Economics for Managers- Strategies for Assessing and Increasing Demand

A clothing store is selling a new style of bathing suits in preparation for the summer season. The store's manager thinks that consumers' willingness to pay for a bathing suit is $65 each, but she is not confident in her estimate. She wants to sell the bathing suits within the next 6 months, before summer ends, because after that she needs to make room in the store for the next year's styles. What price should the manager set for the bathing suit? $55 . $64 $65 $75

$75 The manager can price the bathing suits at $75 each to see if they will sell. If they do not, there is plenty of time to decrease the price.

A restaurant sells salsa and guacamole, each of which can be eaten with the tacos that the restaurant sells. The manager of the restaurant is not sure whether salsa and guacamole are substitutes or complements. However, after increasing the price of guacamole from $2.00 to $2.50, the manager notices that daily salsa sales rise by 5%. What is the cross price elasticity of salsa and guacamole, and what can the manager conclude about their relationship? -1/5. Salsa and guacamole are substitutes. 1/5. Salsa and guacamole are substitutes. -5. Salsa and guacamole are complements. 5. Salsa and guacamole are complements.

1/5. Salsa and guacamole are substitutes. Cross price elasticity is the percent change in quantity demanded of one good (+5%) divided by the percent change in price of the other good (+25%). A positive cross price elasticity indicates that the goods are substitutes.

A product manager is trying to determine customers' preferences for car features. The manager has identified 5 relevant product features, and a range of possible settings for these features, as shown in the table below. If the product manager ran a survey asking respondents to rank all possible combinations of cars, how many different cars would the respondents have to rank?

192 There are 4*4*3*2*2=192 possible combinations of features.

You run an ice cream chain, and decide to conduct a survey to gauge which flavors your customers prefer. You ask the respondents to rank three flavors: vanilla, chocolate, and strawberry. The results are: 50 people ranked: (1) vanilla (2) strawberry (3) chocolate 100 people ranked: (1) chocolate (2) vanilla (3) strawberry What proportion of the respondents prefers vanilla over chocolate? 33% 50% 67% We do not know

33% 33% of respondents ranked vanilla higher than chocolate, and because we have asked customers their relative rankings, rather than their true WTP, they are unlikely to lie.

You are the Head of Strategy for Sunglass World and your company is considering releasing a new brand of highly protective UV sunglasses. You decide to conduct a conjoint analysis to determine which aspects of sunglasses that consumers value most. The consumers in your analysis are presented with sunglasses with combinations of the following options: Colors: Black, Brown, Gold, Silver Shape: Round, Square, Half-Moon UV Protection: High, Medium, Low If you ran a survey asking respondents to rank all possible combinations of sunglasses, how many different pairs would the respondents have to rank? 10 24 27 36

36 Respondents would have to rank 4*3*3=36 different combinations.

An airline conducting a focus group learns that consumers would rather have more frequent delays in flights if it meant that there would be more flights scheduled every day on a given route. What can the airline do with this information? Select all that apply. Determine that its passengers will, on average, welcome more frequent delays in exchange for more scheduled flights. Ask follow-up questions to determine the length of delays that focus group participants would be willing to tolerate in exchange for the more frequent flights Design a follow-up survey asking more consumers how they would make tradeoffs between on-time departures and more scheduled flights.

Ask follow-up questions to determine the length of delays that focus group participants would be willing to tolerate in exchange for the more frequent flights This is one of the correct answers. Focus groups facilitate immediate follow-up questions to learn more from participants. The third answer is also correct. Design a follow-up survey asking more consumers how they would make tradeoffs between on-time departures and more scheduled flights. This is one of the correct answers. A follow-up survey would help the airline determine whether the results of the focus group can be generalized to the overall population. The second answer is also correct.

Part-worths refer to: an implied numeric value that users attach to each feature of a product. a customer's ranked list of product features. the value of each customer type to a seller. the fact that some customers are worth less than others to sellers.

an implied numeric value that users attach to each feature of a product. Part-worths are a way to show consumers' relative preferences for product features numerically.

Summary of "Well-Designed Experiment"

avoids confirmation bias isolates key features of the hypothesis focuses on the most important question and avoids the problem of missing variables through randomization.

Common Settings for Auctions

eBay: Buyers bid for products like used dolls, stamps, autographed memorabilia, and even Luciano Pavarotti's plaster mold from his left leg! Google AdWords: Advertisers bid for right to advertise their products on a Google page. In other words, the products are "keywords" and the bidders are advertisers. Construction projects: Sellers (in this case, contractors) are the bidders. And because of that, in such settings the lowest bid "wins" the auction. Government-run auctions: Valuable assets like 3G spectrum, infrastructure project, or oil and gas tracts have been sold to private operators by various governments. Mergers and acquisitions (M&A): Companies often submit bids to acquire a particular "target" firm.

An art collector is bidding on a statue that would complete a collection he is trying to assemble. The statue is being sold in a Vickrey (sealed second-price) auction. The collector should place a bid: less than his willingness to pay for the statue. equal to his willingness to pay for the statue. greater than his willingness to pay for the statue slightly above his estimate of what the highest bid from another participant will be..

equal to his willingness to pay for the statue. This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.

network effects

increases in the value of a product to each user, including existing users, as the total number of users rises

Conjoint analysis is particularly useful because (select all that apply): it's an efficient way to assess customers' relative preferences for product features. it can be used for customer segmentation. it can be used in product development decisions. it's got a cool name.

it's an efficient way to assess customers' relative preferences for product features. This is one of the correct answers—look for more. it can be used for customer segmentation. This is one of the correct answers—look for more. it can be used in product development decisions. This is one of the correct answers—look for more.

Many movie-goers like to enjoy a bag of popcorn together with a soda beverage: one without the other is not nearly as satisfying. Suppose that a movie-theatre near you prices a small popcorn at $4.50 and a large popcorn at $6.00. A small drink costs $4.00 and a large drink costs $4.75. However, the theatre also offers a large popcorn and large drink as a packaged deal at $10.25. Which of the following is likely to be true based on the information given? Movie goers consider popcorn and soda to be complements Movie goers consider popcorn and soda to be substitutes Movie goers' WTP for bundles is less than their WTP for individual goods Movie theaters are not maximizing profits

Movie goers consider popcorn and soda to be complements Based on the statement that movie goers like to enjoy popcorn and soda together, these goods are considered complements.

Which of the following situations does NOT display confirmation bias? Select all that apply. A political campaign aims to gauge voter interest in its candidate by calling registered voters of the same party and asking about their views on the candidate. A hotel asks its patrons to fill out a comment card about the aspects of their stay that they enjoyed the most. An investor scans a company's financial statements looking for evidence that the company's stock is undervalued. By only looking for evidence that the company's share price is below A CEO hires an independent third party to develop an anonymous survey assessing her employees' job satisfaction. A biologist runs an experiment to attempt to invalidate a widely accepted hypothesis about the nuclei of bacteria cells in order to promote an explanation of his own.

A CEO hires an independent third party to develop an anonymous survey assessing her employees' job satisfaction. This scenario does not hint at any bias. By asking a third party to conduct the survey and making it anonymous, the CEO will likely be able to obtain truthful information about her workers' satisfaction with the company.

In which of the following situations would the use of a focus group be preferable to a survey? An ice cream shop wants to find out how many people prefer chocolate over vanilla. A national movie theater chain wants to see if there is a correlation between income and frequency of going to the movies. A coffeehouse is interested in seeing why customers do not like its new French roast. A shoe manufacturer would like to investigate which features of tennis shoes that customers value most.

A coffeehouse is interested in seeing why customers do not like its new French roast. This analysis would benefit from more in-depth qualitative information.

A landlord is renting out an apartment and has three prospective tenants. The first tenant is willing to pay $1200/month, the second tenant is willing to pay $3000/month, and the third tenant is willing to pay $2000/month. Each potential tenant knows the valuations of the other tenants. Of the following methods of renting the apartment, which would generate the greatest revenue? sealed first-price auction . A sealed second-price (Vickrey) auction A fixed price of $1900/month A fixed price of $2200/month

A fixed price of $2200/month At this price, the apartment will be rented for $2200/month. This is the only option in which the apartment is rented for significantly more than $2000/mo

An artist is selling her latest painting. She knows that there are three interested buyers, who value the painting at $500k, $700k, and $800k, respectively. Which of the following methods will generate the most revenue? An English (open-outcry) auction A Vickrey (sealed second-price) auction A fixed price of $750k An English (open-outcry) or a Vickrey (sealed second-price) auction, either of which will yield the same revenue.

A fixed price of $750k The painting will sell at this price, bringing in $750k of revenue.

Whereas most websites and online web services must continually update and improve user design, Craigslist, a classified advertisements website, has remained largely the same since 1996. What phenomenon might explain this? Craigslist's founder did not have website design expertise. A network effect that makes switching to competitor sites difficult. A network effect that makes switching to competitor sites easy. Limited demand for online classified advertisements.

A network effect that makes switching to competitor sites difficult. Once Craigslist became popular, it had more sellers and buyers than other sites, making it the most attractive site to use regardless of whether it had been updated and improved.

Auctions

Solve two probelms- 1. Getting customers to truthfully reveal their willingness to pay 2. Setting Prices

Which of the following businesses would likely launch an advertising campaign promoting its industry without mentioning its brand name? A software company that is certain businesses will prefer its new product to its competitors' products, once the businesses know that the new product exists. A single manufacturer that sells the only type of car available in a country. A taqueria located near many other restaurants and hoping to bring in a greater percentage of potential consumers. A candidate for student body president in an upcoming high school election.

A single manufacturer that sells the only type of car available in a country. A firm that dominates an industry can advertise without promoting its brand because new consumers in the industry will most likely end up purchasing from the firm anyway.

In which of the following scenarios is the winner of the auction LEAST likely to suffer from the winner's curse? A son winning his mother's favorite painting to give her for her birthday. A diamond dealer placing the winning bid for a set of stones on the diamond exchange. A construction company bidding on a contract to build a new apartment complex. A restaurant bidding on a prime NYC location.

A son winning his mother's favorite painting to give her for her birthday. In this auction, the buyer's valuation of the product does not depend on others' valuations and/or information.

Focus Groups

A strategy to obtain data from a small group of people using interview questions -Provide detail and nuance, and questions can be adjusted in real time

You want to market your brand of apparel to a younger demographic. To find out more about consumers' tastes, you are thinking of conducting a survey. Which type of survey would be most effective in this case? A survey of your customers asking which of your products they like best A survey of your customers asking which products they would like to see more of . A survey of local teenagers asking how they choose which products to purchase A survey of a representative slice of the general population asking which types of products they prefer

A survey of local teenagers asking how they choose which products to purchase Since the goal is to target a younger demographic, the survey should focus on younger respondents rather than existing consumers or the general population.

Your toy company is looking into launching a new line of dolls and action figures but is unsure if kids these days still actually play with them. As part of your market research, you send out a survey to 1000 households that have purchased toys in the last five years. You also decide to run two focus groups: one group of children ages 4-16 and one group of parents. Which of the following questions asked in a survey or focus group would be unbiased and allow you to gain reliable information? Select all that apply. A survey question asking households, "How much money per month do you typically spend on your children's happiness?" A focus group question asking children, "How often per week do you play with dolls or action figures?" A survey question asking households, "What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?" A focus group question asking parents, "With which types of toys do your children typically play?" An anonymous survey question asking children, "what's your favorite toy and why do you like to play with it?

A survey question asking households, "What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?" This question seems reasonable and could be useful to estimate potential market size. An anonymous survey question asking children, "what's your favorite toy and why do you like to play with it? This question is likely to evoke a truthful response and allow your company see some common features of toys that kids would value.

Sealed-First Price Auction

A type of auction in which buyers submit sealed bids (not visible by other bidders), and the buyer with the best bid (the highest bid for purchasing a good or lowest bid for offering services) wins, the transaction occurring at the price the winner bid.

Remember that 20% of customers are in Segment A, 20% are in Segment B, 50% are in Segment C and 10% are in Segment D. These customers, 100 in total, will be deciding between the store's two brands of backpack (either the "gym offering" or the "hiking offering") and a competing store's "school offering" bag. If the sporting goods store were able to bring to market both of its offerings, which modification to its offerings could the store make to definitely earn more revenues? Decrease the size of its hiking offering from large to medium Increase the price of its gym offering Add additional pockets to its gym offering. . Increase the size of its gym offering from small to medium.

Add additional pockets to its gym offering. Adding more pockets would further satisfy Segment C, allowing the store to drive customers away from its competitor and capture more revenue.

A women's apparel retailer has run a survey of their existing customers eliciting preferences on skirt styles. If the retailer follows the respondents' suggestions, which of the following is most likely to occur? Existing customers will purchase more from the retailer. The retailer's client base will expand. The retailer will sell a larger variety of skirt styles. The retailer will be able to attract some of its competitors' clients.

Existing customers will purchase more from the retailer. Since the survey's responses came from the existing client base, they represent those customers' preferences, but not necessarily anyone else's preferences. Following these suggestions would cater to the tastes of the existing customers, and would likely increase the intensity with which they purchase items from the retailer.

Is the following statement true or false? When administering a survey, the most important thing is how many responses one gets, not whom those responses are from. True False

False It is important to survey the correct group (e.g., existing consumers vs targeted others, etc). Getting a large number of responses from a biased customer group may be useless.

If parking spaces and clothing in shopping malls are complements, which of the following statements is FALSE? Stores in the mall that start offering parking validation will see customer WTP for clothing increase. If the mall expands, building new clothing stores where there used to be parking, WTP for parking will decrease. . If the mall builds a new parking garage, doubling the available parking spots, consumer WTP for clothing will increase. If the police begin regularly issuing tickets to cars that have not paid for parking in the lot, consumer WTP for clothing will decrease.

If the mall expands, building new clothing stores where there used to be parking, WTP for parking will decrease. As more clothing becomes more available with the addition of the new stores, WTP for parking will increase.

A traveler's willingness to pay for a room in a hotel in a remote location is $70. The traveler's willingness to pay for a hot breakfast is $10. The traveler views hotel rooms and hot breakfast as complementary products. What is most likely the traveler's willingness to pay for a room in a hotel that includes complimentary hot breakfast? Less than $70 $70 $80 More than $80

More than $80 Since the two goods are complementary, the traveler's WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.

As previously mentioned by Professor Elon Kohlberg, studies from Angrist et al. and others have found a negative correlation between class size and student performance in reading and math, at least in some specific contexts. Consider running a similar experiment to determine the impact of class size on performance in science and history classes in the United States. Which of the following variables would be necessary to account for in the experiment to draw a reasonable conclusion? Select all that apply. Income Age Grade Level Belt Size Native Language Presence of a learning disabitlity Gender Race Hair Color

Income This variable may be correlated with student performance. Age This variable may be correlated with student performance. Grade Level Native language This variable would most definitely be correlated with student performance in a U.S. classroom. Presence of a learning disability This variable is most definitely correlated with student performance. Gender This variable may be correlated with student performance. Race This variable may be correlated with student performance.

The Economics for Managers course content team at HBS Online is trying to determine if there is a relationship between students' economics backgrounds and their success in the course. The team decides to test this hypothesis by separating its latest cohort into two groups: one group consisting of students that have taken at least one economics course in the past, and the second group consisting of individuals with no prior training in economics. The team sees that students with some previous economics knowledge tend to do 5% better, on average, on Module Quizzes than those without prior exposure. What conclusion can the E4M content team draw from this knowledge? Note: The performance data in this question is completely fictional. Individuals with prior economics experience are better HBS Online students. The more economics courses taken, the better a student will do on an E4M Module Quiz. Students with prior experience in Financial Accounting do better on Module Quizzes than those students without experience in FA None of the above..

None of the above. We cannot conclude any of the above. We don't know if other missing/hidden variables could be responsible for the difference between quiz scores between the two groups of students. For example, students with more prior experience in economics may differ from those with none in other systematic ways (income, gender, type of university attended, etc.).

In order to test a new customer loyalty program, a supermarket sends an email to its current customers in one of its regions of operation, inviting them to opt into the new program. After several months, management observes that participants in the new program are much more frequent shoppers than the average customer. Which of the following can management conclude from this experiment? Introducing the new loyalty program in all of its regions of operation will boost sales in the future. The new loyalty program has boosted sales among its test participants. Sales to customers that did not opt into the loyalty program have decreased. . None of the above.

None of the above. See explanations above.

In a focus group discussing a newly opened fitness club, the following scene plays out: One lady points out that it would be useful to add more cardiovascular machines One gentleman voices disagreement, saying that the space should be allocated towards more weight training A second lady speaks up in agreement with the gentleman, saying that she would appreciate a greater variety in the weight training machines. Which of the following should we conclude from this discussion? There is a lot of disagreement in the population regarding whether more space should be allocated towards weight training or cardiovascular training. . Most men prefer weight machines, whereas women's preferences are more split. There is more demand in the population for the weight training machines than the cardiovascular machines. None of the above.

None of the above. The sample size is too small to draw any of the above conclusions.

A company believes that its product will exhibit network effects if enough consumers begin to use it. How might this company decide to price its product? Offer the product for free early on, and increase the price later. Offer the product at a high price initially to attract high-WTP customers and then gradually decrease the price to make it affordable to lower-WTP customers. Offer the product at a price equal to the price charged by the nearest competitor. Set the price based on the cost of manufacturing the product.

Offer the product for free early on, and increase the price later. Offering the product for free will pull in more consumers, which will in turn increase other consumers' WTP.

An art collector is auctioning off three paintings. He has decided to use a sealed-bid second-price auction. The buyers attending the auction are the following: For painting 1: One buyer with a valuation of $100k, and one buyer with a valuation of $120k. For painting 2: One buyer with a valuation of $90k, and one buyer with a valuation of $200k. For painting 3: Two buyers with a valuation of $110k. What is the correct ranking of the revenues the collector will receive for the three paintings? Painting 1 > Painting 2 > Painting 3 Painting 2 > Painting 1 > Painting 3 Painting 3 > Painting 1 > Painting 2 Painting 3 > Painting 2 > Painting 1

Painting 3 > Painting 1 > Painting 2 Each painting will sell at the WTP of the second highest bidder.

A supermarket would like to test whether a new brand of soda pop sells significantly more/fewer units than the brand currently on the shelves. Which of the following experiments would best help the store test this hypothesis? Place the new brand of soda next to the brand the store currently sells, at the same price, and see if there is a significantly different amount of sales between the two products over a 3-month timeframe. Place the new brand of soda next to the checkout counter, at the same price as the current brand, and see how many customers swap the current brand for the new one on the way out. Place the new brand of soda in the same shelf location as the current brand, at the same price, remove the original brand, and see if there is a significantly different amount of sales from the 3-month average sales of the original soda. Place the new brand of soda next to the brand the store currently sells, at a lower price, and see if there is a significantly different amount of sales between the two.

Place the new brand of soda in the same shelf location as the current brand, at the same price, remove the original brand, and see if there is a significantly different amount of sales from the 3-month average sales of the original soda. This is the best setup to test the hypothesis. To compare sales figures between the two brands, the supermarket should change only the type of soda being sold, leaving as many variables as possible (e.g. price, shelf location, amount of other brands sold, length of sales period, etc.) the same.

In what way does randomization help an experimenter to overcome the "missing variables" problem? Select all that apply. Randomization helps to account for systematic differences across groups of interest. Randomization helps to ensure that the impact measured in a treatment vs. control group is due solely to the variable that is manipulated in the experiment. Randomization helps to ensure that the impact on two groups is more or less the same because individuals in either group have an equal chance of receiving the treatment effect. Randomization helps to eliminate the adverse effects of sample selection/selection bias. Randomization does not help overcome the problem of missing variables, but instead helps deal with confirmation bias.

Randomization helps to account for systematic differences across groups of interest. Randomization helps control for unobserved variables not being measured in the experiment. Randomization helps to ensure that the impact measured in a treatment vs. control group is due solely to the variable that is manipulated in the experiment. Randomization makes it so that the effect of other individual-specific variables, should, on average, cancel out across the treatment and control groups. Randomization helps to eliminate the adverse effects of sample selection/selection bias. By randomly creating groups, experimenters can avoid biased samples that may result, for example, when individuals select into groups based on observable differences.

The home electronic store conducts a similar conjoint analysis in another country, where customer preferences are different. In this country, customers fall into one of two well-defined and equal-sized segments, with average part-worths as shown below in the table. Again, customers will be deciding between the store's TV (either the "quality offering" or the "size offering") and a competing store's product. Which TV should the store introduce in order to maximize revenues The quality offering. Neither the customer segment prefers the quality offering, and neither segment will change its behavior based on which TV is offered anyway. The size offering. Although both customer segments prefer the size offering, neither will change their decision based on which TV is offered. Revenues will be the same no matter which TV is introduced.

Revenues will be the same no matter which TV is introduced. Customers in segment A will purchase the TV no matter which one is introduced. Customers in segment B will always choose the competing TV. Since the TVs are offered for the same price, either TV will bring in the same revenue.

After running an advertising campaign intended to increase sales of its line of dishwashers, an appliance store notices that consumer WTP for its dishwashers seems to have increased. However, the store has not captured any market share from its competitors. Which of the following might explain this outcome? The advertising campaign focused on negative features of competitors' dishwashers rather than the positive features of the store's own product. The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store's specific brand of dishwasher. The advertising campaign alerted consumers that the store was having a major sale on dishwashers, without emphasizing the desirable features of the dishwashers. Dishwashers exhibit network effects, and the store is therefore operating in a "winner-take-all" industry.

The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store's specific brand of dishwasher. The campaign increased WTP for dishwashers in general, but without specifically promoting the store. Other dishwasher sellers have probably profited from the campaign in the same way.

A sporting goods store is trying to decide what type of backpack to introduce into its product line. After performing a conjoint analysis, the store finds that customers generally fall into one of four well-defined customer segments, with average part-worths as shown in the tables below. 20% of customers are in Segment A, 20% are in Segment B, 50% are in Segment C and 10% are in Segment D. These customers, 100 in total, will be deciding between the store's two brands of backpack (either the "gym offering" or the "hiking offering") and a competing store's "school offering" bag.

The hiking offering If the store introduces the hiking offering, it will capture Segments B and D, 30% of all consumers (30 out of 100) paying roughly $70 each, for revenues of about $2,100.00. This would yield the most revenue for the store.

A home electronics store is trying to decide what TV to introduce into its product line. After performing a conjoint analysis, the store finds that customers generally fall into one of three well-defined customer segments, with average part-worths as shown in the tables below. 30% of customers are in Segment A, 20% are in Segment B, and 50% are in Segment C. These customers will be deciding between the store's TV (either the "quality offering" or the "size offering") and a competing store's product. Which TV should the store introduce in order to maximize revenues?

The quality offering. If the store introduces the quality offers, segments A and B will both choose it over the competing product, leading to 50% of potential customers paying $2000 each.

A home electronics store is trying to decide what TV to introduce into its product line. After performing a conjoint analysis, the store finds that customers generally fall into one of three well-defined customer segments, with average part-worths as shown in the tables below. 25% of customers are in Segment A, 40% are in Segment B, and 35% are in Segment C. These customers will be deciding between the store's TV (either the "quality offering" or the "size offering") and a competing store's product. Which TV should the store introduce in order to maximize revenues? The quality offering. The size offering. Revenues will be the same no matter which TV is introduced.

The quality offering. Segment C will purchase the TV no matter what. Segment B, which will purchase from the competitor unless the quality offering is introduced, contains more customers than segment A, which will purchase from the competitor unless the size offering is introduced.

Auctions Summary

The reason that auctions are effective at truthfully revealing buyer WTP is because of competition: bid much lower than your true WTP and you risk losing the product. Bid too high and you risk overpaying if you win it. The design of auctions is a very rich—and richly explored—topic. The "revenue equivalence" result says that, generally speaking, the design of auctions doesn't matter: regardless of whether you have an open outcry auction, a sealed-bid second price (or Vickrey) auction, or a sealed-bid first price auction, in every case the winner will pay roughly the WTP of the 2nd highest bidder. The revenue-equivalence result depends on an important assumption: that buyers have private values. In other words, buyers' WTP are independent of each other. When this condition is violated—for example, if bidder's WTP will rise as they realize that other bidders have high WTP—auction design can matter. The winner's curse is one of the most sobering results in auctions. It says that when buyers' WTP are correlated (or, when they have common values)—for example, when bidding on natural resources, construction projects, or service contracts—then the winning bidder usually ends up overpaying. To avoid the winner's curse, buyers usually shade their bids down from their (perceived) WTP. Auctions are generally better for sellers than for buyers—since the latter are less likely to capture surplus. As a result, buyers may tend to prefer fixed price settings over auctions (and that can lead sellers to prefer using fixed prices as well). Fixed prices are also preferable when sellers already have plenty of information on buyers' WTP, when buyers have very different WTP from each other, or when buyers are time-constrained.

In which of the following cases would a seller be least likely to use an auction to determine the price of an item? The item is unique and the seller is not certain what it is worth. Buyers' valuations of the item are interdependent. The seller is aware of each buyer's valuation of the item. The seller overpaid for the item initially and is trying to recover some of his losses.

The seller is aware of each buyer's valuation of the item. If the seller knows buyers' WTP, it would be easier to set a fixed price for the item.

In which of the following situations is an auction especially effective? Select all that apply. The buyer is time-sensitive The seller is time-sensitive Buyers' valuations are independent The seller does not know the WTP of its potential customers. Buyers' valuation of the auction item is within a narrow range.

The seller is time-sensitive Auctions are effective when a seller needs to sell an item by a certain date. A seller could use a fixed price when he or she is not under time pressure The seller does not know the WTP of its potential customers. Auctions are good for items for which there is not an easily available market price. The auction format helps the seller to reveal the top buyer willingness to pay. Buyers' valuation of the auction item is within a narrow range. An auction will be especially effective if buyers' valuations of the item are close together. This ensures that the sale price will be close to the WTP of the second highest bidder (based on the Revenue Equivalence Result)..

Auctions vs Fixed Prices

To start, there's the issue of how informed sellers are about buyer valuations: if the seller knows a lot about WTP, there's a far better chance he knows what price to directly set. On the other hand, the less information he has about the demand curve, the more sense it makes for a seller to run an auction So auctions will be more effective when buyers are not time-constrained. Otherwise their constraints or their impatience might make them decide to buy what they want elsewhere rather than wait to see how an auction plays out. Third, another important consideration is how different the buyers' WTPs are. Remember the revenue equivalence result? An auction will generate more revenue (and will be more likely to do better than a fixed-price sale) if the buyers' valuations are relatively close together, since the highest WTP and the next-highest WTP will be close together. As a result, an auction will lead the highest bidder to bid closer to his true valuation. If there are large differences in WTP across buyers, an auction may not be particularly effective in driving up prices. Fourth, we already saw that several different kinds of auctions all yield practically the same revenue if buyers' valuations are private, but that some types are more effective (for the seller) than others when the various buyers' valuations are interconnected. For example, if the buyers include experts to whom others will be looking for clues to what is more valuable than they had thought, bidding is likely to go higher than it would have otherwise—which is all to the benefit of the seller.

Jim Holzman at Ace Ticket has a few premium seats in the front row. He would like to find out how much extra he can charge for those tickets, relative to identical seats right behind in the second row. To do so, he decided to run a survey. Which of the following questions is LEAST likely to elicit an honest answer? What is the most you would be willing to pay for front row seats? Would you purchase front row seats at a 10% premium over second row seats? Would you rather sit in the first row, or sit in the second row and get a t-shirt with the team's name? Which would you rather have: an upgrade from the second row to the first, or free soda and ice cream at the game?

What is the most you would be willing to pay for front row seats? Survey respondents have a strong incentive to lie if asked directly what their WTP is.

In which of the following situations does a focus group have an advantage over a traditional survey? Select all that apply. hen gathering granular, personalized information on a few customers When gathering anonymous consumer feedback When gathering a large dataset for quantitative analysis When the question or topic is likely to be misunderstood by respondents When it is important for each consumer's feedback to be independent of other consumers' feedback

When the question or topic is likely to be misunderstood by respondents Focus groups allow the coordinator of the group to intervene when there is a misunderstanding. A survey does not have this flexibility and is not able to identify when a participant misread or misunderstood the question.

"Open Outcry" Auction

Where the auctioneer opens the bidding with a minimum price and then each bidder can increase his or her bid. This is also known as an English auction. It's the usual way to sell artwork or rare antiques. It's also how most charity auctions work

A large beer company previously had a yearly budget of $50 million per year for advertising but increased the budget to $60 million in order to run a commercial during the Super Bowl. That year revenues increased by 1%. Should the beer company continue with the increased advertising budget? No, the 1% increase in revenue is smaller than the 20% increase in expenditures. No, because the company had an AED of .05 which is too low for advertising to be a strong investment. Yes, since the AED of .05 was positive, it makes sense to continue with the increased budget. Yes, but only if the increase in revenues was greater than the increase in expenditures.

Yes, but only if the increase in revenues was greater than the increase in expenditures. If the original total revenue was $1 billion, then the increase in revenue would have been 1% of that, so $10 million. This is equal to the increase in advertising expenditures. Thus if original revenues were greater than $1 billion, it makes sense to keep the increased budget.

Conjoint Analysis

technique used to develop an understanding of the attributes that guide consumer preferences by having consumers compare product preferences across varying levels of evaluative criteria and expected utility Key Elements: Pair-wise rankings: First, rather than ask a customer her preference across 27 (or more) different products, the conjoint approach requests a comparison only across two or three offerings at any one time. Infer values from rankings: Second, rather than asking a customer to fill out her dollar value for each feature-combination, in conjoint analysis we don't even need to ask her that. Instead, we infer the dollar value she might assign to any product based on her rankings.

"Vickrey Auction"

the highest bidder wins the item, but only pays the amount of the second-highest bid. For this reason, this type of auction is often referred to as a "sealed-bid second-price auction".