Transcript Externality and Asymmetric Information

EXTERNALITY
Managerial Economics
Jack Wu
EXTERNALITIES

one party directly conveys benefit or cost to
others
•
•

positive
negative
benchmark: collective marginal benefit =
collective marginal cost
(c) 1999-2001, Ivan Png
New York, NY: 611 Fifth Avenue
 Stamford, CT: Town Center Mall
 Chevy Chase, MD: 5555 Wisconsin Ave
 McClean, VA: Tysons Galleria

Externalities
SAKS: FIFTH AVENUE VS MALL
SAK’S POSITIVE
EXTERNALITIES
Marginal benefit/cost
(Hundred thousand dollars)
15
13.4
group marginal benefit
10
Sak’s marginal benefit
9
florist’s marginal
benefit
4
3.6
profit gain from
additional investment
1
0.8
marginal
cost
0
1
shoe store’s
marginal benefit
5
9
10
Hundred thousand dollars of investment
SAK’S NEGATIVE
EXTERNALITIES
10
marginal benefit
profit gain from
reducing investment
group marginal cost
b
a
2
Sol’s marginal cost
1
0
c
5
7.5
9
Sak’s marginal cost
10
Hundred thousand dollars of investment
Hewlett-Packard
 Cisco Systems
 3Com
 Yahoo!

(c) 1999-2001, Ivan Png
Stanford University
 Xerox Palo Alto Research Center

Externalities
SILICON VALLEY
London: The City
New York: Wall Street
Hong Kong: Central
Singapore: Raffles Place
(c) 1999-2001, Ivan Png
•
•
•
•
Externalities
FINANCIAL CENTERS
RESOLVING EXTERNALITIES
Economic inefficiency  opportunity for profit
 merger
 collective action
Cooperative advertising resolves positive
externality from one retailer to other retailers
Externalities
INTEL INSIDE
(c) 1999-2001, Ivan Png
NETWORK EXTERNALITY
Externality where benefit/cost depends on total
number in network
 English language
 Internet email
 international telephone service
NETWORK EFFECT
benefit/cost depends on total number in network
 through market, not directly conveyed
 resolved by producer or service provider
CRITICAL MASS

definition: number of
users at which demand
becomes positive
NETWORK EFFECTS:
DEMAND ELASTICITY
highly elastic around tipping point
highly inelastic at low demand levels
PUBLIC GOOD
Non-rival consumption -- one person’s increase
does not reduce quantity to others

extreme economy of scale
(c) 1999-2001, Ivan Png
Distinguish
 content
 delivery
Externalities
TELEVISION
RIVALNESS
congestible
private good
rival consumption
public good
non-rival consumption
EFFICIENCY IN PUBLIC
GOOD
Marginal benefit/cost ($ per minute)
10
8.9
vertical sum of marginal benefits
5.6
marginal cost
5
4.5
4
3.6
Alan
Mary
1
0.8
0
Peter
1
4
5
Minutes of fireworks
10
EXCLUDABILITY
Provider can exclude particular consumer
 law
 technology
EXCLUDABILITY: LAW


patent – product or process
copyright – artistic expression
(c) 1999-2001, Ivan Png
trade-off
 benefit from usage
 incentive for future creation
Externalities
INTELLECTUAL PROPERTY
DISCUSSION

Let b represent marginal benefit and q the
amount of Sogo’s investment in the new
ZhongXiao Fushing store. Suppose that the
investment generates marginal benefis, b=10-q
for Sogo, b=4-0.4q for the florist, and b=1-0.2q for
the shoe store. Given the marginal cost of 1,
calculate the profit-maximizing quantity of Sogo’s
investment and the economically efficient
quantity of Sogo’s investment.