Post Midterm

Institutions That Mitigate Lemons Problems

1) Reducing Asymmetric Information Directly 2) Incentives for Truthful Quality Reporting 3) Increasing the Average Quality of Cars Placed on the Market

interest

A periodic payment tied to an amount of assets bor- rowed or lent.

adverse selection

A situation in which market characteristics lead to more low-quality goods and fewer high-quality goods being put on the market. for example, It is difficult to judge the quality of workmanship one could expect from a tradesperson. This concern might make homeowners reluctant to offer adequate compensation to con- tractors who bid on a job. But, this reluctance would, in turn, reduce the likelihood of a high-quality (but expensive) contractor taking the job, making it instead more likely that a contractor who would take a job at this lower pay level is incompetent.

Prisoner's dilemma

A situation in which the Nash equilibrium outcome is worse for all involved than another (unstable) outcome.

Diversification

A strategy to reduce risk by combining uncertain outcomes.

lemons problem

An asymmetric information problem that occurs when a seller knows more about the quality of the good he is selling than does the buyer.

the concept of monopolistic competition

Differentiated Products: In monopolistic competition, each firm sells a product that is slightly different from its competitors' products. These differences can be in terms of branding, quality, features, etc. However, the products are not perfect substitutes for each other. Residual Demand: While other firms' choices can affect a particular firm's sales, the focal firm does not typically consider strategic interactions. This means that each firm sets its own price and output level without necessarily taking into account the reactions of other firms. Free Entry: There are no significant barriers to entry or exit in monopolistic competition. New firms can enter the market relatively easily if they see potential profits, and existing firms can exit if they're unable to compete effectively. Market Power and Demand: Differentiated products give each firm some degree of market power, meaning they can influence the price of their product. This is because consumers may perceive differences between products and be willing to pay a premium for certain attributes. As a result, the demand curve for each firm's product is downward-sloping, indicating that higher prices lead to lower quantities demanded.

What do firms do in Cournot competition?

Firms produce identical goods and choose a quantity to produce rather than a price at which to sell the good.

What is Cournot competition?

It is an oligopoly model in which each firm chooses its production quantity.

cartel or collusion

Oligopoly behavior in which firms coordinate and col- lectively act as a monopoly to gain monopoly profits.

Expected Value

The probability-weighted average payout.

Risk-averse

Suffering an expected utility loss from uncertainty, or equivalently being willing to pay to have that risk reduced.

principal

The amount of assets on which interest payments are made.

present discounted value (PDV)

The value of a future pay- ment in terms of equivalent present-period dollars.

Nash equilibrium

This idea of equilibrium — that each firm is doing its best conditional on the actions taken by other firms

The concept of equilibrium in perfect competition and in monopoly...

a price at which the quantity of the good demanded by consumers equals the quantity of the good sup- plied by producers. That is, the market "clears." The market is stable at such a point: There are no shortages or surpluses, and consumers and producers do not want to change their decisions.

Olipology

a state of limited competition, in which a market is shared by a small number of producers or sellers. example: airlines, cars

How does a cournot competition choose their quantity?

based on the quantity produced by all firms, the market demand curve determines the price at which all firms' output will sell.

Asymmetric information

is an imbalance of information across parties in a transaction

The basic way to incorporate risk into NPV investment analysis...

is to compute NPV as an expected value, that is, by weighting each payoff by the probability that it happens.

An equilibrium in an oligopoly starts with the same idea as in perfect competition or monopoly: The market clears. But it adds the requirement that...

no company wants to change its behavior (its own price or quantity) once it knows what other companies are doing. In other words, each company must be doing as well as it can conditional on what the other companies are doing.

Differentiated products provide...

some market power and create downward-sloping demand

Net Present Value (NPV)

the use of PDV to evaluate the expected long-term return on an investment or spending choice