Download Review Questions – ECMC42 – February 2004

Review Questions – ECMC42 – February 2004
1. There are several groups of industries to which the topics studied in this
course may apply. Can you distinguish between: information goods
industries, information technology industries, and telecommunications
industries. Give examples of each one. What is the internet? What is ecommerce?
2. What does the short run equilibrium and long run equilibrium in a perfectly
competitive industry look like? Why does equilibrium occur at P = MC? In
the long run, are perfectly competitive firms able to mark-up prices above
the cost of production, and why or why not? Does the cost of production
include a “normal profit”. What are the cost conditions facing a perfectly
competitive firm? What kind of business strategy can a perfectly competitive
firm pursue? Does perfect competition maximize the sum of consumer and
producer surpluses? Why is this considered to be a good thing? Are there
any other criteria you might want to use to judge an industry?
3. Define monopoly. Are there different kinds of monopoly based on the
different kinds of barriers to entry? Explain. Under what conditions would
a monopolist charge a single price to all of its customers? What type of
inefficiency is usually associated with monopoly, and why does it occur?
Explain in some detail.
4. What is the prisoners’ dilemma game and why does the equilibrium work
out as it does? Why can’t the players of this game avoid its results? How
does the idea of business strategy in game theory differ from the idea of
business strategy in perfect competition and monopoly?
5. What is price discrimination? “Discrimination” is a negative-sounding
word; does this mean that price discrimination is necessarily bad for
consumers? For producers? For both? Explain, with examples.
6. Does a single-price monopolist leave some unexploited profit opportunities?
Explain, including an explanation of under what conditions these
opportunities may be exploitable.
7. What is “perfect” price discrimination? What is another name for it? Give
possible examples. Is the result efficient or inefficient? Explain. If
consumers have identical demands, is it possible to achieve perfect price
discrimination in another way? Explain, using a diagram. What is a take-itor-leave-it price? Is it possible to offer the consumer as much as he wants of
a product at a take-it-or-leave-it price? Explain. Use a diagram to show how
much the price should be. Is this equivalent to perfect price discrimination if
consumers are heterogeneous?
8. What is third-degree price discrimination? Do sellers need to know the
reservation prices of all buyers? What do sellers need to know about buyers
in order for third-degree price discrimination to work? If consumers are
homogeneous, will third-degree price discrimination work? What is
necessary for third-degree price discrimination to work? Who will be better
off and who will be worse off as a result of third-degree price discrimination?
Explain.
9. What is second-degree price discrimination? What is self-selection? What
do sellers need to know about buyers in order for second-degree price
discrimination to work? Give examples of second-degree price
discrimination. If the monopolist creates two different price-quantity
packages, offered on a take-it-or-leave-it basis, and there are two different
kinds of customers with different demand curves, what will make consumers
choose one package over another? What type of price-quantity packages will
be profit-maximizing for the firm? Will these profit-maximizing packages
deliver the desired quantities from the customers point of view? Explain.
Does this model still apply if we interpret quantities as qualities? Explain
and give possible examples.
10. What is bundling? Do cable TV companies engage in bundling? Give some
other examples. Why might bundling be profit-maximizing for the producer.
Create an example to show under what conditions bundling could be an
intelligent business strategy. What are consumers going to think about
bundling? Is this opinion fully justified or are there potential advantages to
consumers from bundling?
11. What is a search good? An experience good? A credence good? Give
examples of each. If different qualities of a good are being sold on the
market, how will difficulties perceiving true quality affect the consumer’s
willingness to pay? What is asymmetric information? Who has more
information and who less?
12. What is adverse selection? What is the market for lemons? Does it apply
only to used cars? What is the market failure associated with the market for
lemons, and what will the effects be on consumers and on sellers? If there is
asymmetric information, what is the profit-maximizing behaviour of sellers?
Will signaling affect this kind of market? What kinds of signals would be
credible to purchasers? Do producers have incentives to engage in false
signaling?
13. What is moral hazard? Give several examples of moral hazard in markets.
Does moral hazard apply to consumers or sellers? When moral hazard
exists, how is it likely to affect the way in which markets work? Provide a
possible example, with explanation. In what ways are moral hazard and
adverse selection similar, and in what ways are they different?
14. What are switching costs? Give examples. Who bears these switching costs?
How high do switching costs have to be before they create lock-in? What is
lock-in? Does lock-in apply to whole products or to brands? What does
lock-in have to do with systems competition, with complementors and
competitors? Would different components of a sound system be likely to
create lock-in? Why or why not? How does lock-in affect consumer
demand? For what product is demand affected? Explain with examples.
Does this affect the attractiveness of the customer base of the product that
has achieved lock-in? How is this likely to affect business strategy behaviour
in relation to this customer base? Will customers react to lock-in if they
perceive it to be likely? How will lock-in affect their behaviour? What are
likely to be the characteristics of equilibrium in a market that has switching
costs? Explain.
15. What are network effects? What is an “externality”? Are network effects a
form of externality? Are network effects similar to a fad? Why and why
not? Do network effects apply to brands or to whole products? Give
examples. What is the likely pattern of industry growth in a market with
network effects? How might this affect profit-maximizing business strategy?
Does it pay to be the first-mover if network effects are important? Is your
brand going to necessarily be the one that benefits from network effects if
you are the first mover? What might this depend on? Are network effects
always positive, or can they be negative? What could make network effects
negative? Give an example.
16. What is intellectual property? Give examples. What forms of protection
exist for different kinds of intellectual property? What is the appropriate
business strategy in relation to intellectual property? It is always best to
protect your intellectual property to the maximum extent, or is sometimes
desirable to make it available to others? What might this depend on? Give
examples.