The practice of posting a discrete schedule of declining prices for different quantities

                Eliminates the information constraint present in 1^st-degree price discrimination

                                Ex: Electric Utilities

when demand during peak times is higher than the capacity of the firm, the firm should engage in peak-load pricing

                Charge a higher price during peak times & lower during off-peak times

prices charged for one product are subsidized by the sale of another product

                May be profitable when there are significant demand complementarities effects

to overcome double marginalization, the internal price at which an upstream division sells inputs to a downstream division should be set in order to maximize the overall firm profits

                To achieve this goal, the upstream division produces such that its marginal cost, MC_u, equals the net marginal revenue to the downstream division (NMR_d): NMR_d = MR_d – MC_d= MC_u

a strategy of constantly changing prices

                Decreases consumer’s incentive to shop around as they can’t learn from experience which firm charges the lowest price

                Reduces the ability of rival firms to undercut a firm’s prices

·         1^st-degree price discrimination, block pricing, & 2-part pricing permit a firm to extract all consumer surplus

·         Commodity bundling, 2^nd-degree & 3^rd degree price discrimination permit a firm to extract some (but not all) consumer surplus

·         Different strategies require different information

Risk Averse: an individual who prefers a sure amount of $M to a risky prospect with an expected value

Risk Loving: An individual who prefers a risky prospect with an expected value

Risk Neutral: An individual who is indifferent between a risky prospect where E[x]=$M and a sure amount of $M

situation that exists when some people have better information than other

                Ex: used car trade-in? Sale? Share of stock?

1.       Hidden Characteristics: Things one party to a transaction knows about itself, but which are unknown by the other party

2.       Hidden Actions: Actions taken by one party in a relationship that can’t be observed by the other party

attempt by an informed party to send an observable indicator of his or her hidden characteristics to an uninformed party

                To work, the signal must not be easily mimicked by other types (ex: MBA)

situation where one party to a contract takes a hidden action that benefits him or her at the expense of another party

                (Ex: the principal-agent problem: fixed salary leads to kicking back)

an auction whereby bidders simultaneously submit bids on pieces of paper; the item goes to the highest bidder; bidders do not know the bids of other players

                Optimal Bidding Strategy: If there are n bidders who all perceive valuations to be evenly (or uniformly) distributed between a lowest possible valuation of L and a highest possible valuation of H, then the optimal bid for a risk-neutral player whose own valuation v is b = v = (v-L)/n.

the same bidding process as a first price auction; high bidder pays the amount bid by the 2^nd highest bidder (no winner’s curse)

                Optimal Bidding Strategy: bid your own valuation of the item

a descending price auction; the auctioneer begins with a high asking price; the bid decreases until one bidder is willing to pay the quoted price; strategically equivalent to a first-price auction

Independent Private Values: bidders know their own valuations of the item, but not other bidders’ valuations; bidders’ valuations do not depend on those of other bidders

Affiliated (or Correlated) Value Estimates: bidders don’t know their own valuation of the item or the valuations of others; bidders use their own information to form a value estimate; value estimates are affiliated: the higher a bidder’s estimate, the more likely it is that other bidders also have high value estimates

                Optimal Bidding Strategy: difficult to describe b/c bidders don’t know their own valuations of the item, let alone the valuations of others; the auction process itself may reveal info about how much the other bidders value the object

                Optimal bidding requires that players use any info gained during the auction to update their own value estimates

Common Values is the special case in which the true (but unknown) value of the item is the same for all bidders [oil and gas exploration rights]

In a common-values auction (p. 463) the winner is the bidder who is the most optimistic re: the item’s value

                To avoid, a bidder should revise downward his or her bid to account for this fact

                The winner’s curse is most pronounced in sealed-bid auctions or in affiliated value cases where one gets ‘swept up’ (ex: farm auctions)

                                Present when highest #’s vary extremely from the rest

controlled by the Federal Reserve through interest rates or injecting liquidity

                Inject Liquidity or Lower Interest Rates to lower fear of a recession

reflects short-term money market system (some businesses need money only short-term)

(expect it to increase): shows the difference b/w short-term Fed Funds Rate & long-term treasury bonds

                Indicator of the State of the Economy

                Commit funds for a longer time = MORE RISK b/c of the unknown value of the dollar

                Flatter Yield Curve (short & long term have the same interest rate) is often followed by a recession

                                Good news for L/T since it shows the Fed’s not expecting inflation

                                Bad news for S/T because it means uncertainty

The Fed actually controls the Monetary Base (currency & deposits of Member Commercial Banks)

Fed policy from 1990’99 wasn’t overly/under stimulated (it was about 8% & 5% was increase in production, with 3% being interest rates)

                2000 – Y2K injection of liquidity over-stimulated the economy w/c Y2K didn’t occur!

interest rates already so low that lowering them further won’t stimulate the economy anymore (ex: Japan for more than a decade was at 1%)

price of stock to earnings of it (inverse = yield of earnings to the current owner)

                Currently it’s about 20, the earnings will be 1/20^th of what you pay = 5% yield

                                So people won’t buy because there’s risk free options that yield the same

Encourage you to do more than you can do.

There’s a responsibility to use your talents fully, for yourself & others.

Magis isn’t screwing up, it’s sticking to business, getting it done, working hard, & doing more than you’re capable of doing. (you don’t know what you’re capable of until you try)

Magis & the entrepreneur

                There are countless organizations working constantly to improve the community

                                Be a board member on a nonprofit.

                “use develop gifts for others” “give back/more to the community”

Slacking off means you’re not offering your creativity & talents to help others. You have responsibility to (for everyone).  When no one’s looking over your shoulder, keep working.

There are no solutions, only tradeoffs. – Economist point of view