Examples of How risk Aversion influences decisions Product quality a Informative advertising ■ Free samples Guarantees Chain stores Insurance Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Examples of How Risk Aversion Influences Decisions • Product quality Informative advertising Free samples Guarantees • Chain stores • Insurance
Consumer search The optimal Search strategy. EB Reservation Price 0 Accept R Reject Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Consumer Search The Optimal Search Strategy. c c EB Reservation Price Accept R Reject $ P 0
Consumer search An increase in search costs EB raises the reservation price. 0 RR Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Consumer Search c c EB R $ P 0 An increase in search costs raises the reservation price. R* c* c*
Uncertainty and the firm · Risk Aversion Are managers risk averse or risk neutral? Diversification -Dont put all your eggs in one basket Profit maximization a When demand is uncertain, expected profits are maximized at the point where expected marginal revenue equals marginal cost: E[MR]=MC Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Uncertainty and the Firm • Risk Aversion Are managers risk averse or risk neutral? • Diversification “Don’t put all your eggs in one basket” • Profit Maximization When demand is uncertain, expected profits are maximized at the point where expected marginal revenue equals marginal cost: E[MR] = MC
Asymmetric Information Situation that exists when some people have better information than others Example: Insider trading Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Asymmetric Information • Situation that exists when some people have better information than others. • Example: Insider trading