class 24 Lemons2 post

class 24 Lemons2 post - Class 24 Asymmetric Information...

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Class 24 symmetric Information: Asymmetric Information: Used Cars, Insurance, Quality Products…
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Today xample: Screening with Asymmetric Information ± Example: Screening with Asymmetric Information ± Adverse Selection: ± Used Cars ± Insurance ± Quality Provision ± Reputation as a Solution
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Screening Again: Software ll Vista Versions are on the same DVD but: All Vista Versions are on the same DVD, but: Home Basic costs $99 for the full version, Home Premium, $159; Business; $199; and Ultimate, $259. Æ What’s the point of damaging the “ultimate” product?
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Screening Again: Software onopolist selling Software Monopolist selling Software Marginal Costs: c = 0 What is the consumer’s willingness to pay? P (Full) Profit Could be high, v = 10 or low, v = 4 Monopolist does not know v, but has belief about elihood Probability of 10 likelihood. Probability of v=10 : w Type WTP for ull WTP for asic Optimal Prices High WTP: Accept p if 10 p Low WTP: Accept p if 4 p Full Edition Basic Edition WTP High 10 4 TP Low WTP Low 4 2
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Screening Again: Software onopolist selling Software Monopolist selling Software Marginal Costs: c = 0 What is the consumer’s willingness to pay? P (Basic) P (Full) Profit Could be high, v = 10 or low, v = 4 Monopolist does not know v, but has belief about elihood Probability of 10 ptimal Price for Basic Edition likelihood. Probability of v=10 : w Type WTP for ull WTP for asic Optimal Price for Basic Edition (If we want to sell both Editions) Price > 2 : No (that’s clear, right?) Full Edition Basic Edition WTP High 10 4 TP Low Price < 2 : No. A higher price for Low Edition means: ore money on Low Value WTP Low 4 2 Introduce Damaged Poduct (Basic) WTP for basic produce is reduced. - More money on Low Value - Higher Price for Full Edition possible! High WTP customers are willing to pay more to get the “upgrade” from Basic to Full
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Screening Again: Software onopolist selling Software Monopolist selling Software Marginal Costs: c = 0 What is the consumer’s willingness to pay?
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This note was uploaded on 12/10/2011 for the course ECON 401 taught by Professor Burbidge,john during the Winter '08 term at Waterloo.

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class 24 Lemons2 post - Class 24 Asymmetric Information...

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