Moas Langos (PAFM)

Question 1

Ramsey Pricing

Answer 1

-The price that maximizes total social benefits subject to the requirement that profits cannot be negative.

The price P1 is a compromise price known as a Ramsey price.

-When the regulators set P = LRAC for the monopolist. Price is a compromise price. Not as low as social optimal but not as high as profit maximization (as the monopolist set before the regulation). Investor does still want to invest in the market.

Question 2

Capture theory

Answer 2

-A theory that regulated firms gain control over the regulatory commissions that are supposed to be their regulators.

-Regulators are influenced by companies (lobbying).

Question 3

The theory of ”Creative destruction”

Answer 3

Explenation for dummies = Is about how innovation and competition constantly shake things up in the business world. The old gives way to the new, and this cycle keeps our economy dynamic and evolving.

-The theory of Joseph Schumpeter that capitalism moves forward in major technological leaps that destroy the old economic order and create a new order.

-Capitalism evolves by destroying companies/industries that uses old technologies when new one as been discovered.

Question 4

Patent System pros (+)

Answer 4

1. Patents increase the incentives to invest in R&D by granting contestable monopoly power.
2. Patents may result in the optimal level of investment in R&D.
3. Patent protection may be necessary for innovation to occur, but there should be a trade-off between the innovation’s time of development and patent life.

Question 5

Patent Systems cons -

Answer 5

-It is found that patents are not effective in appropriating returns from investments in innovation.

-Nevertheless, patents can nowadays be used to secure credit (patent pledge-ability).

Patent race game?

Question 6

Patent race game

Answer 6

A game in which a group of firms attempts to be the first to obtain a patent. Patent races typically result in too many resources being spent to obtain the patent and a reduction in economic welfare.

Question 7

Monopol Cournot-Nash Equilibrium Quantities

Answer 7

q* = (a-c) / 2b

Question 8

Monopol Cournot-Nash Equilibrium Price

Answer 8

P* = (a+c) / 2

Question 9

Monopol Cournot-Nash Equilibrium Profit

Answer 9

(a-c)^2 / 4b

Question 10

Cournot-Nash Equilibrium (two firms)

Answer 10

q1* = [(a - ci) + N(cbar - ci)] / (N+1)b

Question 11

Grim Trigger Strategy (trigger price strategy)

Answer 11

-This strategy is referred to as a trigger price strategy because even a single deviation from cooperation ends cooperation forever. Because of the swift and aggressive punishment associated with defecting in this game, this strategy is also often called the grim strategy.

-A single deviation from cooperation ends cooperation forever.

-If I see you cheat than I will punish you with playing Nash Cournot

Question 12

Deviate

Answer 12

Break the corporation, “cheat”.

Question 13

Entry barriers

Answer 13

Limit pricing = Strategy of charging a price below the short‐run profit‐maximizing price to deter entry (long term plan).

Explenation for dummies = Limit pricing is about keeping competitors at bay by making it tough for them to enter

Predator pricing = Strategy of charging a very low price with the objective of driving a competitor(s) out of the market (short term plan).

Predatory pricing assumes that a monopolist maximizes profit until entry occurs, and after entry, the monopolist expands output aggressively and cuts price, so that the entrant sustains an economic loss, even if this requires the monopolist to sustain an
economic loss as well.

Explenation for dummies = Predatory pricing is about trying to knock out competitors by selling at a loss until they give up.

Entry barriers:
-Economies of scale
-Absolute cost advantages
-Capital costs
-Product differentiation
-Advertising
-Sunk cost

Question 14

Bertrand Price Equlibrium Formula

Answer 14

P = a / 2b - c
P1 = P2 = P(market)

Question 15

Bertrand Profit Equilibrium Formula (differentiated products) - One firm

Answer 15

(ba)^2 / (2b-c)^2

Question 16

Tit for tat strategy

Answer 16

-Collude in the first period and then play the same strategy as the other player in the subsequent periods.

-Start by cooperating, and then cooperate if the other did last period, but defect if the other defected last period.

-A strategy in a prisoner’s dilemma game in which the tit‐for‐tat player starts off in the first round cooperating and in every subsequent round N > 1, adopts his/her opponent’s strategy in the previous round (i.e., the opponent’s strategy in round N - 1).

Question 17

Mixed Strategy

Answer 17

Probability based

Question 18

Institutional theory

Answer 18

-Captures the idea that organizations are influenced by their institutional context, i.e. widespread social understandings, rules, norms, and ideologies that are prevalent in wider society.

-Organizations are expected to behave rationally by abiding to prescriptions of appropriate conduct to gain legitimacy. (Trying to be more legitimize)

Question 19

Isomorphism

Answer 19

Isomorphism is the process towards homogeneity

Question 20

Institutional logic

Answer 20

-Beliefs and rules that structure our cognition and guide our decision-making in an organizational field.

-Steps away for institutional theory (isomorphism) and involve beliefs as culture and so on.

Structure and Agency is two concepts for business logic.

A field, and an organization, might contain multiple, competing ideas

-Which opens up for agency

Question 21

Change framework by Burns & Scapens, 2000 - what does it contain

Answer 21

Based on Rules & routines.
Contains:

1. Encoding

2. Enacting

3. Reproduction

4. Institutionalisation (make something normal)

Question 22

What is Rules & Routines? (change framework by Burns & Scapens, 2000)

Answer 22

Rules = The formally recognized way in which things should be done.

Routines = An established way in which things are actually done.
When rules and routines strongly overlap, the organization is in a
stable mode

Decoupling (in a change perspective) = separating rules and routines (protecting the core)

Question 23

Evolutionary and Revolutionary (Change framework by Burns & Scapens, 2000)

Answer 23

Revolutionary change breaks with current institutions, a major change in accounting system may still be evolutionary, if it does challenge our institutions drastically short term.

(Evolutionary - det växer fram, skapas).

Question 24

Formal / Informal (change framework by Burns & Scapens, 2000)

Answer 24

Formal change = Based on organizational power.

Informal change = Comes from enactment and reproduction over time.

Question 25

Regressive / Progressive (change framework by Burns & Scapens, 2000)

Answer 25

Regressive changes = Works to enforce current power structures, hindering development.

Progressive changes = Points out routes of development that makes new people come in power.

Question 26

The Structure-Conduct-Performance (SCP) Approach

Answer 26

Explenation for dummies = SCP is more worried about big companies having too much power and wants rules to keep them in check.

Hypothesizes a direct (cause-effect) relationship between market structure, market conduct and market performance.

Question 27

The Chicago School Approach

Answer 27

Explenation for dummies = Chicago School says, “Let the companies compete, and everything will be fine.”

Relies heavily on price theory models to make predictions about expected conduct and performance. (E.g., Cost-based, demand-based, or competition-based pricing)

Chicago School of economics (from the book) = A school of industrial organization economists who believe that price theory models should be the primary tool for analyzing markets. Followers of the Chicago School rely heavily on price theory models to make predictions about expected conduct and performance and to analyze economic welfare.

Question 28

New Industrial Organization

Answer 28

Uses game theory to model the behavior of firms within duopoly and oligopoly markets.

Question 29

Information uncertainty

Answer 29

Preperers should know more than the users in financial reporting. Thus, information asymmetry could occur.

Question 30

Financial Accounting Theory

Answer 30

“What we have done until now”.

Question 31

Positivism

Answer 31

Positivists are empiricists.

Question 32

Normative and prescriptive research

Answer 32

“To prescribe, using logic reasoning, how and/or why something should be accounted for in a certain way”

Question 33

Descriptive or positive research

Answer 33

“How something is accounted for and/or why something is accounted for in a certain way”

Question 34

Positive accounting theory (PAT)
(Watts & Zimmerman, 1986)

Answer 34

Wants to enhance the scientific approach for accounting (descriptive). “What is” are more important than “what ought to be”. Accounting theory must remain value-free in order to be scientific.

PAT believes that everyone is utility maximizers.

Question 35

Solution for asymmetric information

Answer 35

A strategy known as signaling (Michael Spence- nobel prize same year as Lemon Theory): Signaling theory is useful for describing behavior when two parties (individuals or organizations) have access to different information. Typically, one party, the sender, must choose whether and how to communicate (or signal) that information, and the other party, the receiver, must choose how to interpret the signal.

Question 36

Weak form of efficiency

Answer 36

“You cannot study past or current stock prices in order to predict future prices, since price changes are independent.”

Efficiency implies that the current share price incorporates all historical data.

Question 37

Semi-strong efficiency

Answer 37

Current and past events can give signal about the future. Good investors could use this for their advantage and get abnormal returns.

Assume prices reflect all information (publicly known).

Question 38

Strong form of efficiency

Answer 38

If markets are characterized by strong efficiency, all information is reflected in stock prices. You cannot win over the market due to every piece of information are already calculated into the share price (no abnormal returns).

Share prices reflect all the prices (public and private).

Question 39

Product proliferation

Answer 39

Product proliferation occurs when organizations market many variations of the same products. This can be done through different colour combinations, product sizes and different product uses. This produces diversity for the firm as it is able to capture its sizable portion of the market.

Question 40

Monopoly vs Perfect Competition

Answer 40

Perfect Competition = Long-run profits = 0


Monopoly = High profit, low social welfare.


Inovations will be more attractive in a monopoly market but there will be low incentives in the perfect competition market because everyone will copy it.

Question 41

Double Marginalization

Answer 41

Double marginalization is a vertical externality that occurs when two firms with market power (i.e., not in a situation of perfect competition), at different vertical levels in the same supply chain, apply a mark-up to their prices.

As a result, the final price for the consumer is higher than it would be if the two firms coordinated their pricing strategies.

Question 42

Limit Pricing (if a monopolist wants to deter enter for a new competitor)

Answer 42

Set P = the potential entrants MC. E.g., MC = 40–>
40 = 780-2Q —>

This will result in the output needed for deter enter - Multiply the output with the difference in both MC (MC-Entrant minus MC-Monopolist) to see what the cost is for the monopolist for deter enter.

Question 43

According to the theory of creative destruction, the emphasis on the efficiency of competition and prices equal to marginal costs is not necessarily in the best interest of society. Explain why? (EXAM question)

Answer 43

The theory of creative destruction is instead of static efficiency concerned with dynamic efficiency, i.e. the optimal rate of technological development. The so-called static efficiency involves P = MC, which is true for perfect competition. But this market structure would not allow for firms to make any profits, hence they would not have any resources to invest in R&D and technological development would not happen. Instead, according to Schumpeter and the theory of creative destruction, the best market structure would be monopolised markets which has a lot of resources that can be invested into R&D.

Question 44

Optimal time for technological development

Answer 44

Marginal benefits = Marginal Cost of development (R&D)

Question 45

Social optimal price? (In the chapter involving efficiency)

Answer 45

MC = P

Question 46

Bounded Rationality

Answer 46

-Bounded rationality means that we cannot write a contract ahead of time that will cover every possible situation, since we cannot predict the future = Contracts are incomplete.
-Transaction costs.

-The bounded rationality opens up for opportunistic behaviour inside the firm by manager’s, who can exploit the bounded rationality and thus use it to maximize his/her own utility, rather than the firm’s utility. In order to mitigate such actions, there is a demand for monitoring, to align the interest of the manager with the interest of the owners. This can for example be done with compensation contracts, to tie the performance of the firm with the manager’s bonuses. The result of bounded rationality is often profit satisfaction instead of
profit maximization.

Question 47

Two elements of isomorphism

Answer 47

Competitive isomorphism and Institutional isomorphism.

Question 48

Three elements of institutional isomorphism

Answer 48

Coercive = Is when e.g. a company have to make changes is their working environment because of new rules, regulations or enforcements from the government for example.

Mimetic = Is the process when firms imitate the structures and practices of competitors and their firms. (almost impossible to separate from normative.)

Normative = Have a lot to do with norms. Is the process when organizations adjust to social values and norms.

Question 49

Asymmetric information

Answer 49

A situation in which some players in a game know different information than other players.

Question 50

Adverse selection

Answer 50

Explenation for dummies = Hidden information before a deal (like not knowing if the car is a lemon).

Refers to any situation where products of different qualities are sold at the same price because buyers or sellers do not have sufficient information to determine the true quality of the products.

A situation in which less desirable buyers or sellers are more likely to engage in a market exchange than more desirable buyers or sellers because buyers or sellers do not have sufficient information to determine the true quality of the product being exchanged.

Question 51

Moral hazard

Answer 51

Occurs after a transaction has taken place. In financial markets, moral hazard is the risk that a borrower, having received funds, may make decisions that decrease the probability that the loan will be repaid.

For example, a borrower may take on riskier projects or monitor activities less carefully.

Question 52

Lemon model

Answer 52

A model developed by George Akerlof in 1970 that explains why asymmetric information can result in inefficient outcomes under a wide variety of market circumstances. The basic model explains why in a used car market with both good and bad quality used cars, the mere existence of the bad cars, that is, the lemons, drives the good cars out of the market.

Sellers know the quality of each car, whereas buyers only know that there are better (“peaches”) and poorer (“lemons”) cars on the market. 


Question 53

What are the most salient (prominent) determinants of accounting quality? In what way do they affect quality? Explain/Elaborate.

(Hint: Chapter 1 of the reading material from Financial Accounting Theory illustrates the determinants in a model. Feel free to use the model in your explanation.)

Answer 53

High accounting quality is today of highest importance for example;
Stakeholders, corporate governance, regulators and enforces.

Question 54

Stackelberg (Different costs)

Answer 54

Leader: a-2c’leader+c(follower) / 2b = q*

Follower: a-3c’follower + 2c(leader) / 4b = q*

-Both firms choose quantities but they do so sequentially rather than simultaneously. 


-The firm that moves first and chooses its output level, first, is the leader firm. The firm that moves second is the follower firm. 


-The sequentially makes the game dynamic. 


-The firms interact only once.

Question 55

Social theory

Answer 55

“Social theory refers to ideas, arguments, hypotheses, thought experiments, and explanatory speculations about how and why human societies or elements or structures of such societies come to be formed, change, and develop over time or disappear. “

Question 56

The Efficient Market Hypothesis (EMH)


Answer 56

States that prices in the capital market fully incorporate all information in the market.

Question 57

According to the theory of creative destruction, the emphasis on the efficiency of competition and prices equal to marginal costs is not necessarily in the best interest of society. Explain why?

Answer 57

Explenation for dummies = The theory suggests that while competition and lower prices can be good for consumers, they should be balanced with other important factors, such as innovation, quality, job security, and sustainability, to ensure the best interests of society as a whole.