Bill Z. Yang

Fixed and Sunk Costs Revisited

Abstract The authors attempt to clarify the concepts of, and the link between, fixed costs and sunk costs. They argue that the root for possible confusion between fixed costs and sunk costs is the inconsistency in defining the term fixed costs. They define fixed costs uniformly as the costs that are independent of the level of output and suggest that instructors refer to the part of fixed costs that are irrevocably committed as sunk costs. Under these definitions, the statement “there are no long-run fixed costs” is incorrect. Instructors should teach students that in the long run there are no sunk costs, although there may easily be fixed costs.

Mixed-strategy equilibria in a quality differentiation model

Abstract This paper shows that the standard quality-differentiation duopoly model has, in addition to the two well-known pure-strategy equilibria of maximum quality differentiation, an infinity of mixed-strategy equilibria in which firms choose mixed strategies in the first-stage quality game. In these equilibria, maximum quality differentiation does not occur due to coordination failure. Total expected consumer surplus is the same at all mixed-strategy equilibria and is higher than that under either pure-strategy equilibrium. Total expected industry profit is the same at all mixed-strategy equilibria and is lower than that under either pure-strategy equilibrium.

A Pedagogical Note on Risk Framing

This article presents several classroom games that help illustrate the effect of risk framing on choices under uncertainty. These games are presented in the context of Kahneman and Tverskys prospect theory that is an alternative to the traditional expected utility theory. Expected utility theory is a prescriptive model of decision making that explains how people should react to risk, while prospect theory is a descriptive model that explains how people actually do react to risk. These classroom games can be used in introductory risk management courses, insurance courses, and financial risk management courses to help students to understand the effect of context on choices made under uncertainty. Although results from actual classroom experiments are included, these results are not meant to be indicative of normal results but are rather illustrative of the type of results that may arise when alternative framing contexts are used.

A Note on Technology Transfer by a Monopoly

This paper studies the incentive for a monopoly to license its technology. It shows that a patent–holding monopoly may be willing to license its proprietary technology to a potential competitor when such a technology transfer has a market–expanding effect.

On the Treatment of Fixed and Sunk Costs in Principles Textbooks: A Comment and a Reply

The authors reply to Colanders comment in this issue on their earlier article (Wang and Yang 2001). They emphasize the necessity to define fixed cost differently than sunk cost because fixed vs. variable costs and sunk vs. avoidable costs classify the total costs from two different perspectives. They show that it is logically incorrect and inconsistent if fixed cost is a synonym of sunk cost. To avoid confusion in pedagogy and education of economics, they argue that fixed cost should be correctly defined in principles textbooks, rather than corrected later at more advanced levels.