Managerial Economics Jack Wu. Externalities one party directly conveys benefit or cost to others ...

Managerial EconomicsJack Wu

Externalitiesone party directly conveys benefit or cost to

others� positive� negative

benchmark: collective marginal benefit = collective marginal cost

Saks: Fifth Avenue vs Mall New York, NY: 611 Fifth Avenue Stamford, CT: Town Center Mall Chevy Chase, MD: 5555 Wisconsin Ave McClean, VA: Tysons Galleria

1 5 9 10

group marginal benefit

Sak’s marginal benefit

florist’s marginalbenefit

profit gain fromadditional investment

marginalcost

shoe store’smarginal benefit

Hundred thousand dollars of investment

inal benefit/

(Hundre

Sak’s Positive Externalities

5 7.5 9 10

marginal benefit

group marginal cost

Sol’s marginal cost

Sak’s marginal cost

Hundred thousand dollars of investment

inal benefit/

Sak’s Negative Externalities

profit gain fromreducing investment

Silicon Valley Stanford University Xerox Palo Alto Research Center

Hewlett-Packard Cisco Systems 3Com Yahoo!

• London: The City• New York: Wall Street• Hong Kong: Central• Singapore: Raffles Place

Financial Centers

Resolving ExternalitiesEconomic inefficiency opportunity for profit merger collective action

Intel InsideCooperative advertising resolves positive externality from one retailer to other retailers

Network ExternalityExternality where benefit/cost depends on total number in network English language Internet email international telephone service

Network Effectbenefit/cost depends on total number in network through market, not directly conveyed resolved by producer or service provider

Critical Massdefinition: number of

users at which demand becomes positive

Network Effects: Demand Elasticity

highly elastic around tipping pointhighly inelastic at low demand levels

Public GoodNon-rival consumption -- one person’s increase does not reduce quantity to others

extreme economy of scale

TelevisionDistinguishcontentdelivery

private good public goodcongestible

rival consumption non-rival consumption

Rivalness

vertical sum of marginal benefits

marginal cost

Minutes of fireworks

inal benefit/

Efficiency in Public Good

ExcludabilityProvider can exclude particular consumer law technology

Excludability: Law patent – product or process copyright – artistic expression

Intellectual Propertytrade-offbenefit from usageincentive for future creation

DiscussionLet 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.

Managerial Economics Jack Wu. Externalities one party directly conveys benefit or cost to others ...

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