TAILIEUCHUNG - Microeconomics for MBAs 26

Microeconomics for MBAs 26. The Economic Way of Thinking for Managers. Microeconomics for MBAs develops the economic way of thinking through problems that MBA students will find relevant to their career goals. Maths is kept simple and the theory is illustrated with real-life scenarios | Chapter 7 Market Failures External Costs And Benefits 20 monopoly on the product by raising the price after the buyer commits to it at the attractive initial price. The seller may promise not to raise the price but the buyer will be taking an expensive risk to trust the honesty of the promise. A long-term contract is possible but it is difficult to specify all the contingencies under which a price increase or decrease would be justified. Also such a contract can reduce the flexibility of the buyer as well as the seller and legal action to enforce the contract is expensive. Another possibility is for the seller to give up his or her monopoly position by licensing another firm to sell the product. By doing so the seller makes his or her promise to charge a reasonable price in the future credible since if the seller breaks the promise the buyer can turn to an alternative seller. Giving up a monopoly position is a costly move of course but it is exactly what semiconductor firms that have developed patented chips have done. To make credible their promise of a reliable and competitively priced supply of a new proprietary chip the use of which requires costly commitments by the user semiconductor firms have licensed such chips to competitive firms. Such a licensing arrangement is another example of making profits by way of a hostage intended to encourage The more difficult it is for consumers to determine the quality of a product or service the more advantage there is in committing to honesty with hostage arrangements. Consider the case of repair work. When someone purchases repair work on their car for example they can generally tell if the work eliminates the problem. The car is running again the rattle is gone the front wheels now turn in the same direction as the steering wheel etc. But few people know if the repair shop charged them for only the repairs necessary or if it charged them for lots of parts and hours of labor when tightening a screw was all that

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