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Kreps Publishes New Microeconomics Text

March, 2004

STANFORD GRADUATE SCHOOL OF BUSINESS—To many former students of microeconomics, the subject is mostly about "supply equals demand," the model of a large and impersonal market in which many anonymous buyers and sellers interact, trading some commodity item. While substantial portions of the economic world approximate that ideal, even more of it consists of cases "like Microsoft dealing with Intel or like Boeing dealing with Airbus and at the same time dealing with the people who make airplane engines," says David Kreps, the author of the new textbook Microeconomics for Managers, published by W. W. Norton & Co.

Written for MBA students, this text covers the traditional topics but is equally about "economics where people have identities and where identities and relationships matter," says Kreps, the Theodore J. Kreps Professor of Economics at the Stanford Graduate School of Business.

Microeconomics expanded beyond "supply equals demand" about 30 years ago in response to two intellectual developments, he says. "In the early 1970s, [GSB professor, and later dean] Mike Spence and other people started studying information economics. Simultaneously, [Business School professor] Bob Wilson and others began applying noncooperative game theory to economic issues," recalls Kreps. "It was a match made in heaven: Game theory gave us the right language to discuss issues like cooperation, reputation, proprietary information—about anything that had to do with identity."

Stanford Business School alumni from 1980 to 1990 probably remember topics such as incentives and signaling entering into the old B261 Decision Trees course. About 1990, these topics were moved to the introductory micro course and then reappeared in courses in strategic and human resource management and many others. Today, these ideas are woven into much of the MBA curriculum, and the new textbook gives them the prominence they have earned.

Kreps credits his Stanford MBA students with pushing him to apply recent Nobel Prize-winning theories to the practical world of real businesses in both class discussions and the book. In the required economics course for first-year students, he writes in the book's preface, the typical student is highly skilled analytically but "the group ethic is that ideas that do not pay back in the first five months on the job are suspect, and those that mightn't pay back in the first five years are a complete waste of time."

MBA students learn by analogy and example, he says, rather than by absorbing abstract theory. "Ask MBAs what they know about implicit collusion with noisy observables, and the response is likely to be, 'Huh?' But when asked what they learned about any given industry from the GE-Westinghouse case, they will give a sophisticated and nuanced answer."

The book, therefore, tries to motivate and illustrate the frameworks and theories it presents with real-world examples: from General Motors trying to settle a class-action lawsuit with coupons to Porsche trying to reorganize how its cars are retailed in the United States; to an explanation for how and why Toyota increases the power of its suppliers.

Kreps may be the perfect economist to write such a book. A very well-regarded teacher, he won the School's Distinguished Teaching Award in 1991, the first year he taught microeconomics and imported these ideas into the core course. He is among the economists who, in the early 1980s, helped marry game theory to information economics, but at the same time he has been critical of how these ideas have sometimes been used. "These theories can be very useful," he says, "but managers need to exercise honest skepticism, bringing other inputs to bear. Managers have to see where the question really lies, whether it is mostly a matter of economics or if noneconomic forces play an important role, and they have to integrate what economics tells them with what other frameworks say. That's where judgment comes in. People pay Stanford MBAs good money not to just be rote appliers of tools but to have the ability to sort through and judge the usefulness of various types of theories."

—Kathleen O'Toole