Chapter 11 part 2

ECN3620 Econometrics Course Overview

• Course Details:
  • Mondays and Wednesdays, 9:45 AM - 11:15 AM
  • Hands-on, application-based
• Focus:
  • Real-world business and policy applications
  • Qualifies for Economics and Business Analytics concentrations
• Sample Topics:
  • Gender pay gaps
  • Minimum wage impact
  • Immigration effects on nations
  • National and global health policies impacts
  • Pricing strategies
  • Business applications of Econometrics models for forecasting
  • Forecasting: unemployment rate, inflation, GDP rates, etc.
• Contact: Professor Yunwei Gai, ygai@babson.edu

X-Inefficiency

• Definition: Occurs when a firm produces output at a higher cost than necessary.
• In LRATC (Long-Run Average Total Cost) construction, it's assumed firms use the most efficient technology.

Rent-Seeking Expenditure

• Definition: Lobbying efforts by a monopolist to maintain power through government intervention (legislation or licenses).
• Increases production costs without adding to the firm’s output.

Info. Tech Industry: Barriers to Entry

1. Network Effects:
   • A product becomes more valuable as more people use it.
   • Examples: phone service, Instagram, iMessage, etc.
   • Leads to a preference for the "standard" product.
   • Often results in a winner-take-all situation, benefiting a large firm with a large user base.
   • This dominant firm can achieve economies of scale.
2. Simultaneous Consumption:
   • Products can serve many consumers at once.
   • Once created (e.g., software), distribution to millions is inexpensive.
   • Example: Windows 11 vs. gasoline.
3. Switching Costs and Lock-In:
   • Even small switching costs can deter consumers from changing products.
4. First-Mover Advantage:
   • Becoming a dominant firm early makes it difficult for new entrants to gain market share.

Multiple Choice Question 1

• Network effects and simultaneous consumption tend to foster the development of Monopoly power.

Multiple Choice Question 2

• Which industry exhibits strong network effects? Computer operating system.

Price Discrimination

• Definition: Charging different prices to different buyers despite similar costs.
• Contrast with non-discriminating monopolist (single price for all).
• Examples:
  • Hotel room rates
  • Movie tickets
  • Bus fares

Conditions for Successful Price Discrimination

1. Monopoly power.
2. Market segregation.
3. No resale.

Multiple Choice Question 3

• Which case best represents price discrimination? A major airline sells tickets to senior citizens at lower prices than to other passengers.

Examples of Price Discrimination

• Fast food combo meals (different options at varying prices)
• Coupons
• College tuition (grants, discounts)
• Movie tickets (various prices)
• Airline tickets (different prices for different bookings)
• Cell phone calling plans.

Price Discrimination Strategy

• Common Strategy: Dividing a market into segments based on different elasticity of demand.

Graphs

• Graph (a): Small businesses
• Graph (b): Students
  Pb: Economic profit Ps: Economic profit
  MC = ATC
  MRb Db
  MRs Ds
  0
  Qb Q Qs
  Q

Multiple Choice Question 4

• If a price-discriminating monopolist sells the same product in two markets but charges a higher price in market X and a lower price in market Y, the pricing difference indicates that demand is Less elastic in market X than market Y.