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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.