Regulation and Antitrust Policy (Econ 180) Drake University, Spring 2009 William M. Boal

### Version A

I. Multiple Choice

(1)c. (2)d. (3)b. (4)a. (5)d. (6)d. (7)d. (8)c. (9)b. (10)d. (11)b. (12)b.

II. Problems

(1) [Monopoly, markup formula, Lerner index: 4 pts]

1. \$60.
2. L = 2/3 = 0.667.

1. structure.
2. conduct.
3. performance.
4. structure.
5. conduct.

(3) [Collusion/joint profit maximization: 16 pts]

1. MR = 16 - 2Q.
2. plot MR curve: price intercept = \$16, slope = \$2/thousand, quantity intercept = 8 thousand.
3. \$10.
4. 6 thousand.
5. \$12 thousand.
6. \$6.
7. 10 thousand.
8. \$0.

(4) [Cournot duopoly: 10 pts]

1. P = (11-(qA/400)) - (qB/400).
2. MRB = (11-(qA/400)) - (qB/200).
3. qB = 1800 - (qA/2).
4. qA = qB = 1200.
5. P = \$5.

(5) [Entry barriers and contestable markets: 26 pts]

1. \$2.
2. 6 million.
3. L = 2/3 = 0.667.
4. \$3.
5. \$4.
6. loss.
7. \$3 million.
8. 9 million.
9. \$2.
10. profit.
11. \$27 million.
12. \$2.
13. L = 0.

(6) [HHI and merger guidelines: 12 pts]

1. 2350.
2. highly concentrated.
3. 2450.
4. highly concentrated.
5. yes, will likely oppose.
6. Market is highly concentrated and merger causes HHI to increase by more than 50 points.

(7) [Welfare tradeoffs of mergers: 24 pts]

1. \$3.
2. 14 million.
3. \$6.
4. 8 million.
5. L = 2/3 = 0.667.
6. \$33 million.
7. \$24 million.
8. \$9 million.
9. \$8 million.
10. decrease.
11. \$1 million.

(8) [Motivations for vertical mergers: 8 pts]

1. two separate firms.
2. single vertically-integrated firm.
3. single vertically-integrated firm.
4. single vertically-integrated firm.

(9) [Cases: 10 pts]

1. MCI v. AT&T (1982).
2. Utah Pie v. Continental Baking (1967).
3. Berkey Photo v. Kodak (1979).
4. Standard Oil v. U.S. (1911).
5. U.S. v. U.S. Steel (1920).

(10) [Value of a statistical live: 6 pts]

1. \$8.1 million.
2. \$2.5 million.
3. yes, because cost < VSL.

1. 90 thousand kWh is the capacity of the generating plant.
2. \$0.10 per kWh.
3. 90 thousand kWh.
4. \$0.04 per kWh.
5. 70 thousand kWh.
6. 100 thousand kWh.
7. 50 thousand kWh.
8. increase.
9. by 10 thousand kWh.
10. \$0.5 thousand.

(12) [Franchise bidding: 16 pts]

1. Acme: 40 units, Best: 30 units.
2. Acme: \$140, Best: \$120.
3. Acme: \$100, Best: \$90.
4. Acme should receive the franchise.
5. Acme's tariff offers greater consumer surplus.

(13) [Motivations for vertical mergers: 8 pts]

1. 10 million.
2. Yes, it is a natural monopoly. It is not possible to divide 12 million units of output between two firms without raising total cost.
3. 5 million.
4. No, it is no longer a natural monopoly.
5. \$3.
6. 20 million.
7. 4 firms.

(14) [Maximum prices and exit restrictions: 10 pts]

1. \$2 million.
2. \$16 million.
3. \$6.
4. \$8 million.
5. \$10 million.

III. Critical thinking

Arguments for a merger include the following. Fiat, which sells autos in Europe, currently has zero market share in the U.S. Also, Chrysler appears to be a failing firm, and would likely disappear from the market if the merger were disallowed.
Arguments against a merger of Fiat and Chrysler include the following. The auto industry in the United States is already highly concentrated. [By production (value of shipments) the HHI ranges from 1900 to 2600, depending on the definition of the industry.] Also, Fiat, which sells autos in Europe, is a potential entrant into the U.S. market.
The overall conclusion is that the merger should be permitted. The "failing firm" issue is the most important one.

### Version B

I. Multiple Choice

(1)b. (2)c. (3)d. (4)e. (5)b. (6)a. (7)e. (8)b. (9)d. (10)c. (11)a. (12)d.

II. Problems

(1) [Monopoly, markup formula, Lerner index: 4 pts]

1. \$25.
2. L = 1/5 = 0.2.

1. performance.
2. structure.
3. conduct.
4. structure.
5. conduct.

(3) [Collusion/joint profit maximization: 16 pts]

1. MR = 16 - 2Q.
2. plot MR curve: price intercept = \$16, slope = \$2/thousand, quantity intercept = 8 thousand.
3. \$11.
4. 5 thousand.
5. \$10 thousand.
6. \$7.
7. 9 thousand.
8. \$0.

(4) [Cournot duopoly: 10 pts]

1. P = (14-(qA/200)) - (qB/200).
2. MRB = (14-(qA/200)) - (qB/100).
3. qB = 1200 - (qA/2).
4. qA = qB = 800.
5. P = \$6.

(5) [Entry barriers and contestable markets: 26 pts]

1. \$3.
2. 7 million.
3. L = 2/3 = 0.5714.
4. \$4.
5. \$7.
6. loss.
7. \$9 million.
8. 8 million.
9. \$3.
10. profit.
11. \$24 million.
12. \$3.
13. L = 0.

(6) [HHI and merger guidelines: 12 pts]

1. 1350.
2. moderately concentrated.
3. 1400.
4. moderately concentrated.
5. no, will not likely oppose.
6. Market is only moderately concentrated and merger causes HHI to increase by less than 100 points.

(7) [Welfare tradeoffs of mergers: 24 pts]

1. \$6.
2. 10 million.
3. \$10.
4. 6 million.
5. L = 3/5 = 0.6.
6. \$32 million.
7. \$24 million.
8. \$8 million.
9. \$12 million.
10. increase.
11. \$4 million.

(8) [Motivations for vertical mergers: 8 pts]

1. single vertically-integrated firm.
2. two separate firms.
3. single vertically-integrated firm.
4. single vertically-integrated firm.

(9) [Cases: 10 pts]

1. Standard Oil v. U.S. (1911).
2. U.S. v. U.S. Steel (1920).
3. MCI v. AT&T (1982).
4. Utah Pie v. Continental Baking (1967).
5. Berkey Photo v. Kodak (1979).

(10) [Value of a statistical live: 6 pts]

1. \$4.8 million.
2. \$6.25 million.
3. no, because cost > VSL.

1. 80 thousand kWh is the capacity of the generating plant.
2. \$0.12 per kWh.
3. 80 thousand kWh.
4. \$0.04 per kWh.
5. 60 thousand kWh.
6. 90 thousand kWh.
7. 30 thousand kWh.
8. increase.
9. by 10 thousand kWh.
10. \$1 thousand.

(12) [Franchise bidding: 16 pts]

1. Acme: 80 units, Best: 70 units.
2. Acme: \$170, Best: \$140.
3. Acme: \$230, Best: \$245.
4. Best should receive the franchise.
5. Best's tariff offers greater consumer surplus.

(13) [Motivations for vertical mergers: 8 pts]

1. 8 million.
2. Yes, it is a natural monopoly. It is not possible to divide 10 million units of output between two firms without raising total cost.
3. 6 million.
4. No, it is no longer a natural monopoly.
5. \$5.
6. 18 million.
7. 3 firms.

(14) [Maximum prices and exit restrictions: 10 pts]

1. \$0.5 million.
2. \$8 million.
3. \$6.
4. \$2 million.
5. \$2.5 million.

III. Critical thinking

Save as version A.