ECO 550 (Latest ) WK 9 Assignment – Dealing with Risk, Asymmetric Information, and Incentives

ECO 550 (Latest ) WK 9 Assignment – Dealing with Risk, Asymmetric Information, and Incentives

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Earlier in the quarter we discussed Southwest Airlines’ use of game theory to create new strategy. Continue to research Southwest Airlines or a company of your choice and write a six to eight (6–8) page paper in which you:

  1. Evaluate a company’s recent (within the last year) actions dealing with risk and uncertainty. Offer advice for improving risk management.
  2. Examine an adverse selection problem your company is facing and recommend how it should minimize its negative impact on transactions.
  3. Determine the ways your company is dealing with the moral hazard problem and suggest best practices used in the industry to deal with it.


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ECO 550 (Latest) Week 7 Case Study – Use of Game Theory to Maximize Profits

ECO 550 (Latest) Week 7 Case Study – Use of Game Theory to Maximize Profits

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The following article describes the unique boarding process used by Southwest Airlines.

Use this article and three (3) others to answer the following questions in 5–7 pages:

  1. Describe the change in Southwest Airlines’ boarding process.
  2. What was Southwest’s main goal introducing the early-bird check-in?
  3. Explain how Southwest Airlines used the game theory approach to increase its profits.
    1. What is the outcome of the game involving early-bird check-in?
    2. Identify what is the passengers’ dominant strategy.
    3. Determine why travelers face the Prisoner’s Dilemma with the early-bird check-in process.


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ECO 550 (Latest) All Discussions (WK 1 to WK 11)

ECO 550 (Latest) All Discussions (WK 1 to WK 11)

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WK 1 Discussion: Post Investment Hold-up

  • Probably the most important source of capital is human capital. For example, most medical doctors spend years learning to practice medicine. Doctors are willing to make large investments in their human capital because they expect to be compensated for doing so when they begin work. In Canada, the government nationalized the healthcare system and reduced doctor’s compensation. Is this a form of post-investment hold-up?

WK 2 Discussion: Economies of Scale and Scope

  • Describe activities in your organization or other organizations that result in economies of scale and economies of scope. Explain the economic benefits of these activities for the organization. Make sure you explain each of the concepts. As you consider the difference between economies of scale and scope consider the merger of AT & T and Time Warner versus the merger of Sherwin Williams and Valspar. Which of these is more likely a merger about scope and which is more likely a merger about scale?

Week 3 Discussion: Monopolies and New Entrants

  • Snack food vendors and beer distributors earn some monopoly profits in their local markets but see them slowly erode from various new substitutes. When California voted on legalizing marijuana, which side would you think that California beer distributors were on? What about snack food vendors? Why? Make sure you think about and define complements and substitutes as you consider these questions. As you think about this question consider what do you really know. Think about the difference between common knowledge, mostly mere rumor.  Consider what is mere a conjecture as to complements and substitutes.  What is mere correlation versus causation?  Finally when you are doing research, are you using an objective source or an advocacy source?

Week 4 Discussion:

  • Examine a highly competitive industry (airlines, video games, fast food, soft drinks, your own field etc.) using the Five Forces. Is this an attractive industry? Why or why not?

Week 5 Discussion: Price Discrimination

  • Does your company use price discrimination? Explain how the practice works in direct and indirect price discrimination and estimate the effect of price discrimination on profits compared to charging a flat price.
  • If your company doesn’t currently use price discrimination, are there opportunities to use price discrimination technique? How would you design the scheme?

WK 6 Discussion: Sequential-Move Game Strategy

  • In the text, we considered a sequential-move game in which an entrant was considering entering an industry in competition with an incumbent firm (Figure 15-1). Consider now that the entrant, if fought, has the possibility of withdrawing from the industry (at a loss of 1 for the entrant and a gain of 8 for the incumbent), or staying (at a loss of 5 for each player). What is the equilibrium of this game? Discuss if the entrant is better off with or without the ability to withdraw.

Week 7 Discussion: Type I and II Decision Error Cost

  • The HR department is trying to fill a vacant position for a job with a small talent pool. Valid applications arrive every week or so, and the applicants all seem to bring different levels of expertise. For each applicant, the HR manager gathers information by trying to verify various claims on resumes, but some doubt about fit always lingers when a decision to hire or not is to be made.
  1. What are the Type I and II decision error costs?
  2. Which decision error is more likely to be discovered by the CEO?
  3. How does this affect the HR manager’s hiring decisions?

Week 8 Discussion: Adverse Selection and Moral Hazard

  • Many police officer positions require the applicant to have a college degree even though the tasks of a police officer rarely call upon college course material. Why don’t police departments increase their applicant pool by dropping this requirement?

Week 9 Discussion: Working In the Firm’s Best Interest

  • Each year, public schools are rewarded with bigger budgets for achieving a rating of “excellent” or  “recommended”  and are punished for rating ” needs improvement”.These ratings are based on meeting thresholds on a broad set of measures such as attendance rates, graduation rates, standardized test scores, SAT scores, and so on. Discuss the incentives for school principals (who are the agents, in this case) under this scheme and how you might improve them.

Week 10 Discussion: Loyalty Payments

  • Intel made large loyalty payments to HP in exchange for HP buying most of their chips from Intel instead of rival AMD. AMD sued Intel under the antitrust laws, and Intel settled the case by paying $1.25 billion to AMD.
  1. What incentive conflict was being controlled by these loyalty payments?
  2. What advice did Intel ignore when they adopted this practice?
  3. Why did they ignore it?

Week 11 Discussion:

  • Which of these concepts would have been really helpful to know in the past? What would it have changed?
  1. Use benefit-cost analysis to evaluate decisions.
  2. Motivate employees to work in the firm’s best interests.
  3. Make decisions in uncertain environments.