Exam Final Flashcards
What is 1st degree price discrimination / perfect price discrimination
-Price that correspond as closely as the customers valuation
-The firm captures the entire customer surplus
-Ex: Auctions, flea market, garage sells, car dealers…
What is 3rd degree price discrimination / explicit market segmentation
-Customers can be differentiated with observable characteristics
-Groups of consumers
-Students/Eldery discounts, insurers…
The optimal discriminant tragedy (3rd) is to charge a higher price in the market segment with the ___ elasticity of demand
Lowest
(Consumers less sensitive to a price change)
The optimal strategy is to charge a lower price to the market segment with the ___ elasticity of demand.
Highest
(Consumers who are more sensitive to a change in price)
What is 2nd degree price discrimination / implicit market segmentation
Charging different prices depending on non-observable characteristics
Segmentation is obtained through the choices consumers make
Ex: Phone plans, airplane tickets, Netflix subscription (ya plusieurs forfaits)
What is a two part tarif ?
The price is composed with the Lump-Sum fee (Set the lump-sum fee equal to the CS when he buys the
optimal number of good at the per-unit price) and the Per-Unit Price (Set the per-unit price equal to the MC)
Ex: Costco (membership + sales)
Tying allows the firm to …
capture a larger portion of the consumer surplus. Sold by the same firm only.
(Ex: Printer and ink, Nespresso…)
Bundling consists in…
selling a bundle of goods and services at a lower price that the consumer would pay by buying all goods individually.
Bundling allows the firm to…
charge a high price to consumers with a high valuation for some goods and to propose lower prices to consumers who are ready to buy all goods but at a lower average price.
Ex: Microsoft, skincare bundle…)
Risk averse people are …
Unwilling to expose themselves to risk unless he expected payoff is large enough.
Risk neutral people only care about…
The expected pay off.
Risk seeking people only enjoy risk, to the point of…
Being willing to accept a lower payoff in order to face risk.
Will a risk seeker buy insurance?
The risk attitude is not enough to answer.
What is the insurance premium?
The fee you pay to buy insurance.
Insurance companies usually charge premiums that are …
Above the actuarially fair premium (actuarially fair premium is equal to the expected loss).
The maximum premium that a risk neutral individual will be willing to pay is equal to…
The expected loss
A risk averse person is willing to pay ___ than the expected loss. (Insurance)
More
A risk seeker is willing to pay ___ than the expect loss. (insurance)
Less
____ is the strategy maximizing the payoff of a player, given the strategies of the other players.
Best response
___ is a strategy considered dominant if it yields a higher payoff than any other strategy against all possible strategies chosen by other players.
Dominant strategy
___ is a situation where each player is playing his best response against the other player’s strategy. No single player is better off deviating unilaterally.
Nash equilibrium
True or false : The Nash Equilibrium = best outcome for both parties
False.
True or false : The Nash Equilibrium = best outcome for both parties
False.
What are the main characteristics of an oligopoly
-Small number of firms
-Strategic interactions between firms: Firms consider how the actions of other firms affect their own actions (game theory).
-Barriers to entry
-Cost advantages (economies of scale seen in monopoly)
Ex: Airlines
An H index equal to 0 would mean…
Perfect competition
An H index equal to 1000 would mean…
Monopoly
What is the main difference between Cournot Model and Stackelberg Model?
In Cournot, firms choose their production simultaneously.
In Stackelberg, firms choose their production sequentially.
What is tacit collusion?
It occurs when companies restrict competition between themselves, but they do so without explicit agreement or communication.
What do we call a group of firms that meet to discuss how to organize a collusion?
A cartel
Antitrust refers to laws that enforce….
free competition in markets: eliminate barriers to entry.
What are the conditions for perfect competition?
- Large number of firms and consumers
- Identical product sold across firms (product homogeneity)
- Free entry and exit in the market
4. Perfect information - No transaction costs
What are the solutions of adverse selection?
- Signaling (solution used by informed agents to signal the high quality of their product by using a costly instrument)
- Screening (solution used by uninformed agents to screen good risks from bad risks)
- Regulations (involves the government)
- Certifications (directly transmits information to the uninformed agent and eliminates any asymmetry)
- Brands and reputation (can credibly reveal the quality of the product.)
The problem of adverse selection can lead to…
Market failure
What is a moral hazard (chap. 12)
A situation in which an individual takes a hidden action that benefits him at the expense of another party.
Effort is observable or not observable?
Not observable
Revenue is observable or not observable?
Observable.
Name 3 types of contract
-Fixed salary
-Revenue sharing
-Performance premium
Who is the agent ? (Chap12)
Employee
Who is the principal? (Chap12)
Employer
If EU<U(EV), the individual is risk ____
Risk averse.
They prefer sure outcome (EV) over the gamble because they dislike uncertainty.
If EU=U(EV), the individual is a risk ___
Risk neutral.
They only care about the expected outcome.
If EU>U(EV), the individual is a risk ___
Risk seeker.
They prefer the gamble over the sure outcome due to liking risk.
