COURSEWORK»PROBLEMS
Problem One
Google is the most popular search engine on the Net and many praise its effectiveness.
(A) What attributes should an excellent search engine have?
(B) What makes Google so popular and it is because it is a "good" search engine according to the criteria you stated in (A)?
Problem Two
Most consumers, when they are searching the Net for goods and services, are interested in finding lower prices. Of course, not all consumers use the same search engines, use the same sites, or search in the same ways and this affects their results.
(A) Is it possible that some consumers end up paying higher prices when they use the Net? Provide two examples where you think this might occur.
(B) Assuming your examples are valid, are consumers better off or worse off if they end up paying higher prices when they use the Net?
Make clear any assumptions that underpin your discussion.
Problem Three
A debate exists among economists about the effects of the "branding" of products upon consumer welfare. (A product becomes "branded" when we recognize its name and its characteristics, for example, McDonald’s or Nordstrom’s.) Some argue that the advertising and other techniques that brand products entail costs that inevitably are passed on to consumers in the form of higher prices. Others argue that branding helps consumers identify products, provides them with information, and thereby improves their welfare.
(A) Critique these arguments using theory and any empirical evidence you can muster.
(B) Is branding likely to become less or more important on the Net?
Problem Four
DVD disks can be used to store entire movies by digital means. Usually the movie file is encrypted so that it cannot easily be decoded without the consent of the producer/owner of the movie. DivX is a (new) loose collection of software that enables DVD files to be decrypted and then stored on a PC, except that a DVD movie is compressed to about 15 percent of its usual size. This means that a full length movie might fit on a regular CD disk that is DVD. Previously a single DVD movie file might have consumed 6-8 GB of space on a PC’s hard drive. Given that many PC hard drives still are only 20 to 50 GBs, this discouraged many individuals from copying DVD files on to their PC hard drives. Now, however, these files can be decoded and compressed to a fraction of their previous size and streamed over the Net to other PCs, far and wide. Further, hard drives have become much larger and hence file copiers have much more room for what they copy. Also, copying is now done at much higher speeds because of upgraded processors and high speed, broadband access.
(A) What are the likely effects of these new innovations, especially DivX, on the prices of DVD movies? On sales?
(B) Consider those who produce and "own" movies (the studios, etc.). What effects will DivX likely have upon their activities and profits?
(C) What about the activities and wages of movie stars?
Problem Five
DoubleClick, Inc., is one of the largest and most important "data mining" firms that collect information about households’ and consumers’ behavior on the Net. DoubleClick purports to have profiles on more than 90,000,000 American households that it has developed from recording Net behavior or from other sources.
Some individuals, consumer interest groups, editorialists, and legislators called variously for a ban on all such information collecting, or for a ban on such activities unless they are disclosed, or have advocated rules that will restrict how such information and data may be used or sold.
A) What benefits do data mining firms argue that consumers as a group receive from their data mining activities?
B) What costs to consumers as a group might be associated with data mining?
C) Having specified A and B above, will all consumers as a group be better or worse off if the various bans or rules are implemented? Explain why and how.
Problem Six
According to the New York Times (20 July 2000), a U.S. Department of Transportation official told a Congressional committee "...we found some airlines’ practices of simultaneously quoting widely disparate fares for the same product within the same channel to be somewhat disturbing."
(A) Explain why airlines might quote quite different fares for the same product, depending upon the identity of customer or the path the customer took to obtain that quote. Assume profit-maximizing behavior.
(B) Is this a "bad" practice from the standpoint of consumer welfare?
(C) Is this practice "Pareto Optimal?" I.e., does it make at least one party better off without harming all other parties? (In a non-Pareto Optimal situation, at least one party is harmed.)
Problem Seven
Consider a conventional English auction on the Net of a ticket to a Washington Redskins football game against the St. Louis Rams by an individual ("Tom") who owns the ticket.
(A) Illustrate how this English auction can improve welfare of both seller ("Tom") and buyer ("Paul"), that is, be Pareto Optimal. Use supply and demand curves to show what's going on.
(B) Can you say anything about who is likely to gain the most from this auction?
(C) Suppose, instead, Paul (who wants a ticket) holds a Reverse Auction. How will this work? Will this yield a Pareto Optimal result? Will this auction method change the likely distribution of gains between Tom and Paul?
Explain your answers carefully and make clear any assumptions which underpin your answers.
Problem Eight
In this Problem, you actually must go out and obtain term life insurance price quotes on the Net. You must present this evidence to me in class by means of printouts, etc., showing that you actually did the requisite search.
Obtain as many quotes as you can, but at least six from different insurance companies, by using at least three of the following sites: quotesmith.com, selectquote.com, insure.com, accuquote.com, insweb.scom and term4sale.com. Obtain the sites' quotes for a ten-year $100,000 term life insurance policy for a 25-year old male who is a non-smoker. Your quotes should include the annual (not monthly or quarterly) price and the financial safety rating of the firm that would supply the insurance. Plot the quotes on a graph (Excel or Quattro Pro), with the price on the vertical axis and the safety rating on the horizontal axis.
What relationship, if any, do you observe between price and safety? On the basis of your empirical research, is the life insurance market "efficient" in the sense that economists use this term? What is the likely effect of the Net on the efficiency of this market?
Problem Nine
An absence of barriers to the entry and exit of firms is one of the most important determinants of the state of competition in a market. Indeed, in the long-run, substantial market power cannot exist without the benefit of barriers to entry.
(A) What is the general level of barriers to entry into e-commerce today?
(B) Provide an example of a Net market for which barriers to entry are particularly high. Why?
(C) Provide an example of a Net market for which barriers to entry are particularly low. Why?
(D) What, if anything, do economies of scale have to do with all of this?
Problem Ten
A few "pure" Net firms seem to be making money (for example, eBay), but most pure Net firms (that is, firms that are doing business only on the Net) seem to be losing money. Amazon is a prominent example of a Net firm that still has yet to make money according to usual accounting principles and the dot.com graveyard is full of pure Net firms that lost millions of dollars trying to sell things ranging from dog food to furniture on the Net.
On the other hand, many "bricks and clicks" firms that do business both in conventional bricks and mortar outlets and on the Net (e.g., Wal-Mart and Target) seem to be doing acceptably well in the Net-oriented portions of their businesses, though it is often difficult to separate their e-commerce activities from their bricks and mortar activities. Why are the bricks and mortar firms doing better than so many of the pure Net firms? Explain carefully and make clear any assumptions which underpin your answer.
