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Criminal Minds > Econ of AI FINAL STUDY > Flashcards

Econ of AI FINAL STUDY Flashcards

1
Q

Drastic Innovation vs. Non-Drastic Innovation [Technological Advance]

A

Drastic Innovation: an entirely new product OR a major change in production process that can make innovating firm a monopoly

Non-Drastic Innovation: innovator still faces competition

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2
Q

Product Innovation vs. Process Innovation

A

Product Innovation: technological advance in the NATURE/TYPE of products produced. Increased quality.

Process Innovation: Increase in the operations. Lower marginal cost.

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3
Q

What is a “near monopoly” firm?

A

A firm with a market share that is less than 100% but is large enough to dominate the industry.

Dominant firm acts like a monopolist on RESIDUAL DEMAND.

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4
Q

Market Power of Dominant Firm INCREASES as:

A
  1. Elasticity of market demand DECREASES
  2. Elasticity of supply in fringe DECREASES
  3. Market share of the dominant firm INCREASES
  4. Market share of the fringe firm DECREASES
  5. Number of fringe firms INCREASE
  6. Degree of product differentiation INCREASES (they have more capital to invest in innovation)
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5
Q

What is 1st Degree Price Discrimination?

A

Personalized Pricing

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6
Q

What is Personalized Pricing (1st Degree)

A

Generates pricing per customer based on purchase history.

Extracts more of the unexploited consumer surplus to increase profits.

Perfect Price Discrimination = charge each customer their maximum WTP as long as it exceeds the MC.

Not possible as we do not have the data to accurately estimate this [but getting close].

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7
Q

What are the benefits of price discrimination?

A
  1. Consumer Surplus: optimizing customers WTP more than market prices
  2. DWL: WTP higher than the cost of production but think the market price is too high.
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8
Q

What is the 3rd Degree Pricing Discrimination?

A

Market Segmentation

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9
Q

What is Market Segmentation?

A

Consumers are distinguished by OBSERVABLE characteristics (student discount)

Monopolists charge higher prices in less elastic markets since demand is less responsive to higher prices.

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10
Q

What is 2nd Degree Price Discrimination?

A

Memberships

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11
Q

What are Memberships?

A

Monopolist knows that there is a distribution of WTP among customers but doesn’t know which customers are in which group (NON-OBSERVABLE CHARACTERISTICS).

Prices differ across units sold, not groups of people.

Self-selection for customers.

Versioning: when groups of buyers are hard to identify. Customers select their group. Ex: Different Mac book pricing options.

Ex: Credit Card Companies OR Costco

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12
Q

Why must Arbitrage be prevented / limited in price discrimination?

A

If consumers with low price buy and sell to high price consumers, firm is better off with uniform pricing.

Don’t want low price consumers to become vendors for high price consumers.

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13
Q

What are Porter’s 5 Forces?

A
  1. Barrier to Entry
  2. Power of Suppliers
  3. Power of Buyers
  4. Threat of New Entrants
  5. Competitive Rivalry
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14
Q

What are some Barriers to Entry?

A
  1. Patents
  2. Capital Expenditures
  3. Switching Costs
  4. Network Effects
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15
Q

What are Network Effects?

A
  1. Irreversibility of Investment = benefit of being first
  2. Affected Labor Market

QWERTY keyboard is universal but NOT the most efficient.

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16
Q

Direct Network Effects vs. Indirect Network Effects

A

Direct Network Effects: when a consumer’s benefit from owning a product INCREASES with the # of other consumers using the product [eg. playing Madden with friends]

Indirect Network Effects: # of buyers of a good stimulated the production of COMPLEMENTARY goos that INCREASE the value of the original products. [eg. Xbox and games]

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17
Q

What are Consumer Expectations?

A

WTP INCREASES if consumer expects other customers will also purchase the product.

  1. Critical mass of buyers
  2. Lock-in
  3. Winner-takes-all
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18
Q

How do firms get Snowball rolling?

A
  1. Introductory Pricing (early adaptors programs until reach critical mass)
  2. Price Discrimination
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19
Q

Power of Suppliers INCREASES when:

A
  1. There is a scarcity of resources
  2. High switching costs
  3. Suppliers offer differentiated products
  4. Incentives for using a particular buyer: frequent shopper programs
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20
Q

Power of Buyers DECREASES when:

A
  1. There are very few suppliers or no substitutes
  2. High switching costs
  3. Product is essential to buyers
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21
Q

What are Durable Goods?

A

Goods bought today that can be used for a long time [eg. Cars, factories, capital equipment, etc.]

There are different degrees of durability! [aircraft vs. laptop]

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22
Q

Explain Durable Goods and Competition

A

The company that sells durable goods create their own competition.

Market power tomorrow is determined by today’s sales. [WTP = consumer’s expectations about tomorrow’s price]

If consumers expect the price to go down, they may wait = reducing the demand today.

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23
Q

What is intertemporal price discrimination?

A

Initially, monopoly supplies customers with HIGH WTP. Higher valuation consumers buy early + pay higher prices.

Over time, the monopoly moves down the demand curve and gradually lowers price.

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24
Q

What is a Patent?

A

A patent gives the right to sure for infringement anyone who makes, sells, uses, offers, imports, or offers to import the invention into the country using the patent.

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25
Q

What is the Duration of a Patent?

A

20 years from the filing date.

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26
Q

What are the Basic Requirement of Patents?

A
  1. Subject Matter: must fall within the categories that are ‘patentable’
  2. Usefulness : must offer some positive benefit to society
  3. Novelty: must NOT have been previously used or described in a single publication.
  4. Non-obviousness: must NOT have been obvious to somebody who had ordinary skill in the technology.
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27
Q

What do Patents protect?

A

Knowledge

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28
Q

What aspect does Knowledge have as a Public Good?

A
  1. Non-rivalry in Consumption: consumption of one does not reduct availability of goods.
  2. Non-Excludability: goods cannot be confined to those who have paid for them.

Ex:
Learning = public good
Education = private good

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29
Q

What are the ADVANTAGES of Patents?

A
  1. Concentrates costs among users.
  2. Information is disclosed publicly (no trade secrets).
  3. De-centralized. Gathers diffused ideas; no need to negotiate. (Have an idea? Rewarded a patent).
  4. Risk if borne by individuals.
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30
Q

What are the DISADVANTAGES of Patents?

A
  1. DWL
  2. Duplicate Costs (Patent Race)
  3. One-Size-Fits-All
    - Reward not related to cost of innovation
    - Reward may be disproportionate to the incentive step
    - Rights cannot be modified according to market structure
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31
Q

What clientele is IP generally better for?

A

IP may be useful for innovations with NARROW CLIENTELE (video games) vs. innovations with widely dispersed benefits (satellite).

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32
Q

What are Trade Secrets?

A

Almost any type of business-related information that has been kept secret and benefits its owner.

  1. Measures to preserve secrecy.
  2. NDAs for employees.
33
Q

What are Copyrights and what to they protect?

A

Copyrights protect creativity. Gives rights holders exclusive right to copy, reproduce, and distribute or display their work.

They protect “Information Goods”.

34
Q

What are Information Goods?

A

Protects expression.

ex: Lord of the Rings.

35
Q

What is the Subject Matter of Copyrights?

A

Protects “original works for authorship fixed in any tangible medium of expression”.

Must show minimum of creativity. Not Novelty.

36
Q

What is the Breadth of Copyrights?

A
  1. changing names of characters / reordering pieces.
  2. Protection over derivative works.
37
Q

What are the DISADVANTAGES of Copyrights?

A

Same as Patents EXCEPT:
1. More competition (narrower breadth)
2. Fair use of exceptions (OK to distribute a few pages to Yale Students)

38
Q

What are the ADVANTAGES of Copyrights?

A

Same as Patents EXCEPT:
1. No problem with duplicate costs or exclusion of more valuable ideas

39
Q

What are Trademarks?

A

A name, phrase, logo, symbol, image, color, etc. that DISTINGUISHES goods and services from other entities.

They indicate the commercial source of origin.

40
Q

How do you LOSE a Trademark?

A
  1. Failure to use trademark for a period of time.
  2. Court rules trademark has become generic through common use.
41
Q

What is a Generic Trademark?

A

When a trademark becomes a generic description for a general class of product / service rather than an indicator of source.

Ex: Aspirin (Bayer trademark)

42
Q

What are Trademark Awareness Advertisements?

A

Used to prevent the brand from becoming a generic noun.

Ex: “Jeep” invented “SUV” to protect their trademark.

43
Q

Targeted Prizes vs. Blue Sky Prizes

A

Targeted Prizes: Need identified in advance and the prize $ is posted ex-ante.

Blue Sky Prizes: Need NOT identified in advance and the $ is posted ex-post to the value of the innovation.

44
Q

What are the ADVANTAGES of Prizes?

A
  1. Avoids DWL (if tech is put in the public domain)
  2. Achieve goals
  3. Encourages basic research
45
Q

What are the DISADVANTAGES of Prizes?

A
  1. Administrative Costs
  2. Duplication Costs
46
Q

What are the instruments of a License?

A
  1. Royalties
  2. Fixed Fees
47
Q

What are Royalties?

A

$X per unit sold.

Adds to licensee’s marginal cost.

48
Q

What are fixed fees?

A

Per unit time (not linked to sales).

Profit Sharing.

49
Q

What are the reasons to License?

A
  1. To increase the use of knowledge (welfare enhancement).
  2. To let others use the IP as inputs to innovation (research tools)
  3. To resolve blocking rights.
  4. To enable development of complementary innovations.
50
Q

What is a Joint Licensing Agreement?

A

A joint licensing agreement is required to bring several patent holders with rights on different aspect of a given product to market.

Joint ownership of research tools.

51
Q

What is a Patent Pool?

A

An agreement which owners of several proprietary technologies license them as a bundle. [Must include patents that are ESSENTIAL (not substitutes)].

Holding company of patents can facilitate one-stop shop.

Research tools can be put into patent pools and priced jointly.

52
Q

What are the ADVANTAGES of Joint Licensing?

A
  1. Joint pricing of (complementary) pieces of IP.
  2. If proprietary technologies are complements, licensees would use all of the pieces of the pool. Contribute to the value of each other.
  3. Saves transaction costs. Don’t need to negotiate with everyone.
53
Q

What are the DISADVANTAGES of Joint Licensing?

A
  1. Pool which includes noninfringing substitutes may weaken competition. Creates a monopoly of resource tools group.
  2. Cross-licensing can weaken the incentives to innovate. Worries if it won’t complement, not worth the investment.
  3. Acts as a barrier to entry for non-members.
54
Q

What is a Collective Rights Management Organization (CMOs)?

A

CMO = a type of pool for copyrighted content.

[eg. radio + TV station]

55
Q

How does collective licensing affect competition?

A

Existing members have the incentive to RESTRICT membership.

But, if they downside too much, another organization may merge.

Fragmentation also reduces profit.

Incentives to invest (for artist) depend on how much surplus she will appropriate.

56
Q

What is Bad Practice for Licensing?

A

Exclusive License: constrains licensee from dealing with other suppliers.

57
Q

What is infringement?

A

Entails that EVERY ELEMENT of at least ONE CLAIM is embodies in the offending product.

58
Q

What are the terms of Infringement?

A
  1. Injunction: “stop doing it”
  2. Damages: “you have to pay”
  3. Treble Damages: “willful infringement”
  4. Criminal Penalties: “go to jail”
59
Q

What type of Patent is more likely to be Infringed?

A

More valuable patents = more likely to be litigated.

95% filed patent suits are settled before trial.

[eg. computers, biotech, pharma, etc.]

60
Q

How does the Infringement process work?

A
  1. Plaintiff files infringement.
  2. Defendant counterclaims patent invalidity.
61
Q

What are the Remedies of Infringement?

A
  1. Injunctive Relief
  2. Damages
62
Q

What is Injunctive Relief?

A

A court order to the infringer to stop using or selling infringing product.

Very HARD to obtain.

63
Q

What are Damages?

A

Compensation for loss suffered.

Infringer must pay LOSS PROFIT or disgorge their UNJUST ENRICHMENT (what rivals had profited)

64
Q

What is a Reasonable Royalty?

A

A royalty that licensee would pay for the rights of patented invention in hypothetical negotiation (softer slap on the wrist for the infringer).

65
Q

What is the Lost Profit Rule?

A

Profit of Market - Patent > Profit of Competition.

In infringement, competition LOWERS market price and right holder LOSES market share.

Due to the price drop, the loss-profit value yields LARGER DAMAGES for patent owner than the unjust-enrichment rule does.

66
Q

Why does Information Matter in Searching Costs?

A

Customers don’t always know the quality of the product.

[eg. new drugs, new restaurants, etc.]

High quality firms try to signal themselves to customers. Consumers may also try to find this information, but is costly.

Lower price firms have incentive to reveal themselves [decrease asymmetric information].

67
Q

What are vertical relationship?

A

Relationships between firms involved in sequential steps of “production”

Upstream vs. Downstream

68
Q

What are the BENEFITS of in-house production?

A
  1. Flexible in variety, amount, and frequency of products.
  2. Rapid production turnover.
69
Q

Why is Vertical Integration an ADVANTAGE?

A
  1. Cutting costs [do not outsource = set production price]
  2. Faster + More Efficient [complete control over production]
70
Q

What are the roles of the Manufacturer vs. Retailers?

A

Manufacturer = rarely supply final consumers directly

Retailers =
1. Determine final price
2. Promotional Effort
3. Placement of product on store shelves
4. Promotion and placement of competing products

71
Q

What is the Double Marginalization Problem?

A

When each firm in a vertical chain MARKS UP. Domino Effect. Increases final price of product. Solve by cutting out the middle man!

Vertical Integration:
- Price = DECREASES
- Quantity = INCREASES

72
Q

How do you solve Double Marginalization Problem?

A
  1. Vertical Integration
  2. Resale Price Maintenance
  3. Franchise
    [set wholesale price at upstream firm’s MC to max total profits and then have a FLAT FEE to share profits (membership fee)]
73
Q

What are Vertical Mergers?

A

“Input-output” mergers. Typical approved UNLESS company is trying to acquire SOLE producer of a resource - monopoly.

74
Q

What is the Anticompetitive Effect of Vertical Mergers?

A

A vertically integrated firm may refuse to deal with unintegrated retailers OR raise rival retailer’s costs by INCREASING input price.

75
Q

What are Conglomerate Mergers? [Horizontal Merger]

A

Mergers between companies with UNRELATED OUTPUT.

[eg. Soup Company + Chocolate Company]

Typically approved and done to increase brand portfolio.

76
Q

What are the SOCIETAL BENEFITS of Conglomerate Mergers?

A
  1. Shipping Optimization
  2. Production Optimization
  3. Management Optimization
77
Q

What are Horizontal Mergers?

A

Merger between companies that sell SIMILAR products.

Face the greatest scrutiny by government.

If merger affects competition, it is rejected.

78
Q

What are the ADVANTAGES of Horizontal Mergers?

A
  1. Advances Technologies: eliminates overlapping research. Innovation = expensive.
  2. New Products = cooperation on future projects.
  3. Input purchases
  4. Joint Production = Overall average production cost decreases.

Also includes firm-specific factors and industry factors (deregulation of airline industry)

79
Q
A

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