Question

In: Economics

Consider the following situations and determine whether they exhibit simultaneous consumption, network effects, x-inefficiency or rent-seeking...

Consider the following situations and determine whether they exhibit simultaneous consumption, network effects, x-inefficiency or rent-seeking behavior. Assume the businesses referenced function as monopolies.

(a) A pharmaceutical company discovers a vaccine for the common cold. The company puts a significant effort into tests to get it FDA-approved and into hiring lawyers to obtain a patent.

(b) An Internet service provider adds thousands of new customers.

(c) The head of a family-owned, major hotel chain decides to hire his wild, socialite niece to work as an executive of the company after her reality TV career ends.

(d) An online profile company helps college and high school students from across the country to connect with each other.


Solutions

Expert Solution

a) Rent-Seeking Behaviour
The company has developed a vaccine for the common cold and has been trying to get a patent for that. The patent means only this company will be allowed to sell it and in that case, the company will price it well above its cost. That will be like manipulating the society which is nothing but the rent-seeking behavior.

b) Network Effect
The network effect is the scenario where an addition to the user base of product or service actually improves the overall ecosystem of that product or service by creating a positive externality. Internet's rising user base means there will be more software, online services, and marketing opportunities.

c) X-inefficiency
This is the scenario where a firm operates in a less competitive market and it does not need to lower the cost or become an efficient player. The head of hotel chain has inducted his niece who has no related experience and not so competitive in management indicates an x-inefficiency scenario.

d) Simultaneous Consumption
An online profile company is connecting college and high school students through its portal which is a single product and does not incur any extra distribution cost while providing this service. This is the case of simultaneous consumption where a single product serves a large number of customers and there is no additional distribution cost.

Rahul Sunny answered 1 year ago
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