Ps4 - Problem set PDF

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1. Appropriable quasi-rents a) The quasi-rent is the difference between the value of the asset in the transaction for which it is specific and its value in the next best transaction. It does not include the sunk cost so we interpret 5000 as the knowledge of Jordina and not as a cost. Quasi rent= value of the asset - value in its next best use Quasi rent= 5000-300=4700 euros b) They are dealing with the specific asset of Human specificity, due to the fact that this sophisticated database is only used by SKY, therefore having to take the course and incur the cost is a human specific asset. The knowledge acquired is only valuable inside that firm. c) Two different strategies that would reduce the quasi-rent could be could be hiring someone whose cost is higher to teach her new knowledges to be capable to work in other enterprises. The other variation could be taking online courses or using books worth more, thus the quasi-rent will be lower.

2. Bargaining and specific assets a) An asset is specific to a transaction if part of its value depends on it being used in that transaction rather than another one. In this case there are specific assets: -Human asset specificity: A human specific asset is found when people are trained in something very specific. Thus, human capital is only valuable within a specific firm or relationship. In this business we can find this type of asset on the investment of learning how to cook the preferred high-quality ingredients. -Physical asset specificity: A physical specific asset is the design of a product that makes it specific to a certain use. In this case we can find it on the customized 4x4 SVU, specially painted and adapted to move the clients to places with a difficult access. If they decide not to use it, no one else would like to buy it. b) The optimal level of G’s investment is found optimizing the function of the benefit (revenue - total cost), that is to say, doing the derivative of After getting the derivative,

, we equal it to 0 and it gives us the value

that optimizes it, i=1.Therefore G would have to invest a quantity of 1. Moreover, if there are not any exchange or transaction costs it would not matter who owns the truck, because none of them would have to pay transaction costs to the other.

c) i) we have to calculate the quasi rents if g or h has the property of the car. If Grossman own the SUV, to calculate the quasi-rent we have to do QRg= ( ) -1 . Being 1 the Qg, the outside value of H (when H owns the car). On this formula we see that the QRg depends on the investment and the value of a. If H owns the car, we do: H-Qh, being 1 the Qh that is earned by H when she owns the vehicle. On the other hand Qh is what he earns when G owns the SUV. As we can see it does matter who owns the property of the car. ii) The ownership of the SUV should be on G, since she earns more money than H.Moreover, if they decide to spit in half the quasi rents, they would both gain more money since her quasi rent is larger 3. Low and high quality services a) If the seller provides low quality in the first period, then the total surplus of the economy generated by the transaction of the service would be the consumers surplus and the seller surplus, that is to say: (U_L-p)+(p-C_l). As the price is larger than the cost of providing low quality, there will be only one transaction in the first period as the consumer will choose not to repeat this comercial relation. However, if the seller commits himself to provide high quality, the total surplus would be the sum of the consumer and seller’s surplus. The consumer gains utility and so does the seller when the price is higher than the cost of production so there will be trade in both of the periods and the exchange will be produced indefinitely as there would be a trust relationship between the two sides. b) The seller should be able to sell at a price that is larger than the cost of providing the high-quality service. On the other hand the cost of behaving opportunistic on one period should be smaller than the benefit of trading during two periods. c) If the relation is supposed to last only two periods, the seller could act opportunistic in the second period as there will not be incentives to give the better quality, that is to say, selling a low-quality service for the price of one with high-quality. However, this incentives to behave opportunistic could affect the reputation of the seller for future transaction to occur.

4. High-end quality products a) A company is said to be vertically integrated when it owns successive stages of the production process of a product. Luxury firms tend to use vertical organization because it is a way of ensuring they will get from suppliers the good quality resources and intermediate

product they need in order to fulfill all its demand. Another reason could be related to marketing to make the customer feel that their products are unique and better from others. It also allows to get better on the production in order to use competitive advantage. There could be a problem of specific assets as luxury brands target very specific customer groups, we would be talking about dedicated because it satisfies the demand of a limited number of customers. Another factor taken into account could be the cost of outsourcing against the cost of vertical integration. b) Gucci or Velasca uses more a vertical organization, Inditex and other low-price brands uses outsourcing to make their products. Their clothes are made in factories in underdeveloped countries. Some differences in quality between different brands could be related to outsourcing, it is more probable there are defects on the outputs of these firms. In order to develop customer trust each of this brands uses different strategies:luxury brands focuses on the image of the product and its quality, making it unique and exclusive and not selling it on every store to keep this image of exclusivity. On the other hand brands like inditex focuses on keeping low prices and the best quality they can have trying not to increase that price. c) I would recommend them to choose a distributor that has good prestige in order to keep the image of the brand and also a distributor who can be trusted, meaning that both enterprises have something in common like common shareholders. d) One of the reasons luxury products exist is that people want to be able differentiate themselves from the rest of people. Wearing luxury brands, you are signaling to other people your social status, being able to afford high prices,and also the taste for exclusive thing which allow you to be different and to show the world, even when they do not know anything about you. Sometimes the signal received could be wrong...