Reference no: EM133203213
Assignment:
1 True/False questions
Determine if the statements are true or false. Justify your answer.
1. Personalized pricing is the modern term that is equivalent to first degree price discrimination according to the classification of Pigou (1920).
2. A case the illustrates the discrepancies in approach and standards between the Unites States and the European Union antitrust competition law is the Virgin/British Airways cases in the year 2000.
3. Uniform pricing across different international geographic locations is always dominated by local geographic group price discrimination.
4. It is fair to state that over the last couple of decades European Competiton law and practice has moved farther from the antitrust approach of the United States.
5. Menu pricing is the modern term that is equivalent to third degree price discrimination according to the classification of Pigou (1920).
6. A partial cartel formation can be stable in a single market where firms compete ‡ la Cournot with suffciently dfferentiated products.
7. Two factors that explains the divergent approaches between competition policy in the United States (U.S.) and the European Union (EU) are: i) the historical development of the business environment in both geographic areas and ii) the importance of economic analysis which was more relevant in the E.U. than in the U.S.
8. A horizontal merger between two firms is basically the same as a partial cartel formation between the two firms.
9. Main social issue for a horizontal merger is when it is profitable and reduces the welfare of society.
10. Consider an industry in which firms compete a la Cournot with homogenous products. In a sequential cartel formation process less than 80% of the firms in the industry form a cartel while the complement remain independent.
Problems
11. Regulation of a monopolist that can choose between uniform and personalized pricing. Consider a market that has a linear demand function Q = 95 p. The monopolist has a cost function C (Q) = 5Q.
a. Find the price (pm) and optimal amount of output (Qm) as well as profits (Πm) the monopolist would get if it cannot establish personalized pricing. Compute the consumer surplus and deadweight loss for this scenario.
b. Consider now a monopolist that can set up personalized pricing assuming it has all the information to do this. Find the price schedule, the amount of output it produces and the profits ( p ) it attains. Compare this situation with the previous scenario.
c. A regulator faces the issue of regulating the monopolist in order to maximize consumer surpluses.
It sets up the following policy: if the monopolist charges a uniform price for all units sold the monopolist pays 50% of its profits while if the monopolist engages in personalized pricing it has to pay x% of its profits.
Find the level of x that makes the monopolist indifferent between a uniform price and a personalized price schedule. Suppose that what is collected as corporate income tax is redistributed back to consumers of the market as consumer surplus. Explain.
d. Suppose the regulator offers the scheme as in c) to the monopolist given the value of x% found previously such that the monopolist would prefer strictly to implement personalized pricing. Find the amount of corporate income tax collected by the policy and compare it with the consumer surplus in part a). Which scenario would generate the greatest consumer surplus? Discuss the advantage or disadvantage of this policy. Explain.
12. Geographical and uniform pricing. "Vitamin Strong" has the monopoly on the production of vitamin C. It faces geographically separated markets, denoted A and B. The demand on these two markets are respectively QA = 1 pA and QB = 0:5 pB. The transport and production costs are zero for simplicity.
a. Assume that the firm chooses to set a uniform price across the two markets. Determine the optimal uniform price. What are the quantities sold on the two markets at this price? Explain.
b. Assume the monopolist uses local group pricing (third degree price discrimination). What are the prices and ouput levels for the two markets? Explain.
c. Calculate consumer surplus for both markets individually and profits under a uniform price and local geographic prices. Compare the two situations and comment on the result. Would the consumers of both markets prefer uniform pricing over local pricing (price discrimination)? Explain.
13. Collusion and quantity competition ‡ la Cournot. Consider the following market in which two firms compete in quantities ‡ la Cournot. The firms are symmetric and produce with a marginal cost of 20. The inverse demand function is p = 260 q where q = q1 + q2 2 [0; 260]. Suppose that the two firms compete in this market for an infinite number of periods where the common discount factor for each firm is 2 (0; 1).
a. Find the equilibrium quantities under Cournot competition as well as the quantity that a monopolist would produce. Calculate the equilibrium profits under the Cournot duopoly and the monopoly.
b. The firms would like to form a cartel by restricting the amount of production for each firm such that it would produce the monopoly level. What grim trigger strategy can each firm follow that could allow the cartel to form? Explain.
c. For which values of is the tacit collusion sustainable using the strategies of part b)? Justify your answer. (Hint: use the best response function of a Cournot competitor for a deviation of the other firm to and the optimal deviation. Compute the profits for each situation and use equation 14.2 on page 360)
14. Cournot mergers and synergies. Consider a homogenous-product Cournot oligopoly with 4 firms. Suppose that the inverse demand function is P (q) = 64 q where q = i=1Σ4 qi and q-i = q-qi .
a. Suppose that firms incur a constant marginal cost c = 4. Characterize the Nash equilibrium of the game in which all firms simultaneously choose quantity.
b. Suppose that firms 1 and 2 consider merging and that there are synergies leading to a lower marginal cost for the merged organization of cm < c = 4. Characterize the Nash equilibrium. At which level the two firms are indiferent whether to merge or not? Explain.
c. At the Nash equilibrium would non merged firms 3 and 4 prefer the merger between firms 1 and 2? Would the merger generate a negative or a positive external effect for non merged firms? Explain.
d. At which level of cm would the merger be consumer surplus-neutral, if at all? Is it possible that the merger is at the same time profitable for the firms and consumers of that industry? Would a regulator block the merger based on your result? Explain..
Completion questions
15. If a firm can observe a buyers characteristics then it can charge different prices as a function of these characteristics. This type of price discrimination is referred to as ___________ in Pigous taxonomy or as _________ in Shapiro and Varians.
a. third-degree price discrimination; group pricing
b. second-degree price discrimination; group pricing
c. third-degree price discrimination; personalized pricing
d. first-degree price discrimination; personalized pricing
16. In a monopoly setting _________ allows the monopolist to extract more surplus from each consumer relative to the benchmark ____________.
a. group pricing; first degree price discrimination
b. group pricing; duopoly setting
c. personalized pricing; first degree price discrimination
d. personalized and group pricing; monopoly setting with a unique price
17. In a competitive duopoly setting group pricing allows firms to extract ________ from each consumer while at the same time it ___________. When the quality of information is sufficiently large, the former e§ect _________ the latter.
a. more surplus; decreases price competition; dominates
b. less surplus; increases price competition; dominated by
c. more surplus; exacerbates price competiton; dominates
d. less surplus; exacerbates price competiton; dominated by
18. In a monopolist group pricing setting, the monopolist optimally charges ________ with a ________ elasticity of demand.
a. more in market segments; lower
b. less in market segments; higher
c. more in market segments; higher
d. less in market segments; lower
19. Competiton policy can be defined broadly as "the set of _________ which ensure that ____________ is not restricted in such a way as to ______ economic welfare".
a. policies and laws; competition in the marketplace; reduce
b. behaviours; competition in the marketplace; reduce
c. policies and laws; competition in the marketplace; increase
d. behaviours; monopolist pricing in the marketplace; increase
20. Antitrust legislation in the United States is contained in the ________Act of 1890, _________ of 1914 and the ___________ Act of 1914.
a. Clayton Antitrust; Sherman Act; Federal Trade
b. Sherman Antitrust; Clayton Act; Federal Trade Commission
c. Federal Trade Antitrust; Sherman Act; Clayton
d. Shapiro Antitrust; Varian Antitrust; Hotelling Commission
Multiple choice questions
21. A famous case of cartel formation is:
a. Vitamin cartel for the sale of bulk vitamins.
b. The Organization of the Petroleum Exporting Countries.
c. a and b are correct.
d. None of the other answers are correct.
22. A cartel in an industry:
a. eliminates the competition that was existing between firms.
b. leads to the coordination of the reduction in output supplied to the market.
c. leads to the coordination of the increase in prices in the market.
d. all of the above answers are correct.
23. A cartel can be formed as a tacit collusion when:
a. they interact strategically in an infinite horizon.
b. the discount factor of each firm is suffciently large.
c. Örms strategically act in accordance with a grim trigger strategy.
d. all of the above are correct.
24. The 80% rule applies:
a. for a partial cartel formation in a sequential Cournot industry with homogenous goods.
b. in horizontal mergers of symmetric firms in Cournot industries that are highly concentrated.
c. a and b are correct.
d. none of the other answers are correct.
25. The profitability of a merger depends:
a. on internalizing previous rivalry between the merged firms.
b. on the reaction of outside forms to the merger of the firms.
c. a and b are correct answers.
d. none of the other answers are correct.