This Week In Finance

Finance and Economics: Kissin' Cousins

After nearly two decades of teaching the introductory corpfin course, it no longer surprises me that so few students are aware of the importance of basic microeconomics to the study of Finance. As a remedy, I take every opportunity to point the relationship out to them. And last week, a wonderful opportunity to do so appeared in the form of a Wall Street Journal article on the front page of the Tuesday, February 21st edition.

The article details the Tyco International's apparent attempt (I'm trying to avoid a lawsuit here) to monopolize the plastic hanger manufacturing industry. How boring! you say. How utterly "smokestack" you say. Perhaps, but according to the article, Tyco now owns all of the major manufacturers and has sharply increased prices and, according to one person quoted in the article, reduced service.

Now, how Tyco runs their business doesn't particularly concern me, but this does seem (I'm still trying to avoid that lawsuit) to be an interesting real-world case of the classical monopolist behavior. In other words, all those market structure models the students memorized and quickly forgot in Econ 101 really do have real-world applications.

And from a Finance standpoint, one might say that we are simply observing value-maximizing managers making shrewd capital budgeting decisions. Of course, one could also bring in a discussion of the basic rationale for mergers and acquisitions and, if you really want to get the class hopping, raise the question of managerial ethics. (I might point out that, according to the article, the crackerjack attorneys in Janet Reno's Justice Department haven't lifted a finger to slow Tyco down. (Lazy or stupid? You be the judge.)