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Berkeley ECON 100A - Section Notes 25

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Section Notes 25, Econ 100A Spring ’06 1Section Notes 25Covering material from Lecture on April 25thClass Outline1. Sequential Game2. Assymetric InformationHW Remark: What does it mean for a market to be efficient? What does it mean for an outcome in agame (i.e. pay-off matrix) to be efficient?1 Sequential GameProblem: (P&R, Chapter 13, Exercise 10)Defendo is introducing a new video game and will become a monopoly. It can use a publicly availabletechnology A, with an annual cost given by: CA(q) = 10+8q. Alternatively, they created a new technologythat only they have with an annual cost given by CB(q) = 60 + 2q. They face an annual market demandof P = 20 − Q, where Q is total demand.a. If Defendo knew they would maintain monopoly for the entire life of product (with no threat of entry),what technology should they adopt and what are their profits?b. Suppose a competitor, Offendo, wants to also introduce the product an has access to technology A. IfOffendo enters, Defendo will have no timing advantage.i. If Defendo adopted technology A, and Offendo enters, what is the annual profit of each firm?ii. If Defendo adopted technology B, and Offendo enters, what is the annual profit of each firm?iii. Which technology should Defendo adopt, if Offendo is threatening entry? What are their profitsand what is consumer surplus?c. What happens to social welfare as a result of the threat of entry?Section Notes 25, Econ 100A Spring ’06 22 Assymetric InformationProblem: There are many buyers who value high-quality used cars at the full-information market price ofp1and lemons at p2. There are a limited number of potential sellers who value high-quality cars at v1≤ p1and lemons at v2≤ p2. Everyone is risk neutral. The share of lemons among all the used cars that mightpotentially be sold is θ.1. Under what conditions are all cars sold? When are only lemons sold? Are there any conditions underwhich no cars are sold?2. Suppose that the buyers incur a transaction cost of $200 to purchase a car. This transaction cost isthe value of their time to find a car. What is the equilibrium? Is it possible that no cars are


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