 127
Price Elasticity Defined 73 Heteroscedasticity 129
Interpreting the Price Elasticity: The Relationship Specification and Measurement Errors 130
between the Price Elasticity and Sales Revenue 76 Multicollinearity 131
The Importance of Elasticity-Revenue Simultaneous Equation Relationships and
Relationships 82 the Identification Problem 131
Factors Affecting the Price Elasticity of Demand 84 Nonlinear Regression Models 134
International Perspectives: Free Trade Semilogarithmic Transformation 134
and the Price Elasticity of Demand: Double-Log Transformation 134
Nestlé Yogurt 86 Reciprocal Transformation 135
The Income Elasticity of Demand 87 Polynomial Transformation 135
Income Elasticity Defined 87 Summary 136
Cross Elasticity of Demand 90 Exercises 136
Cross Price Elasticity Defined 90 5 Business and Economic Forecasting 139
Interpreting the Cross Price Elasticity 90 Chapter Preview 139
Antitrust and Cross Price Elasticities 90
An Empirical Illustration of Price, Income, Managerial Challenge: Excess Fiber Optic
and Cross Elasticities 92 Capacity at Global Crossing Inc. 139
The Combined Effect of Demand Elasticities 92 The Significance of Forecasting 141
Summary 93 Selecting a Forecasting Technique 141
Exercises 94 Hierarchy of Forecasts 141
Case Exercise: Polo Golf Shirt Pricing 97 Criteria Used to Select a Forecasting
Technique 142
4 Estimating Demand 99 Evaluating the Accuracy of Forecasting Models 142
Chapter Preview 99 What Went Right/What Went Wrong:
Managerial Challenge: Demand for Crocs Shoes 142
Whitman’s Chocolate Samplers 99 Alternative Forecasting Techniques 143
Statistical Estimation of the Demand Function 100 Deterministic Trend Analysis 143
Specification of the Model 101 Components of a Time Series 143
A Simple Linear Regression Model 103 Some Elementary Time-Series Models 144
Assumptions Underlying the Simple Linear Secular Trends 145
Regression Model 104 Seasonal Variations 148
Estimating the Population Regression Smoothing Techniques 150
Coefficients 105 Moving Averages 151
Using the Regression Equation to Make First-Order Exponential Smoothing 153
Predictions 108 Barometric Techniques 156
Inferences about the Population Regression Leading, Lagging, and Coincident Indicators 156
Coefficients 110 Survey and Opinion-Polling Techniques 157
Correlation Coefficient 113 Forecasting Macroeconomic Activity 158
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 Contents xi

Sales Forecasting 159 What Went Right/What Went Wrong:

Econometric Models 159 Big Box U.S. Retailers in China 200
Advantages of Econometric Forecasting Relative Purchasing Power Parity 201
Techniques 159 Qualifications of PPP 202
Single-Equation Models 159 The Appropriate Use of PPP: An Overview 202
Multi-Equation Models 161
What Went Right/What Went Wrong: GM,
Consensus Forecasts: Livingston and
Toyota, and the Celica GT-S Coupe 203
Blue Chip Forecaster Surveys 162
Trade-Weighted Exchange Rate Index 204
Stochastic Time-Series Analysis 163
International Trade: A Managerial Perspective 207
Forecasting with Input-Output Tables 166 Shares of World Trade and Regional Trading
International Perspectives: Long-Term Blocs 207
Sales Forecasting by General Motors Comparative Advantage and Free Trade 210
in Overseas Markets 166 Import Controls and Protective Tariffs 212
Summary 167 The Case for Strategic Trade Policy 214
Exercises 167 Increasing Returns 216
Case Exercise: Cruise Ship Arrivals in Alaska 171 Network Externalities 216
Case Exercise: Lumber Price Forecast 172 Free Trade Areas: The European Union
Case Exercise: Forecasting in the Global and NAFTA 217
Financial Crisis 173 Optimal Currency Areas 218
Intraregional Trade 219
6 Managing in the Global Economy 176 Mobility of Labor 219
Chapter Preview 176 Correlated Macroeconomic Shocks 219
Managerial Challenge: Financial Crisis Largest U.S. Trading Partners: The Role
Slows U.S. Household Consumption of NAFTA 220
and Crushes Business Investment: Can A Comparison of the EU and NAFTA 222
Gray Markets, Knockoffs, and Parallel
Exports to China Provide a Recovery? 176
Importing 223
Introduction 179
What Went Right/What Went Wrong:
What Went Right/What Went Wrong:
Ford Motor Co. and Exide Batteries:
Export Market Pricing at Toyota 180
Are Country Managers Here to Stay? 224
Import-Export Sales and Exchange Rates 180
Foreign Exchange Risk 180
Perspectives on the U.S. Trade Deficit 225
Summary 227
International Perspectives: Collapse Exercises 228
of Export and Domestic Sales Case Exercise: Predicting the Long-Term
at Cummins Engine 182 Trends in Value of the U.S. Dollar and
Outsourcing 184 the Euro 229
China Trade Blossoms 186 Case Exercise: Elaborate the Debate on
China Today 188 NAFTA 229
The Market for U.S. Dollars as Foreign 6A Foreign Exchange Risk Management 230
Exchange 190
Import-Export Flows and Transaction International Perspectives: Toyota and
Demand for a Currency 190 Honda Buy U.S. Assembly Capacity 231
The Equilibrium Price of the U.S. Dollar 192
Speculative Demand, Government Transfers,
and Coordinated Intervention 192
PART III
Short-Term Exchange Rate Fluctuations 193 PRODUCTION AND COST 233
Determinants of Long-Run Trends in
Exchange Rates 193 7 Production Economics 234
The Role of Real Growth Rates 194
Chapter Preview 234
The Role of Real Interest Rates 196
The Role of Expected Inflation 197 Managerial Challenge: Green Power
Purchasing Power Parity 198 Initiatives Examined: What Went
PPP Offers a Better Yardstick of Wrong in California’s Deregulation
Comparative Size of Business Activity 199 of Electricity? 234
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xii Contents

The Production Function 236 8 Cost Analysis 280

Fixed and Variable Inputs 237 Chapter Preview 280
Production Functions with One Variable Managerial Challenge: Can a Leaner
Input 239 General Motors Compete Effectively? 280
Marginal and Average Product Functions 239
The Meaning and Measurement of Cost 281
The Law of Diminishing Marginal
Accounting versus Economic Costs 281
Returns 240
Three Contrasts between Accounting
What Went Right/What Went Wrong: and Economic Costs 282
Factory Bottlenecks at a Boeing Short-Run Cost and Product Functions 286
Assembly Plant 241 Average and Marginal Cost Functions 286
Increasing Returns with Network Effects 241 Long-Run Cost Functions 291
Producing Information Services under Optimal Capacity Utilization: Three
Increasing Returns 243 Concepts 291
The Relationship between Total, Marginal, Economies and Diseconomies of Scale 292
and Average Product 244 The Percentage of Learning 293
Determining the Optimal Use of the Diseconomies of Scale 296
Variable Input 246 The Overall Effects of Scale Economies and
Marginal Revenue Product 247 Diseconomies 296
Marginal Factor Cost 247 International Perspectives: How Japanese
Optimal Input Level 247
Companies Deal with the Problems
Production with Multiple Variable Inputs 248 of Size 297
Production (Output Constant) Isoquants 248
Summary 299
The Marginal Rate of Technical
Exercises 300
Substitution 250
Case Exercise: Cost Analysis of Patio Furniture 302
Determining the Optimal Combination of Case Exercise: Profit Margins on the
Inputs 252 Amazon Kindle 304
Isocost Lines 253
Minimizing Cost Subject to an Output 9 Applications of Cost Theory 305
Constraint 254 Chapter Preview 305
A Fixed Proportions Optimal Production
Managerial Challenge: How Exactly Have
Process 255
Production Processes and Process Rays 256 Computerization and Information
Measuring the Efficiency of a Production Technology Lowered Costs at Chevron,
Process 257 Timken, and Merck? 305
Returns to Scale 258 Estimating Cost Functions 306
Issues in Cost Definition and Measurement 307
Measuring Returns to Scale 259
Controlling for Other Variables 307
Increasing and Decreasing Returns to Scale 260
The Form of the Empirical Cost-Output
The Cobb-Douglas Production Function 260
Relationship 308
Empirical Studies of the Cobb-Douglas
Production Function in Manufacturing 261 What Went Right/What Went Wrong:
A Cross-Sectional Analysis of U.S. Boeing: The Rising Marginal Cost
Manufacturing Industries 261 of Wide-Bodies 309
Summary 264 Statistical Estimation of Short-Run Cost
Exercises 265 Functions 310
Case Exercise: The Production Function Statistical Estimation of Long-Run Cost
for Wilson Company 268 Functions 311
Determining the Optimal Scale of an Operation 311
7A Production Economics of Renewable and Economies of Scale versus Economies of Scope 314
Exhaustible Natural Resources, Advanced Engineering Cost Techniques 314
Material 270 The Survivor Technique 316
Renewable Resources 270 A Cautionary Tale 317
Exhaustible Natural Resources 274 Break-Even Analysis 317
Exercises 279 Graphical Method 318

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 Contents xiii

Algebraic Method 318 What Went Right/What Went Wrong:

Some Limitations of Break-Even Analysis 321 The Dynamics of Competition at
Doing a Break-Even versus a Contribution Amazon.com 361
Analysis 321 Short Run 361
A Limitation of Contribution Analysis 323 Long Run 361
Operating Leverage 323 Selling and Promotional Expenses 363
Inherent Business Risk 325 Determining the Optimal Level of Selling
Summary 325 and Promotional Outlays 364
Exercises 326 Optimal Advertising Intensity 365
Case Exercise: Cost Functions 327 The Net Value of Advertising 366
Case Exercise: Charter Airline Operating
Competitive Markets under Asymmetric
Decisions 328
Information 367
Incomplete versus Asymmetric Information 367
Search Goods versus Experience Goods 368
PART IV Adverse Selection and the Notorious Firm 368
Insuring and Lending under Asymmetric
PRICING AND OUTPUT DECISIONS: Information: Another Lemons Market 370
STRATEGY AND TACTICS 331 Solutions to the Adverse Selection Problem 371
Mutual Reliance: Hostage Mechanisms Support
10 Prices, Output, and Strategy: Pure and Asymmetric Information Exchange 371
Brand-Name Reputations as Hostages 372
Monopolistic Competition 332
Price Premiums with Non-Redeployable Assets 374
Chapter Preview 332 Summary 376
Managerial Challenge: Resurrecting Exercises 377
Apple in the Tablet World 332 Case Exercise: Netflix and Redbox Compete
Introduction 333 for Movie Rentals 379
Competitive Strategy 334 Case Exercise: Saving Sony Music 380
What Went Right/What Went Wrong:
Xerox 335 11 Price and Output Determination:
Generic Types of Strategies 336 Monopoly and Dominant Firms 382
Product Differentiation Strategy 336 Chapter Preview 382
Cost-Based Strategy 336 Managerial Challenge: Dominant
Information Technology Strategy 337
Microprocessor Company Intel
The Relevant Market Concept 339
Adapts to Next Trend 382
Porter’s Five Forces Strategic Framework 339
The Threat of Substitutes 340
Monopoly Defined 383
The Threat of Entry 341 Sources of Market Power for a Monopolist 383
The Power of Buyers and Suppliers 344 Increasing Returns from Network Effects 384
The Intensity of Rivalrous Tactics 345 What Went Right/What Went Wrong:
The Myth of Market Share 349 Pilot Error at Palm 387
A Continuum of Market Structures 349 Price and Output Determination for a
Pure Competition 350 Monopolist 388
Monopoly 351 Spreadsheet Approach: Profit versus Revenue
Monopolistic Competition 352 Maximization for Polo Golf Shirts 388
Oligopoly 352 Graphical Approach 389
Price-Output Determination under Pure Algebraic Approach 390
Competition 353 The Importance of the Price Elasticity of
Short Run 353 Demand 391
Profit Maximization under Pure Competition The Optimal Markup, Contribution Margin,
(Short Run): Adobe Corporation 356 and Contribution Margin Percentage 393
Long Run 357 Gross Profit Margins 395
Price-Output Determination under Components of the Margin 395
Monopolistic Competition 360 Monopolists and Capacity Investments 396

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xiv Contents

Limit Pricing 397 Oligopolistic Rivalry and Game Theory 446

Using Limit Pricing to Hamper the Sales
What Went Right/What Went Wrong:
of Generic Drugs 398
Nintendo’s Wii U 446
Regulated Monopolies 399 A Conceptual Framework for Game Theory
Electric Power Companies 400
Analysis 447
What Went Right/What Went Wrong: Components of a Game 448
The Public Service Company of Cooperative and Noncooperative Games 450
New Mexico 400 Other Types of Games 450
Natural Gas Companies 401 Analyzing Simultaneous Games 451
The Economic Rationale for Regulation 401 The Prisoner’s Dilemma 451
Natural Monopoly Argument 401 Dominant Strategy and Nash Equilibrium
Summary 403 Strategy Defined 453
Exercises 403 The Escape from Prisoner’s Dilemma 456
Case Exercise: Differential Pricing of Multiperiod Punishment and Reward
Pharmaceuticals: The HIV/AIDS Crisis 407 Schemes in Repeated Play Games 456
Unraveling and the Chain Store Paradox 457
12 Price and Output Determination: Mutual Forbearance and Cooperation in
Oligopoly 409 Repeated Prisoner’s Dilemma Games 459
Chapter Preview 409 Bayesian Reputation Effects 460
Managerial Challenge: Google’s Android Winning Strategies in Evolutionary Computer
Tournaments: Tit for Tat 460
and Apple’s iPhone Displace Nokia in
Price-Matching Guarantees 462
Smart phones? 409
Industry Standards as Coordination
Oligopolistic Market Structures 411 Devices 464
Oligopoly in the United States: Relative
Analyzing Sequential Games 465
Market Shares 411
A Sequential Coordination Game 466
Interdependencies in Oligopolistic Industries 416 Subgame Perfect Equilibrium in
The Cournot Model 416 Sequential Games 468
Cartels and Other Forms of Collusion 418 Business Rivalry as a Self-Enforcing
Factors Affecting the Likelihood of Successful
Sequential Game 469
Collusion 420
First-Mover and Fast-Second Advantages 470
Cartel Profit Maximization and the Allocation
of Restricted Output 421
Credible Threats and Commitments 472
Mechanisms for Establishing Credibility 473
International Perspectives: The OPEC Replacement Guarantees 475
Cartel 423 Hostages Support the Credibility of
Cartel Analysis: Algebraic Approach 428 Commitments 476
Price Leadership 430 Credible Commitments of Durable Goods
Barometric Price Leadership 430 Monopolists 477
Dominant Firm Price Leadership 431 Planned Obsolescence 478
The Kinked Demand Curve Model 434 Post-Purchase Discounting Risk 479
Avoiding Price Wars 435 Lease Prices Reflect Anticipated Risks 481
What Went Right/What Went Wrong: Summary 481
Exercises 482
Good-Better-Best Product Strategy at
Case Exercise: International Perspectives:
Marriott Corporation and Kodak 438
The Superjumbo Dilemma 487
Summary 440
Exercises 441
Case Exercise: Web-Based Satellite Phones 13A Entry Deterrence and Accommodation
Displace Motorola’s Mobile Phone 443 Games 489
Excess Capacity as a Credible
13 Best-Practice Tactics: Game Theory 444 Threat 489
Chapter Preview 444 Precommitments Using Non-Redeployable
Managerial Challenge: Large-Scale Entry Assets 489
Deterrence of Low-Cost Discounters: Customer Sorting Rules 492
Southwest Airline/AirTran 444 A Role for Sunk Costs in Decision Making 493
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 Contents xv

Perfectly Contestable Markets 494

Brinkmanship and Wars of Attrition 495 PART V
Tactical Insights about Slippery ORGANIZATIONAL ARCHITECTURE
Slopes 497 AND REGULATION 547
Summary 498
Exercises 499 15 Contracting, Governance, and
Organizational Form 548
14 Pricing Techniques and Analysis 500 Chapter Preview 548
Chapter Preview 500 Managerial Challenge: Controlling the
Managerial Challenge: Pricing the Vertical: Ultimate TV versus
Chevy Volt 500 Google TV 548
A Conceptual Framework for Proactive, Introduction 549
Systematic-Analytical, Value-Based The Role of Contracting in Cooperative
Pricing 501 Games 549
Optimal Differential Price Levels 504 Vertical Requirements Contracts 551
Graphical Approach 505 The Function of Commercial Contracts 552
Algebraic Approach 506 Incomplete Information, Incomplete Contracting,
Multiple-Product Pricing Decision 507 and Post-Contractual Opportunism 555
Differential Pricing and the Price Elasticity Corporate Governance and the Problem
of Demand 508 of Moral Hazard 555
Differential Pricing in Target Market What Went Right/What Went Wrong:
Segments 513 Forecasting the Great Recession with
Direct Segmentation with “Fences” 514 Workouts and Rollovers 557
Optimal Two-Part Tariffs 516 The Need for Governance Mechanisms 558
What Went Right/What Went Wrong: What Went Right/What Went Wrong:
Unlimited Data at Verizon Wireless 516 Moral Hazard and Holdup at Enron
Couponing 518 and WorldCom 559
What Went Right/What Went Wrong: The Principal-Agent Model 559
Two-Part Pricing at Disney World 518 The Efficiency of Alternative Hiring
What Went Right/What Went Wrong: Arrangements 559
Creative Ingenuity and the Moral Hazard
Price-Sensitive Customers Redeem 519
Problem in Managerial Contracting 561
Bundling 519
Formalizing the Principal-Agent Problem 563
Price Discrimination 522
Screening and Sorting Managerial Talent
Pricing in Practice 524 with Optimal Incentives Contracts 564
Product Life Cycle Framework 524
Full-Cost Pricing versus Incremental What Went Right/What Went Wrong:
Contribution Analysis 526 Why Have Restricted Stock Grants
Pricing on the Internet 528 Replaced Executive Stock Options at
Summary 531 Microsoft? 565
Exercises 532 Choosing the Efficient Organizational Form 567
What Went Right/What Went Wrong:
14A The Practice of Revenue Management 535 Cable Allies Refuse to Adopt Microsoft’s
A Cross-Functional Systems Management WebTV as an Industry Standard 570
Process 536
International Perspectives: Economies
Sources of Sustainable Price Premiums 538
of Scale and International Joint
Revenue Management Decisions, Advanced
Ventures in Chip Making 571
Material 538 Prospect Theory Motivates Full-Line Forcing 572
Proactive Price Discrimination 539
Vertical Integration 574
Capacity Reallocation 540
Optimal Overbooking 543 What Went Right/What Went Wrong:
Summary 546 Dell Replaces Vertical Integration
Exercises 546 with Virtual Integration 577
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xvi Contents

The Dissolution of Assets in a Partnership 577 16 Government Regulation 611

Summary 579 Chapter Preview 611
Exercises 580
Managerial Challenge: Cap and Trade,
Case Exercise: Borders Books and
Deregulation, and the Coase
Amazon.com Decide to Do Business
Together 581 Theorem 611
Case Exercise: Designing a Managerial The Regulation of Market Structure and
Incentive Contract 582 Conduct 612
Case Exercise: The Division of Investment Market Performance 613
Banking Fees in a Syndicate 582 Market Conduct 613
Contestable Markets 614
15A Auction Design and Information Antitrust Statutes and Their Regulatory
Economics 583 Enforcement 615
Optimal Mechanism Design 583 The Sherman Act (1890) 615
Queue Service Rules 583 The Clayton Act (1914) 615
First-Come, First-Served versus Last-Come, The Robinson-Patman Act (1936) 616
First-Served 584 The Hart-Scott-Rodino Antitrust
Stratified Lotteries for Concerts 585 Improvement Act (1976) 617
Auctions 586 Antitrust Prohibition of Selected Business
Types of Auctions 586 Decisions 618
Winner’s Curse in Asymmetric Information Collusion: Price Fixing 618
Bidding Games 587 Mergers That Substantially Lessen
Information Revelation in Common-Value Competition 620
Auctions 589 Merger Guidelines (2010) 621
Bayesian Strategy with Open Bidding Design 590 Monopolization 621
Strategic Underbidding in Private-Value Wholesale Price Discrimination 623
Auctions 592 Refusals to Deal 624
Second-Highest Sealed-Bid Auctions: Resale Price Maintenance Agreements 624
A Revelation Mechanism 594 Command and Control Regulatory
Revenue Equivalence of Alternative Auction Constraints: An Economic Analysis 625
Types 596 The Deregulation Movement 627
Contractual Approaches to Asymmetric
What Went Right/What Went Wrong:
Information in Online Auctions 598
The Need for a Regulated
Incentive-Compatible Revelation
Clearinghouse to Control Counterparty
Mechanisms 600
Risk at AIG 627
Cost Revelation in Joint Ventures and
Regulation of Externalities 628
Partnerships 600
Coasian Bargaining for Reciprocal
Cost Overruns with Simple Profit-Sharing
Externalities 629
Partnerships 601
Qualifications of the Coase Theorem 630
Clarke-Groves Incentive-Compatible
Impediments to Bargaining 631
Revelation Mechanism 603
Resolution of Externalities by Regulatory
An Optimal Incentives Contract 603
Directive 632
International Perspectives: Joint Venture Resolution of Externalities by Taxes and
in Memory Chips: IBM, Siemens, and Subsidies 633
Toshiba 604 Resolution of Externalities by Sale of Pollution
Implementation of IC Contracts 605 Rights: Cap and Trade 635
International Perspectives: Whirlpool’s Governmental Protection of Business 635
Licensing and Permitting 635
Joint Venture in Appliances Improves
Patents 636
upon Maytag’s Outright Purchase of
The Optimal Deployment Decision:
Hoover 606
Summary 607
To License or Not 636
Pros and Cons of Patent Protection and
Exercises 608
Licensure of Trade Secrets 637
Case Exercise: Spectrum Auction 609
Case Exercise: Debugging Computer What Went Right/What Went Wrong:
Software: Versioning at Intel 610 Delayed Release at Aventis 638
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 Contents xvii

What Went Right/What Went Wrong: Analysis and Valuation of Benefits

Technology Licenses Cost Palm Its and Costs 665
Lead in PDAs 640 Direct Benefits 665
Direct Costs 665
What Went Right/What Went Wrong:
Indirect Costs or Benefits and Intangibles 665
Motorola: What They Didn’t Know
The Appropriate Rate of Discount 666
Hurt Them 641
Conclusion on Licensing 641
Cost-Effectiveness Analysis 667
Least-Cost Studies 667
Summary 642
Objective-Level Studies 668
Exercises 643
Summary 668
Case Exercise: Do Luxury Good Manufacturers
Exercises 669
Have a Legitimate Interest in Minimum
Case Exercise: Industrial Development
Resale Price Maintenance: Leegin v.
Tax Relief and Incentives 672
Kay’s Kloset? 645
Case Exercise: Multigenerational Effects of
Case Exercise: Microsoft Tying Arrangements 646
Ozone Depletion and Greenhouse Gases 673
Case Exercise: Music Recording Industry
Blocked from Consolidating 647 APPENDICES
17 Long-Term Investment Analysis 648 A The Time Value of Money A-1
Chapter Preview 648 B Differential Calculus Techniques in
Management B-1
Managerial Challenge: Industrial C Tables C-1
Renaissance in America: Insourcing D Check Answers to Selected
of GE Appliances 648 End-of-Chapter Exercises D-1
The Nature of Capital Expenditure Glossary G-1
Decisions 649 Index I-1
A Basic Framework for Capital Budgeting 650 Notes
The Capital Budgeting Process 650
Generating Capital Investment Projects 651 WEB APPENDICES
Estimating Cash Flows 651 A Consumer Choice Using Indifference Curve
Evaluating and Choosing the Investment Analysis
Projects to Implement 653
B International Parity Conditions
Estimating the Firm’s Cost of Capital 656 C Linear-Programming Applications
Cost of Debt Capital 657
D Capacity Planning and Pricing against a Low-Cost
Cost of Internal Equity Capital 657
Cost of External Equity Capital 659 Competitor: A Case Study of Piedmont Airlines
Weighted Cost of Capital 659 and People Express
Cost-Benefit Analysis 660 E Pricing of Joint Products and Transfer Pricing
Accept-Reject Decisions 661 F Decisions under Risk and Uncertainty
Program-Level Analysis 662 G Maximization of Production Output Subject to a
Steps in Cost-Benefit Analysis 662 Cost Constraint, Advanced Material
Objectives and Constraints in Cost-Benefit H Long-Run Costs with a Cobb-Douglas Production
Analysis 664 Function, Advanced Material

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 Copyright 201 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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 Preface
ORGANIZATION OF THE TEXT
The 13th edition has been thoroughly updated with 45 new applications and dozens of new
figures and tables. Responding to user request, we continue to expand the review of microeco-
nomic fundamentals in Chapter 2, employing a wide-ranging discussion of the equilibrium
price of crude oil and gasoline as well as the marginal analysis of long-lasting lightbulbs and
driving a Mini-Cooper. A wind vane symbol highlights discussion of environmental effects
and sustainability spread throughout the text. Another special feature is the extensive
treatment in Chapter 6 of managing global businesses, import-export trade, exchange rates,
currency unions and free trade areas, trade policy, and an expanded new section on China.
Several major new analyses appear in the 13th edition (and the chapter in which they
appear): moral hazard in teams (1), demand for a branded candy product (4), forecasting
in the global financial crisis (5), geographic distribution of value-added for an iPad (6),
GM’s cost structure post-bailout (8), $80 operating loss on flat screen TVs (10), Chrome
takes share (12), pricing the Chevy Volt and ebook pricing (14), luxury goods and RPMs
(16), and insourcing of appliance manufacturing at GE (17).
There is more comprehensive material on applied game theory in Chapters 13, 13A,
15, 15A, and Web Appendix D than in any other managerial economics textbook, and a
unique treatment of revenue (yield) management appears in Chapter 14A. Part V
includes the hot topics of corporate governance, information economics, auction design,
and the choice of organizational form. Chapter 16 on economic regulation includes a
broad discussion of cap and trade policy, pollution taxes, and the optimal abatement of
externalities. Chapter 17 now leads off with a capital budgeting decision by GE to return
appliance manufacturing to the United States.
By far the most distinctive feature of the book is its 300 boxed examples, Managerial
Challenges, What Went Right/What Went Wrong explorations of corporate practice,
and mini-case examples on every other page demonstrating what each analytical concept
is used for in practice. This list of concept applications is highlighted on the inside front
and back covers.

STUDENT PREPARATION
The text is designed for use by upper-level undergraduates and first-year graduate stu-
dents in business schools, departments of economics, and professional schools of man-
agement, public policy, and information science as well as in executive training
programs. Students are presumed to have a background in the basic principles of micro-
economics, although Chapter 2 offers an extensive review of those topics. No prior
work in statistics is assumed; development of all the quantitative concepts employed is
self-contained. The book makes occasional use of elementary concepts of differential
calculus. In all cases where calculus is employed, at least one alternative approach, such
as graphical, algebraic, or tabular analysis, is also presented. Spreadsheet applications have
become so prominent in the practice of managerial economics that we now address
optimization in that context.
xix
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xx Preface

PEDAGOGICAL FEATURES OF THE

13TH EDITION
The 13th edition of Managerial Economics makes extensive use of pedagogical aids to
enhance individualized student learning. The key features of the book are:
1. Managerial Challenges. Each chapter opens with a Managerial Challenge (MC) illumi-
nating a real-life problem faced by managers that is closely related to the topics covered
in the chapter. Instructors can use the new discussion questions following each MC to
“hook” student interest at the start of the class or in preclass preparation assignments.
2. What Went Right/What Went Wrong. This feature allows students to relate
business mistakes and triumphs to what they have just learned, and helps build
that elusive goal of managerial insight.
3. Extensive Use of Boxed Examples. More than 300 real-world applications and
examples derived from actual corporate practice are highlighted throughout the
text. These applications help the analytical tools and concepts to come alive
and thereby enhance student learning. They are listed on the inside front and
back covers to highlight the prominence of this feature of the book.
4. Environmental Effects Symbol. A wind vane symbol highlights numerous passages
that address environmental effects and sustainability throughout the book.
5. Exercises. Each chapter contains a large problem analysis set. Check answers to
selected problems color-coded in blue type are provided in Appendix D at the
end of the book. Problems that can be solved using Excel are highlighted with an
Excel icon. The book’s Web site (www.cengage.com/economics/mcguigan) has
answers to all the other textbook problems.
6. Case Exercises. Most chapters include mini-cases that extend the concepts and
tools developed into a deep fact situation context of a real-world company.
7. Chapter Glossaries. In the margins of the text, new terms are defined as they are
introduced. The placement of the glossary terms next to the location where the term
is first used reinforces the importance of these new concepts and aids in later studying.
8. International Perspectives. Throughout the book, special International Perspec-
tives sections that illustrate the application of managerial economics concepts
to an increasingly global economy are provided. A globe symbol highlights this
internationally relevant material.
9. Point-by-Point Summaries. Each chapter ends with a detailed, point-by-point
summary of important concepts from the chapter.
10. Diversity of Presentation Approaches. Important analytical concepts are
presented in several different ways, including tabular, spreadsheet, graphical, and
algebraic analysis to individualize the learning process.

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

Instructor’s Manual and Test Bank

The instructor’s manual and test bank that accompany the book contain suggested
answers to the end-of-chapter exercises and cases. The authors have taken great care to
provide an error-free manual for instructors to use. The manual is available to instruc-
tors on the book’s Web site as well as on the Instructor’s Resource CD-ROM (IRCD).
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 Preface xxi

The test bank, containing a large collection of true-false, multiple-choice, and numerical
problems, is available to adopters and is also available on the Web site in Word format,
as well as on the IRCD.

ExamView
Simplifying the preparation of quizzes and exams, this easy-to-use test creation software
includes all of the questions in the printed test bank and is compatible with Microsoft
Windows. Instructors select questions by previewing them on the screen, choosing
them randomly, or picking them by number. They can easily add or edit questions,
instructions, and answers. Quizzes can also be created and administered online, whether
over the Internet, a local area network (LAN), or a wide area network (WAN).

Textbook Support Web Site

When you adopt Managerial Economics: Applications, Strategy, and Tactics, 13e, you and
your students will have access to a rich array of teaching and learning resources that you
won’t find anywhere else. Located at www.CengageBrain.com, this outstanding site features
additional Web Appendices including appendices on indifference curve analysis of con-
sumer choice, international parity conditions, linear programming applications, a capacity
planning entry deterrence case study, joint product pricing and transfer prices, decision
making under uncertainty, and production optimization subject to cost constraints.
It also provides links to additional instructor and student resources.

Accessing CengageBrain
1. Use your browser to go to www.CengageBrain.com.
2. The first time you go to the site, you will need to register. It’s free. Click on “Sign
Up” in the top right corner of the page and fill out the registration information.
(After you have signed in once, whenever you return to CengageBrain, you will
enter the user name and password you have chosen and you will be taken directly
to the companion site for your book.)
3. Once you have registered and logged in for the first time, go to the “Search for
Books or Materials” bar and enter the author or ISBN for your textbook. When
the title of your text appears, click on it and you will be taken to the companion
site. There you can choose among the various folders provided on the Student side
of the site. NOTE: If you are currently using more than one Cengage textbook, the
same user name and password will give you access to all the companion sites for
your Cengage titles. After you have entered the information for each title, all the
titles you are using will appear listed in the pull-down menu in the “Search for
Books or Materials” bar. Whenever you return to CengageBrain, you can click on
the title of the site you wish to visit and go directly there.

PowerPoint Presentation
Available on the product companion Web site, this comprehensive package provides an
excellent lecture aid for instructors. Prepared by Richard D. Marcus at the University of
Wisconsin–Milwaukee, these slides cover many of the most important topics from the
text, and they can be customized by instructors to meet specific course needs.

CourseMate
Interested in a simple way to complement your text and course content with study and
practice materials? Cengage Learning’s Economics CourseMate brings course concepts to
life with interactive learning, study, and exam preparation tools that support the printed

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xxii Preface

textbook. Watch student comprehension soar as your class works with the printed
textbook and the textbook-specific Web site. Economics CourseMate goes beyond the
book to deliver what you need! You and your students will have access to ABC/BBC
videos, Cengage’s EconApps (such as EconNews and EconDebate), unique study guide
content specific to the text, and much more.

ACKNOWLEDGMENTS
A number of reviewers, users, and colleagues have been particularly helpful in providing
us with many worthwhile comments and suggestions at various stages in the development
of this and earlier editions of the book. Included among these individuals are:
William Beranek, J. Walter Elliott, William J. Kretlow, William Gunther, J. William
Hanlon, Robert Knapp, Robert S. Main, Edward Sussna, Bruce T. Allen, Allen Moran,
Edward Oppermann, Dwight Porter, Robert L. Conn, Allen Parkman, Daniel Slate, Richard
L. Pfister, J. P. Magaddino, Richard A. Stanford, Donald Bumpass, Barry P. Keating, John
Wittman, Sisay Asefa, James R. Ashley, David Bunting, Amy H. Dalton, Richard D. Evans,
Gordon V. Karels, Richard S. Bower, Massoud M. Saghafi, John C. Callahan, Frank Falero,
Ramon Rabinovitch, D. Steinnes, Jay Damon Hobson, Clifford Fry, John Crockett, Marvin
Frankel, James T. Peach, Paul Kozlowski, Dennis Fixler, Steven Crane, Scott L. Smith,
Edward Miller, Fred Kolb, Bill Carson, Jack W. Thornton, Changhee Chae, Robert
B. Dallin, Christopher J. Zappe, Anthony V. Popp, Phillip M. Sisneros, George Brower,
Carlos Sevilla, Dean Baim, Charles Callahan, Phillip Robins, Bruce Jaffee, Alwyn du Plessis,
Darly Winn, Gary Shoesmith, Richard J. Ward, William H. Hoyt, Irvin Grossack, William
Simeone, Satyajit Ghosh, David Levy, Simon Hakim, Patricia Sanderson, David P. Ely, Albert
A. O’Kunade, Doug Sharp, Arne Dag Sti, Walker Davidson, David Buschena, George
M. Radakovic, Harpal S. Grewal, Stephen J. Silver, Michael J. O’Hara, Luke M. Froeb, Dean
Waters, Jake Vogelsang, Lynda Y. de la Viña, Audie R. Brewton, Paul M. Hayashi, Lawrence
B. Pulley, Tim Mages, Robert Brooker, Carl Emomoto, Charles Leathers, Marshall Medoff,
Gary Brester, Stephan Gohmann, L. Joe Moffitt, Christopher Erickson, Antoine El Khoury,
Steven Rock, Rajeev K. Goel, Lee S. Redding, Paul J. Hoyt, Bijan Vasigh, Cheryl A. Casper,
Semoon Chang, Kwang Soo Cheong, Barbara M. Fischer, John A. Karikari, Francis
D. Mummery, Lucjan T. Orlowski, Dennis Proffitt, and Steven S. Shwiff.
People who were especially helpful in the preparation of the 13th edition include
Robert F. Brooker, Kristen E. Collett-Schmitt, Simon Medcalfe, Dr. Paul Stock, Shahab
Dabirian, James Leady, Stephen Onyeiwu, and Karl W. Einoff. A special thanks to
B. Ramy Elitzur of Tel Aviv University for suggesting the exercise on designing a manage-
rial incentive contract and to Bob Hebert, Business Librarian at Wake Forest School of
Business, for his tireless pursuit of reference material.
We are also indebted to Wake Forest University and the University of Louisville for the
support they provided and owe thanks to our faculty colleagues for the encouragement and
assistance provided on a continuing basis during the preparation of the manuscript. We wish
to express our appreciation to the members of the Cengage Learning staff for their help in
the preparation and promotion of this book. We are grateful to the Literary Executor of the
late Sir Ronald A. Fisher, F.R.S.; to Dr. Frank Yates, F.R.S.; and to Longman Group, Ltd.,
London, for permission to reprint Table III from their book Statistical Tables for Biological,
Agricultural, and Medical Research (6th ed., 1974).
James R. McGuigan
R. Charles Moyer
Frederick H. deB. Harris

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 About the Authors
James R. McGuigan
James R. McGuigan owns and operates his own numismatic investment firm. Prior to this
business, he was Associate Professor of Finance and Business Economics in the School of
Business Administration at Wayne State University. He also taught at the University of
Pittsburgh and Point Park College. McGuigan received his undergraduate degree from
Carnegie Mellon University. He earned an M.B.A. at the Graduate School of Business at
the University of Chicago and his Ph.D. from the University of Pittsburgh. In addition to
his interests in economics, he has coauthored books on financial management.
His research articles on options have been published in the Journal of Financial and
Quantitative Analysis.

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

Frederick H. deB. Harris

Frederick H. deB. Harris is the John B. McKinnon Professor of Managerial Economics and
Finance at the School of Business, Wake Forest University. His specialties are pricing
tactics and capacity planning. Professor Harris has taught integrative managerial econom-
ics core courses and B.A., B.S., M.S., M.B.A., and Ph.D. electives in business schools and
economics departments in the United States, Germany, France, Italy, and Australia. He has
won two school-wide Professor of the Year teaching awards and two Researcher of the
Year awards. Other recognitions include Outstanding Faculty by Inc. magazine (1998),
Most Popular Courses by Business Week Online 2000–2001, and Outstanding Faculty by
BusinessWeek’s Guide to the Best Business Schools, 5th to 9th eds., 1997–2004.
Professor Harris has published widely in economics, marketing, operations, and
finance journals, including the Review of Economics and Statistics, Journal of Financial
and Quantitative Analysis, Journal of Operations Management, Journal of Industrial
Economics, and Journal of Financial Markets. From 1988 through 1993, Professor Harris
served on the Board of Associate Editors of the Journal of Industrial Economics.
xxiii
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Another random document with
no related content on Scribd:
The Project Gutenberg eBook of Steamships
and their story
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
ebook or online at www.gutenberg.org. If you are not located in the
United States, you will have to check the laws of the country where
you are located before using this eBook.

Title: Steamships and their story

Author: E. Keble Chatterton

Release date: November 5, 2023 [eBook #72045]

Language: English

Original publication: London: Cassell and company, ltd, 1910

Credits: Peter Becker, Charlie Howard, and the Online Distributed

Proofreading Team at https://www.pgdp.net (This file was
produced from images generously made available by The
Internet Archive)

*** START OF THE PROJECT GUTENBERG EBOOK

STEAMSHIPS AND THEIR STORY ***
 Transcriber’s Note
Larger versions of most illustrations may be seen by right-
clicking them and selecting an option to view them separately, or
by double-tapping and/or stretching them.
Additional notes will be found near the end of this ebook.
STEAMSHIPS AND THEIR
STORY
THE WHITE STAR LINER “OLYMPIC”
(Drawn by Charles Dixon, R.I.)
 STEAMSHIPS
AND THEIR STORY
BY
E. KEBLE CHATTERTON
Author of “Sailing Ships and Their Story”
WITH 153 ILLUSTRATIONS

CASSELL AND COMPANY, LTD.

London, New York, Toronto and Melbourne
1910
ALL RIGHTS RESERVED
 PREFACE
The exceptionally kind reception on the part of both Press and
public which greeted the appearance of my history of the sailing ship
last year, and the numerous expressions of appreciation that have
reached me from so many parts of the world, have encouraged me
to attempt in a similar manner to set out the story of the steamship
from the earliest times to the present day.
I am by no means unaware that between the sailing ship and the
steamship there is a wide difference, as well in character as in their
respective development. But that is no reason for supposing that the
steamship is less interesting in her history or less deserving of
admiration in her final presentation. Around the sailing ship there
hovers eternally a halo of romance; that is undeniable even by the
most modern enthusiast. But, on the other hand, the sailing ship in
the whole of her career has not done more for the good of humanity
than the steamship within a century or less. It requires but a moment
of thought to realise the truth of this statement; and for that reason
alone, the history of the steamship makes its appeal not to a special
class of reader, but to all who interest themselves in progress, in the
development of their own country and empire, in the welfare of the
world generally, and the evolution from stagnation to beneficial
activity and prosperity. There are but few civilised people nowadays
who have not been brought into contact with the steamship in one
way or another. Perhaps sometimes it has been unwillingly, though
at other times to their great gain. In some of those moments which
have seemed to drag on wearily during the enforced idleness of a
voyage, the inquiring mind has over and over again exhibited a
desire to know something of the nature of the fine creature which is
carrying him from one distant country to another. He has desired to
know in plain, non-technical language, how the steamship idea
began; how it developed; how its progress was modified, and what
were the influences at work that moulded its character as we know it
to-day. Further, he has felt the desire to show an intelligent interest in
her various characteristics and to obtain a fair grasp of the principles
which underlay the building and working of the steamship. As a
normal being himself, with mind and sympathy, he has wished to be
able to enter into the difficulties that have been overcome so
splendidly by the skill and enterprise of others, both past and
present. If he talks to the professional sailor or marine engineer, they
may not, even if they have the inclination to unbend, be able easily
to separate their explanation from the vesture of technicality, and the
inquirer is scarcely less satisfied than before. It is, then, with a view
of supplying this want that I have aimed to write such a book as will
interest without, I trust, wearying, the general reader.
The plan on which I have worked has been to give the historical
continuity of the steamship from the most reliable and authoritative
material obtainable, and to supplement and correct a number of false
statements by comparison with the latest researches. At the same
time, my object has been not merely to ensure absolute historical
accuracy, but to show how in a special manner and peculiar to itself
the steamship is every bit as romantic, and equally deserving of our
affectionate regard, as her predecessor the sailing ship, whose
sphere of utility she has succeeded so materially in limiting. After
having been brought safe and sound through gales of wind, across
many thousands of miles of ocean, past cruel coast, and through
treacherous channels, until at last the fairway and the harbour of
safety have been reached, no one who has any heart at all can step
ashore without feeling that he is parting from one of the noblest and
best friends that a man ever had. True, there are some people, as an
officer on one of the crack liners once remarked to me, who, as soon
as ever the big ship is tied up alongside the landing-stage, hurry
ashore from her as if she were a plague-ship. But such, let us hope,
are the few rather than representative of the majority who have been
brought into intimate relationship with the steamship.
Nor only to the history and the glamour of the great steam-driven
vessel have I confined myself. The sea is not merely a wide ocean,
but contains within its mighty bosom many smaller areas such as
channels and bays wherein the steamboat is able to ply as well for
pleasure as for profit; and besides the big, brave sisters with their
enormous displacement and their powerful engines, there are other
children which run across smaller sea-ways, and these, too, are not
to be passed over lightly. Then there are fleets of special steamships
which in a quiet, unostentatious manner do their noble work, and are
none the less efficient, even if they escape the limelight of general
publicity. I shall seek to show in the following pages not merely the
conditions which in the past have hindered or helped the ship-maker,
but to indicate the modern problems which have still to be faced and
overcome.
The difficulty that awaits an author who writes on a technical
subject for the benefit of the non-technical, average reader, is always
to make himself intelligible without being allowed the full use of the
customary but technical terms. In order that, as far as possible, the
present volume may be both a full and accurate account of the
steamship, in all times and in all the phases of her development,
whilst yet being capable of appreciation by those to whom
technicalities do not usually appeal, I have endeavoured whensoever
possible to explain the terms employed.
The story of the steamship may at the first mention seem to be
bereft of any interest beyond that which appeals to an expert in
marine engineering. Pipes and boilers and engines, you are told, are
not suggestive of romance. To this one might reply that neither were
sails and spars during the first stages of their history; and I shall
hope that after he has been so kind as to read the following pages,
the reader may feel disposed to withdraw the suggestion that the
steamship is a mere inanimate mass of metal. On the contrary, she
is as nearly human as it is possible to made a steel shell, actuated
by ingenious machinery; and, after all, it is the human mind and hand
which have brought her into being, and under which she is kept
continuously in control. It would be surprising, therefore, since she
has been and continues to be related so closely to humanity, if she
should not exhibit some of the characteristics which a human
possesses.
 It is fitting that the history of the steamship should be written at
this time, for if final perfection has not yet arrived, it cannot be very
far distant. It is but three or four years since the Lusitania and
Mauretania came into being, and only during the present year have
they shown themselves to possess such exceptional speed for
merchant ships. On the 20th of October, 1910, will be launched the
Olympic, whose size will dominate even the Mauretania. Much
further than a 45,000-ton ship, surely, it cannot be possible to go;
and the likelihood is that with the commercial steamship’s
manifested ability to steam at the rate of over thirty-one land miles
per hour, we are in sight of the limitations which encompass her. As
to the future of transport, changes happen so quickly, and possess
so revolutionary a character, that it is hardly safe to prophesy; but it
is significant that the week before this preface was written, an
aeroplane succeeded in flying, in perfect ease and safety, the 150
miles which separate Albany from New York; and thus, just a century
after Fulton had convinced the incredulous by traversing the same
course through water in his steamship, the latest means of travelling
from one place to another has caused to look insignificant the
wonderful record which Fulton, in his Clermont, was the first to set
up. If, then, as will be seen from this volume, the steamship has
done so much within a hundred years, what, we may legitimately
ask, will be accomplished by the airship or aeroplane before another
century has come to an end? Those who have the temerity to give
expression to their opinions, suggest that the steamship will
ultimately be made obsolete by the flying craft. If that be a true
forecast, it is perhaps as well that the steamship’s story should be
told here and now whilst yet she is at her prime.
Of the matter contained within this volume, much has been
obtained at first hand, but much has also been derived from the
labours of others, and herewith I desire to acknowledge my
indebtedness. I would especially wish to mention in this connection:
“A Chronological History of the Origin and Development of Steam
Navigation, 1543–1882,” by Geo. Henry Preble, Rear-Admiral U.S.N.
(1883); certain articles in the “Dictionary of National Biography”;
“Ancient and Modern Ships: Part II., The Era of Steam, Iron and
Steel,” by Sir George C. V. Holmes, K.C.V.O., C.B. (1906); “The
Clyde Passenger Steamer: Its Rise and Progress,” by Captain
James Williamson (1904); “The History of American Steam
Navigation,” by John H. Morrison (1903); “The History of North
Atlantic Steam Navigation,” by Henry Fry (1896); “The American
Merchant Marine,” by W. L. Martin (1902); “The Atlantic Ferry: Its
Ships, Men, and Working,” by Arthur J. Maginnis (London, 1893);
“Ocean Liners of the World,” by W. Bellows (1896); “Life of Robert
Napier,” by James Napier (1904); “Handbook on Marine Engines and
Boilers,” by Sir G. C. V. Holmes (1889); “The Royal Yacht Squadron,”
by Montague Guest and W. B. Boulton (1903); “The Rise and
Progress of Steam Navigation,” by W. J. Millar (1881); “Practical
Shipbuilding,” by A. Campbell Holms; “The Boy’s Book of
Steamships,” by J. R. Howden (1908); “The Steam Turbine,” by
R. M. Neilson (1903); “Our Ocean Railways, or Ocean Steam
Navigation,” by A. Macdonald (1893); “Life of R. Fulton and a History
of Steam Navigation,” by T. Wallace Knox (1887); “Life on the
Mississippi,” by Mark Twain; “American Notes,” by Charles Dickens;
“The Orient Line Guide,” by W. J. Loftie (1901); “The History of the
Holyhead Railway Boat Service,” by Clement E. Stretton (1901); the
“Catalogue of the Naval and Marine Engineering Collection in the
Science Division of the Victoria and Albert Museum, South
Kensington” (1899); “Catalogue of the Mechanical Engineering
Collection in the Science Division” of the above (1907); “The
Progress of German Shipbuilding” (1909); “Leibnizens und Huygens
Briefwechsel mit Papin,” by G. W. Von Leibnitz (1881); “British
Shipbuilding,” by A. L. Ayre (1910); “Lloyd’s Calendar.” In addition to
the above, I have laid myself under obligation to a number of articles
which have appeared at one time and another in the newspapers
and periodicals within the last century, and especially to certain
contributions in the Century Magazine, the Yachting Monthly, the
Engineer and in Engineering. For the rest, I have relied on material
which I have myself collected, as well as on much valuable matter
which has been courteously supplied to me by the various
shipbuilding firms and steamship lines.
My thanks are also due for the courteous permission which has
been given to reproduce photographs of many of the steamships
seen within these pages. To the authorities at South Kensington I am
indebted for the privilege of reproducing a number of the exhibits in
the Victoria and Albert Museum. I wish also to thank the City of
Dublin Steam Packet Company for permission to reproduce the
Royal William; Mr. James Napier for the illustration of the British
Queen; the Cunard Steamship Company for the various photographs
of many of their fleet; also the Royal Mail Steam Packet Company,
the Peninsular and Oriental Steam Navigation Company, Messrs.
Ismay, Imrie and Co., Messrs. Anderson, Anderson and Co., the
American Line, the Norddeutscher Lloyd Company, the Liverpool
Steam Towing and Lighterage Company, Messrs. L. Smit and Co.,
the Ymuiden Tug Company, Messrs. Lobnitz and Co., Renfrew, the
Mersey Docks and Harbour Board, Liverpool, Sir W. G. Armstrong,
Whitworth and Co., Messrs. William Doxford and Sons, Sir Raylton
Dixon and Co., Messrs. Cochrane and Sons, Selby, the Fall River
Line, Messrs. A. and J. Inglis, Messrs. Thos. Rhodes and Co., the
Caledon Shipbuilding and Engineering Co., Messrs. Camper and
Nicholson, Messrs. Cammell, Laird and Co., the Great Western
Railway Company, the London and North Western Railway
Company, the London and South Western Railway Company, the
South Eastern and Chatham Railway Company, Messrs. Harland
and Wolff, and Messrs. C. A. Parsons and Co. To the Right Hon. the
Earl of Stanhope, to the New Jersey Historical Society, and also to
the proprietors of the Century Magazine I wish to return thanks for
being allowed to reproduce certain illustrations connected with
Fulton’s early experiments in steam navigation, and to the Yachting
Monthly for permission to reproduce the diagrams of steam yachts
and lifeboats.
Finally, I have to apologise if through any cause it should be
found that in spite of extreme carefulness errrors should have found
their way into this narrative. The nature of the subject is necessarily
such that to have erred herein would have been easy, but I have
been at great pains to prevent such a possibility occurring.
E. Keble Chatterton.
June, 1910.
 CONTENTS
CHAPTER PAGE
1. Introduction 1
2. The Evolution of Mechanically-Propelled
Craft 12
3. The Early Passenger Steamships 63
4. The Inauguration of the Liner 104
5. The Liner in her Transition State 145
6. The Coming of the Twin-Screw Steamship 165
7. The Modern Mammoth Steamship 183
8. Smaller Ocean Carriers and Cross-Channel
Steamers 215
9. Steamships for Special Purposes 233
10. The Steam Yacht 266
11. The Building of the Steamship 282
12. The Safety and Luxury of the Passenger 297
13. Some Steamship Problems 309
 LIST OF ILLUSTRATIONS
Page
The “Olympic” Frontispiece
Hero’s Steam Apparatus 18
Jonathan Hulls’ Steam Tug Boat 30
The Marquis de Jouffroy’s Steamboat 40
Patrick Miller’s Double-hulled Paddle-boat 42
Symington’s First Marine Engine 42
Outline of Fitch’s First Boat 45
The “Charlotte Dundas” 46
The “Clermont” in 1807 46
Fulton’s design for a Steamboat submitted to the
Commission appointed by Napoleon in 1803 51
Fulton’s First Plans for Steam Navigation 57
Fulton’s design of Original Apparatus for determining
the Resistance of Paddles for the propulsion of the
“Clermont,” dated 1806 64
The Reconstructed “Clermont” at the Hudson-Fulton
Celebrations, 1909 70
Paddle-wheel of the Reconstructed “Clermont” 70
Fulton’s Preliminary Study for the Engine of the
“Clermont” 75
Fulton’s plans of a later Steamboat than the “Clermont-
North-River,” showing application of the square side
connecting rod Engine 77
The “Comet” 78
Engine of the “Comet” 78
S.S. “Elizabeth” (1815) 84
Russian Passenger Steamer (1817) 84
The “Prinzessin Charlotte” (1816) 90
The “Savannah” (1819) 90
The “James Watt” (1821) 94
Side-Lever Engines of the “Ruby” (1836) 94
The “Sirius” (1838) 96
The “Royal William” (1838) 96
The “Great Western” (1838) 100
Paddle-wheel of the “Great Western” 100
The “British Queen” (1839) 102
The “Britannia,” the First Atlantic Liner (1840) 102
The “Teviot” and “Clyde” (1841) 110
Side-lever Engine 110
Launch of the “Forth” (1841) 112
The “William Fawcett” and H.M.S. “Queen” (1829) 112
Designs for Screw Propellers prior to 1850 118
The “Robert F. Stockton” (1838) 120
The “Archimedes” (1839) 120
Stern of the “Archimedes” 122
The “Novelty” (1839) 122
The “Great Britain” (1843) 126
Propeller of the “Great Britain” 126
Engines of the “Great Britain” 128
Engines of the “Helen McGregor” 128
The “Scotia” (1862) 130
The “Pacific” (1853) 130
Maudslay’s Oscillating Engine. 132
Engines of the “Candia” 132
The “Victoria” (1852) 134
The “Himalaya” (1853) 134
Coasting Cargo Steamer (1855) 134
The “Great Eastern” (1858) 138
Paddle Engines of the “Great Eastern” 140
Screw Engines of the “Great Eastern” 140
The “City of Paris” (1866) 148
The “Russia” (1867) 148
The “Oceanic” (1870) 152
The “Britannic” (1874) 154
The “Servia” (1881) 154
The “Umbria” (1884) 158
The “Orient” (1879) 158
The “Austral” (1881) 162
The “Victoria” (1887) 162
The “Majestic” (1889) 162
The “City of Paris” (1893) (now the “Philadelphia”) 166
The “Ophir” (1891) 166
The “Lucania” (1893) 170
The “Kaiser Wilhelm der Grosse” (1897) 174
The “Oceanic” (1899) 176
The “Cedric” 176
The “Celtic” 178
The “Kaiser Wilhelm II.” 180
Giovanni Branca’s Steam Engine (1629) 184
The Blades of a Parsons Turbine 185
The Parsons Turbine 186
The “Carmania” (1905) 188
Lower half of the fixed portion of one of the
“Carmania’s” Turbines 188
A Study in Comparisons: the “Magnetic” and “Baltic” 192
The “Mauretania” when completing at Wallsend-on-
Tyne 198
Stern of the “Mauretania” 200
The “Lusitania” 202
The “Adriatic” 206
The “George Washington” 208
The “Berlin” 208
The “Laurentic” on the Stocks 210
The “Mooltan” 216
The Starting Platform in the Engine Room of the
“Mooltan” 218