Economics of Information Goods Midterm Exam 1998

2 hours

  1. What is the Areeda-Turner rule for detecting Predatory Pricing? Why is it thought that firms behaving in this way are likely to be engaged in predatory pricing? What do you think this implies for the legal definition of a predatory price for software delivered over the Internet? Are there any nonpredatory instances where firms might charge a price that the Areeda-Turner rule would consider predatory.
  2. Microsoft includes a free copy of Internet Explorer with each copy of Windows 95. Does this sound like a traditional tie-in? What is normally specified in a tie-in contract? How is it thought that a tie-in sale might increase profits for the firm instigating the tie-in sale?
  3. How does price discrimination lead to increased profits? Airline tickets, trading stamps (e.g. S&H), coupons, and regular sales are sometimes given as examples of price discrimination by firms. Explain how each of these practices sorts customers into groups and how the elasticities differ across groups.
  4. Publishers of commercial newsletters often charge subscription prices of thousands of dollars. Law firms regularly purchase these newsletters so that they me be kept abreast of the latest changes in their fields of expertise. Currently, it is estimated that 90 per cent of all law firms make a few copies of each newsletter without the permission of the publisher. A new, almost zero cost, technology would make the pages of the newsletter impossible to photocopy. If publishers start to use this new technology what is likely to happen to the price of newsletters? What is likely to happen to the quantity of each newsletter that they sell? Will the publishers make greater profits?