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Unformatted text preview: Industrial Organization
PS #6 (Due Friday, Dec 16, 5pm, slip under my office door!
DO NOT PUT INTO MY MAILBOX!) (1) Read the text “Experts and Price Distortion.”
(a) What do the authors want to depict with the various ! figures?
(b) What is the main reason for expert induced price distortion?
(a) the various ! figures denote different depreciation schemes for past reviews..
(b) it is caused by the spillover (externality) on lowquality wines. A heavily reviewed
firm will increase all of wine prices  including bad wines. This will distort the qualityprice variation.
(2) zscores
Assume 102 students have to match 2 wine descriptions and 2 wines. 59 are correct.
Compute the zscore and calculate the confidence level (in rejecting the null that
students’ knowledge is not better than random). z= obs − exp
.578 − 0.5
=
=1.576
exp* (1 − exp) / N
0.5 * 0.5 /102 we state that the students are better than random with a confidence of 94.18%.
€ (3) Credit Rating Agencies
(a) Read this NY Times article:
http://www.nytimes.com/2011/11/30/business/ratingsfirmsmisreadsignsofgreekwoes.html?_r=1&hp=&adxnnl=1&adxnnlx=13237382204Cx1eWtO+qnGbZ+3o6D4eg
How did Moody’s rate Greece in 1995 and in 2005? Why did they change their rating?
(b) The main credit rating agencies (“experts”) are Standard and Poor’s, Fitch and
Moody’s. Why is the credit rating market problematic? Describe at least two issues; one
sentence for each.
(PS: You want to google, check Wikipedia or consult other sources)
(a) In 1995, Greece was rated Baa3 (just above Junk Bonds). In 2005, Greece was rated
A1. (Interestingly, each year, Greece had to pay Moody’s up to $540,000 to get a rating
at all.) Clearly, the better the rating the more the client will pay for this rating. Moody’s
thought the European Union would not let Greece go bankrupt. (b) (1) This is a rating oligopoly with monopoly power. (2) the very firms that are being
assessed by the rating agencies have to pay. There maybe substantial conflicts of interests
(4) Read this Wall Street Journal article by Leonard Mlodinov “A Hint of Hype, A
Taste of Illusion”
http://online.wsj.com/article/SB10001424052748703683804574533840282653628.html
(a) According to the article, how much does one RobertParker point add to a wine’s
price?
(b) Hodgson found wine competitions (and wine judging in general flawed). He
published two papers in the Journal of Wine Economics. In two sentences, describe what
he did and what he found.
(a) each point adds 7% to the price of a bottle
(b) First paper: Hodgson hid 3 glasses with identical wines in the tasting flight to find out
whether wine judges can detect them and give them the same grade. He found that the
wine judges could not detect them and most wine judges gave identical wines grades as
far apart as a GOLD and a FLAWED.
Second paper: He analyzed the chances of a wine getting a GOLD at more than one wine
competition. If the events (getting Gold at a wine competition) were independent from
each other a wine’s chance of getting a Gold at four competition would follow a binomial
probability distribution. For instance, if the chance of getting a Gold at a competition
were 20%, then the chance of getting a Gold in 3 competitions would be
0.2*0.2*0.2=0.008 (0.8%).
However, for a wine that has received a Gold in one competition, one would assume that
it is of aboveaverage quality and will have a higher chance of to also get a Gold at other
competitions. Hodgson found that this is not the case and that Gold medals awarded at
wine competitions follow a random distribution. ...
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This note was uploaded on 04/05/2012 for the course ECON UA.31 taught by Professor Storchmann during the Spring '11 term at NYU.
 Spring '11
 Storchmann

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