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Consumer surplus: Net value gained by consumers.

Coordination costs: Costs parties incur to complete a transaction. These include the costs
trading partners incur to learn about each others existence, to determine the price and the
other terms of the transaction and to come together to complete the transaction.

Efficient (or Pareto optimal) : An allocation of goods and services is efficient if no

reallocation of goods and services exists that makes somebody better off without making
someone else worse off.

Externality: Cost or benefit which results from an activity which affects and otherwise
uninvolved party who did not choose to incur that cost or benefit.

Fundamental theorem of welfare economics: Economic principle, which states that an

efficient allocation of goods emerges at a competitive equilibrium.

Imperfect commitment: Situation in which partners cannot bind themselves to fulfill

promises they would like to make before a transaction takes place.

Information asymmetry: Situation in which one party engaged in a transaction has more or
better information than another

Market: Place (in the broadest sense of the word) where buyers and sellers can trade goods
and services, usually in exchange for money.

Market power: The extent to which a firm is able to sell its products at a price above
marginal costs.

Organization: Entity in which people interact to reach economic goals.

Producer surplus: Net value gained by producers. It equals the sum of the profits of the
firms that are active in the market.

Transaction cost: Cost incurred in making an economic transaction.

Value maximization principle: Economic principle, which states that an allocation of goods
and services is efficient (only) if it maximizes the total value among the affected agents.

Welfare: Total value that a market generates. It is equal to the sum of the consumer surplus
and producer surplus.

Case: Apple begon met een computer Apple I. Begin jaren 80 groot succes. Verschil met IBM
was dat Apple niemand hun software en hardware geheimen wilde prijsgeven (patent). IBM
deed dit wel (open architecture model). Consequence: Apple hogere kwaliteit, maar ook
prijs. 1984 Jobs weg, 1997 terug en Apple ging weer goed onder het motto design &
innovation. Bij Google motivation with carrots, Jobs used a stick (Strict requirements and
high fear of being fired, but he was able to create a strong feeling of membership). Sued a lot
for patent rights, for example Samsung.

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Equal compensation principle: Economic principle that refers to the case where an agent
can expend effort on two tasks. It states that an agent will only expend effort on both tasks if
their marginal rate of return is the same. Otherwise, he will exert zero effort on the task with
the lower marginal rate of return.

Principal-agent problem: Problem arising in motivating one party (the agent), to act in the
best interests of another (the principal) rather than in his or her own interests.

Case: Financial Innovation from Originate-to-hold to Originate-to-distribute model. Thus

Moral Hazard (mortgage brokers and banks because the risk was passed to the investors)
due to securitization etc. Causing financial crisis.

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Competition policy: Policy that promotes or maintains market competition by regulating
anti-competitive conduct of firms

Economic regulation: A set of legal tools that allows regulators to intervene in markets to
mitigate welfare losses, for example, by imposing maximum prices to prevent firms from
charging excessive prices.

Herfindahl-Hirschman index: A measure of market concentration. It is equal to the sum of

the squares of the market shares of the firms active in the market.

Influence costs: Costs that arise if a party spends time and effort trying to affect the
decisions made by another party, e.g. the government or a firms top management.

Lerner Index: Measure of a firms market power.

Market concentration: Measure of the number of firms in a market shares.

Market power: The extent to which a firm is able to sell its products at a price above
marginal costs.

Ratchet effect: Instance in which the principal can partly take away the risk of uncertain
future performance by letting the agents performance standards depend on his
performance in early periods.
Case: Cartelprijzen hoger dan competitive collusion prijzen. Cartels tend to have less market
power in countries with strictly enforced competition laws. How to decrease cartels: 1)
strictly enforced competition laws 2)higher penalties

Rate of return regulation: regulator sets prices such that firms are exactly compensated for
the costs they incur, including a fair rate of return

Price cap regulation: regulator sets maximum price that the firm can charge

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Best response: A players strategy in a game that results in at least as high a payoff as any
other strategy the player can play given the strategies chosen by the other players.

Hotelling game: Game that models firms location choice, either literally or I terms of
product positioning.

Nash equilibrium: A solution concept used for games identifying a strategy for each player in
the game which she prefers over all other available strategies given the other players
strategies

Product differentiation: The process of distinguishing a product or service from other

products or services.

Case: Penalty kick game. 2 predictions with hypotheses: 1) The probability that a kicker
scores a goal (or a GK prevents it) is independent of the corner chosen 2) A players choice
does not depend on his choices in previous penalty kicks.

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Comparative performance evaluation: Situation in which a workers payment is based on his
performance relative to the performance of other workers.

Tournament: Competition between participants to win one or several prizes that will be
allocated to the best performer(s).

Case: Conclusies:

1) Effort is lower in smaller groups than in bigger groups under comparative

performance method.
2) If people in group are friends, then they care about friends or they colluse.

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Bertrand game: Model of competition, named after Bertrand, used to describe an industry
structure in which firms set prices and customers choose quantities at the prices set (NE:
P=MC)

Bertrand paradox: The outcome of the Bertrand game in which the price in the Nash
equilibrium equals marginal costs, despite higher market concentration compared to perfect
competition.

Cournot competition: Model of competition, named after Cournot, used to describe an

industry structure in which firms strategically choose the quantities they sell.

Differentiated goods: Goods which are not homogeneous.

Search costs: Costs the consumers incur to find out about the existence of firms supplying
the goods they need.

Switching costs: Costs incurred to consumers when changing supplier.

Case: Hypotheses: Airplanes with more competitors try harder to prevent delays than
airplanes which are monopolies. Hypotheses is true, but on average only 1.35 minutes later,
so not so significant effect.

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Backward induction: Solution concept used for dynamic games according to which one
starts by solving the last stage of a game, then the penultimate stage, and so forth, up to the
first stage. The solution for each stage is the Nash equilibrium in that stage, where payers
take into account the actions that will be chosen in later stages of a game.

Double marginalization problem: A situation that occurs when both upstream and
downstream firms have market power and each firm adds a profit margin to the marginal
costs, resulting in excessively high prices.

Subgame perfect Nash equilibrium: A Nash equilibrium in which players play a Nash
equilibrium in each subgame of the entire game.

Vertical chain: Series of firms selling inputs to each other, starting with the firms exploiting
raw materials to firms selling the final products to end consumers.

Case: With backward induction chess players etc. The game to 100, moet player 2 de som
10,20,30 etc. maken zodat hij wint. Chess players not necessarily better in this game, only
with chess they are. Conclusie: Not everyone behaves according to backwards induction.

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Incentive intensity principle: Economic principle, which states that the optimal intensity of
incentives is higher the more responsive the agent is to incentives, the greater the principals
incremental profits from additional effort, the more precisely performance can be measured
and the greater the agents risk tolerance.

Informativeness principle: Economic principle, which states that the total value is increased
by correcting for events beyond the agents control in such a way that the error with which
the principal measures the agents performance is reduced.

Ratchet effect: (zie hfs 3)

Case: Pay enough or dont pay at all: Little incentives are ineffective or even worse than no
bonus. High bonuses are effective though.

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Geen begrippen.

Case: GM vs Ford. Ford maakte in 1920 veel lage kwaliteit cars, GM hogere. Ford hogere
Market Share. GM besloot om de verschillende divisies die het heeft (Cadillac, Chevrolet
etc.) te differentieren. Bv Cadillac lux, andere divisie nog goedkoper dan Ford en zo werd het
de leider op de markt.

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Discount factor: Factor by which a future value must be multiplied in order to obtain the
present value.

Trigger strategy: Strategy that tells a player to cooperate as long as the other player
cooperates in all previous periods and punish the other player as much as possible in all
future periods as soon as she does not cooperate in one period.

Trigger strategy stability condition: Condition on the discount factor in which the trigger
strategy is a subgame perfect Nash equilibrium.

Case: Trigger Strategy in veilingen. NorthCoast wilde dat NextWave stopte met bidden op
een vergunning, dus bood NorthCoast op een andere vergunning van NextWave. NextWave
snapte dit signaal en stopte met het bidden op die vergunning die NorthCoast initieel wilde.

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Implicit contracts: Agreements between two parties that cannot be enforced by the court.
Relational contract: Implicit contract that involves agreements which are enforceable
because parties interact repeatedly and thus have a long-term relationship with each other
(bv trigger strategy).

Case: 2 conclusies:

1) Er was geen groot verschil in prestaties tussen de groep die een lagere beloning
kreeg en de groep die een grotere (10x meer) beloning kreeg
2) Een grote bonus geven bij een baan die uit fysieke taken bestaat helpt de prestaties.
Een grote bonus geven bij een baan die bestaat uit cognitieve taken werkt minder
goed of zelfs negatief voor de prestaties.

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Collusion: Explicit or implicit agreements between firms, for instance, about the prices they
will charge. Factors facilitating collusion:

High market concentration

High entry barriers
High Market transparency (interaction between buyer and seller is observable)
Frequent interaction (more next periods)
Stable demand

Entry barrier: Cost of producing that must be borne by firms seeking to enter a market but
that is not borne by firms already in the market.

Facilitating practices: Business strategies that facilitate collusion

Firm symmetry: Measure of similarity between firms, for instance, in their size or cost
structure.

Lowest price guarantee: Pricing strategy according to which a firm promises customers a
refund if they find the same product for a lower price at another firm.

Merger: Two or more firms agreeing to go forward as a single new firm rather than remain
separately owned and operated.

Most-favored-customer-clause: Pricing strategy according to which a customer pays a lower

price if the price decreases in the near future.

Case: Er was een lysine collusion. Ondanks dat de markt niet transparant was, werkte deze
collusion. Elk bedrijf gaf aan hoeveel ze verkochten en voor welke prijs. Collusive strategies
satisfy the trigger stability condition.

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Adverse selection: Instance in which an uninformed party tends to select the wrong kind of
trading partner.

Moral hazard: A party is more likely to take risks because the costs that could result will not
be borne by the party taking the risk.

Experience good: Good of which a consumer only observes the quality after consumption.

Incentive compatibility: property of a menu of contracts for which all customer types prefer
the item designed for them over the other items.

Information asymmetry: see chapter 1

Informative advertising: Advertising that informs a consumer about the characteristics of a

particular good or service (for search goods)

Persuasive advertising: Advertising aimed at convincing a consumer to purchase a particular

good or service (for experience goods)

Screening: A mechanism an uninformed party uses to separate good trading partners from
bad ones

Search good: Good for which the quality is observable before consumption

Signaling: Sending a credible signal to the uninformed party, for example by showing a
college degree.

Case: Credible sellers on Ebay disclose more pictures and text if their product is of high
quality. Studies have shown that one extra picture of a car increases the final price by
1.54%.. A sellers reputation on Ebay (because of reviews) also shows credibility.

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Credentials: Qualifications, degrees, and experience in past jobs that can serve as signaling
devices.

Job assessment: A formal procedure in which a candidate for a job may be asked to
participate when the firm is unsure about a candidates suitability for the job.

Probation: Interim period during which workers are hired on a fixed-term contract before
they receive tenure.

Case: Glass company Safelite switched from hourly wages to piece-rate play to increase
worker effort.

The company was able to screen out high quality workers from low quality workers
 The company attracts high quality workers, because their productivity is higher and
they will come to the company because they will get a higher wage for this.
Productivity rose by 44% as result of the higher incentives

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Bundling: Pricing strategy under which a firm offers a package of two or more products for a
single, usually discounted, price. 1) pure bundling: only bundle, no separate products. 2)
mixed bundling: bundle & separate products.

Damaged good: A good which is intentionally worsened by the producer in order to enhance
price discrimination.

First-degree price discrimination (personalized pricing): A pricing strategy according to

which a seller (potentially) charges each individual consumer a different price.

Second-degree price discrimination (menu pricing): A pricing strategy according to which a

seller implicitly price discriminates by offering consumers a menu of pricing schemes from
which they can choose.

Third-degree price discrimination (group pricing): A pricing strategy according to which a

seller (potentially) charges each individual consumer group a different price. Also referred to
as third-degree price discrimination.

Multi-part tariff: Price discrimination scheme in which the price of a good is composed of
multiple parts: a fixed fee as well as a number of per-unit charges.

Quality discrimination: Type of second-degree price discrimination in which a firm offers a

menu of different qualities for consumers to choose from.

Quantity discount: Price discrimination scheme under which the unit price of a good is
lower, the higher the quantity a consumer purchases.

Two-part tariff: Price discrimination scheme in which the price of a good is composed of two
parts: a fixed fee as well as a per-unit charge.

Case: Selling damaged goods can be welfare improving, since all consumers can benefit from
this type of price discrimination. There is profitability is there is a large enough difference in
the preferences of two consumer types, so that a damaged good can be appealing enough to
attract low value consumers, while at the same time will not tempt high value consumers to
switch and buy the damaged good instead of the original good. Another point is that
consumers may feel a sense of unfairness since producers actually incurred additional costs
in order to damage a good.
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First mover advantages:

Creating building overcapacity (meer voorraden inslaan)

Technological leadership >hierdoor minder kosten
Preemption of assets
Making higher switching costs

First mover disadvantages:

Second firm can freeride on the first firms innovation

Second firm can enter the market on the most advantageous time, for example when
the customer needs are less dynamic

Asset pre-emption: Ability of a first-mover to prevent rivals from acquiring scarce assets.

Hold-up problem: Problem that arises if two parties refrain from establishing an efficient
outcome because one of the parties fears being forced to accept disadvantageous terms
from the other party after having sunk a relationship-specific investment. Bv. Ik investeer in
grond, daarna other party wil dat grond niet gebruiken terwijl dat wel afgesproken was, dus
verlies voor mij.

Stackelberg model: Strategic game, in which the leader frim moves first and then the
follower firms move sequentially.

Case: Voordeel ECB als lender of last resort: Prevention from pushing countries into a self-
fulfilling debt crisis.

Nadeel ECB als lender of last resort: This will lead to inflation (buying bonds, money
supply etc.)

Oplossing: Liquidity provision should be performed by the ECB and the governance of
moral hazard by another independent institution.

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Advantages of vertical integration:

Avoiding double marginalization problems

Improves coordination between firms in different layers of the vertical chain
Solution to free-riding problems, for example a customer comes for information from
a shop owner and then buys the good for a lower price on internet. If vertically
integrated, then there is only 1 retailer
 Avoiding hold-up problems
Device to foreclose competitors (not supply to them, but only the downstream firm

Advantages of vertical separation / Disadvantages of vertical integration

Economies of scale are an advantage of vertical separation (the scale of the firm is
too small to justify producing it at the firm rather than buying it from an independent
supplier
Reducing influence costs. Supplier doesnt have to spend time to influence the
decisions made by top management.
If the firms are separated, researchers for example have stronger incentives to come
up with a groundbreaking invention.

If there is a contract, a firm is indifferent between buying and producing

Vertical restraints:

Franchise contracts
Resale-price maintenance
Agreements about quantity
Exclusive territories contract
Exclusive dealing contract

Economies of scale: Cost advantages that firms obtain due to size when the per-unit cost of
output is decreasing in scale

Exclusive dealing contract: Contract that specifies that a retailer is not allowed to sell
competing producers products.

Exclusive territories contract: Contract that specifies that a retailer obtains a monopoly
position in a well-defined region.

Foreclosure (of competitors): A business strategy that cuts competitors off from input
supplies or distribution channels.

Franchise contract: Contract under which a downstream firm pays an upstream firm for the
right to sell the upstream firms products.

Influence costs: Costs that arise if a party spends time and effort trying to affect the
decisions made by another party, e.g., the government or a firms top management.

Quantity agreement: Contractual agreement that specifies the quantity a firm must buy
from its supplier.
Resale-price maintenance: Contractual agreement under which the upstream firm specifies
the prices the downstream firm is allowed to charge to its customers.

Vertical restraints: Specific agreements or contracts that restrict parties in the vertical chain
as to what decisions they can take.

Upstream: raw materials etc.

Downstream: eindproduct

Case: The car market faces vertical constraints, such as exclusive territories contract. If the
car market would be liberated (so no vertical constraints), then consumer and producer
surplus, and thus welfare would rise.

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Predatory strategies:

Predatory pricing
Raise rivals costs (for example obtaining patents, so that another firm cant or
advertising aggressively)
Cut off potential rivals from essential facilities (bidding on mobile licenses to raise the
price)
Building excessive production capacity.

Accommodated entry: Situation in which it is not profitable for an incumbent to deter entry
by potential entrants.

Areeda-Turner test: Test designed to distinguish predatory prices from competitive ones.
The test considers prices to be predatory if they are lower than the short run marginal costs.

Blockaded entry: Situation in which an incumbent prevents entry by playing the same
strategy as it would without the existence of potential entrants.

Predation: Firm practice aimed at driving competitors out of the market.

Predatory pricing: A pricing strategy according to which a firm aims at driving competitors
out of the market.

Entry deterrence: increase capacity so that another firm wont enter.

Case: In 1995 the internet browser Netscape had a share of over 90%. Then Internet
Explorer came, which was installed with windows and 3 years later it already had 50% of the
shares. This bundling strategy of Microsoft was seen as predation. The opinions were divided
by top economists whether it was predation or not, but Microsoft was convicted for
predation, but then a settlement came. Nevertheless, it was too late for Netscape at that
time.