Design and Implementation of Pay for Performance

A large, mature and robust economics literature now provides a useful framework for understanding incentives. This chapter uses the lessons of that literature to discuss how to design and implement pay for performance in practice. A unified treatment of properties of numeric performance measures is provided, including how performance measures relate to employee knowledge and decision making. Subjective performance evaluation, and the tie of evaluations to rewards, are analyzed. Practical implementation issues, such as matching of pay for performance to job design, motivating creativity, and links between incentives and employee selection, are considered. The chapter concludes with suggested directions for future research.

On the Profitability of Corporate Environmentalism

Corporations often take environmentally friendly actions that go beyond what is required by law. Whether such corporate environmentalism is a profitable form of corporate strategy, or altruism in the form of a sacrifice of profits in the public interest, has been hotly debated. This chapter offers a theoretical framework for understanding when proactive environmental management is profitable, incorporating market forces, government regulation, and pressures from civil society, sometimes referred to as private politics. It then reviews, summarizes and critiques the empirical evidence relating corporate profitability to corporate environmentalism and identifying specific sources of “green” profits. It concludes with perspectives on the most valuable lessons for managers and the most promising areas for further scholarly research.

Managing Workplace Safety and Health

This entry explicates how market forces incent managers to be concerned with worker health and safety. It also notes how supplementing market forces are government actions intended to improve work-related health and safety. These include the legal system under tort laws, states’ workers’ compensation insurance Programs, research into the causes of health hazards at the National Institute of Occupational Safety and Health (NIOSH), and the federal government’s workplace regulations under the Occupational Safety and Health Act (OSHA). An important empirical conclusion emerging is that the labor market, via the additional compensation workers require for exposure to health and safety risks, provides the largest economic incentive for managers making workplace decisions involving worker health-related well being.

Organizational Design and Firm Performance

This chapter provides a critical survey of the stream of studies that have examined the effect of organizational design decisions on firm performance. The focus is on selected organizational design dimensions that can be measured using quantitative indicators, notably i) organizationalconfiguration, ii) allocation of decision-making authority, and iii) adoption offormal organizational practices. The aim is to highlight ‘stylized facts’ supported by robust quantitative empirical findings, and to link them to insights provided by theoretical work. Moreover, we consider firm-, industry-, and country-specific factors that moderate the organizational design-firm performance relation. In reviewing this emergent and still quite fragmented empirical literature, we also take the opportunity to present open issues, and to indicate avenues for future research.

Product Distribution and Promotion

We model multiple brands in a product category so as to determine how channel members’ profits and consumers’ surplus are affected by distribution channel structure, manufacturer and retailer pricing policies, brand differentiation, and brand promotion. We employ a game-theoretic analysis with linear demand to prove that, in a decentralized channel, there are parametric values for which (1) jointly setting prices to maximize total category profits leads to more brands than does individually setting each brand’s price to maximize that brand’s profit; (2) unless brands are little differentiated, all channel members would be better off pricing to maximize brand profit rather than category profit. Neither of these points hold for a vertically-integrated channel. (3) We also prove that a decentralized channel that maximizes brand profit generates more consumers’ surplus than does a vertically-integrated channel.

Game and Information Theory in Modern Managerial Economics

This chapter describes how methodologies developed in the field of game and information theory can assist in understanding the interaction of competitors in markets, and the study of managerial economics, in general. The chapter highlights, in particular, the role of incomplete information in generating market failures, and provides examples of mechanisms that can alleviate such failures. Some examples of topics addressed are: first- and second-mover advantages, long term strategic commitments versus short term tactical choices made by competitors, erection of entry barriers to secure market power, choices of product-mix, special pricing mechanisms to enhance profitability, and issues related to vertical control and the internal organization of the firm.

Market Power

Market power – how it arises, and how it is measured – is an important topic for the economics field of “industrial organization” (IO). It is also an important topic for managers and for managerial economics, since it can be related to sustainable advantage for a company and it is usually at the center of antitrust cases in which a company may be involved. This chapter defines market power, discusses how it arises, and describes the various methods that have been used for empirically detecting and measuring it. Attention is also given to the role and measurement of market power in important antitrust contexts.

Competitive Strategy in the Nonprofit Sector

This paper explores the uses of the field of competitive strategy in the nonprofit sector. It begins with a discussion of the central differences between nonprofit and for profit organizations. Most fundamentally, nonprofits emphasize mission fulfillment rather than strict profit maximization. Nonprofits are also distinguished from for-profits by their reliance on donations as well as earned income. Both the difference in objective function and the use of multiple revenue sources affect the dynamic strategies of nonprofits. This paper explores exit and entry patterns we expect to see in the nonprofit sector, pricing strategies, levels of differentiation, and the usual sources of competitive advantage in the sector. It also illustrates the ways in which the classic tools from strategy like Hotelling and the Bresnahan-Reiss entry models are informative in the nonprofit sector.

Strategies for Network Industries

Firms' strategic behavior and managerial decision-making in network industries may differ from those in other industries. This happens because an increase in the demand for one brand need not reduce the demand for competing brands. In addition, consumers may be locked-in a particular standard, so they may bear a cost of switching to competing brands. Therefore, starting as early as from the design stage, managers must evaluate the implications of their choices of prices, technology standards, and the degree of compatibility of their own brands with the standards adopted by firms producing competing brands. This article analyzes some of the major issues facing managers operating in modern network industries.

Combinatorial Auctions

Traditional auctions struggle to achieve efficient allocations in multi-resource environments where individual resources are complements (the value of obtaining a package of items is worth more than the sum of the unbundled individual values) or they are substitutes. For this reason, Combinatorial Auctions are valuable resource allocation mechanisms in a host of environments. These environments include, but are not limited to, spectrum auctions, procurement of transportation services, exchange of pollution credits, and the allocation of space shuttle resources. This chapter provides a summary of several important combinatorial auction mechanisms. For each mechanism examined we highlight the strengths, weaknesses, and the environments for which they are well suited. In addition, the chapter provides examples of how these mechanisms have been used by business and government to gain efficiency and revenue in these complex resource allocation environments.