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

www.drake.edu/cbpa/econ/boal/180

william.boal@drake.edu

QUIZ 7 ANSWER KEY
Vertical Mergers and Vertical Restraints

Version A

I. Multiple Choice

(1)c. (2)a. (3)d. (4)b. (5)a. (6)a. (7)b. (8)b.

II. Problems

(1) [Motivations for vertical mergers: 16 pts]

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

(2) [Tying: 28 pts]

  1. $20.
  2. $10.
  3. $30.
  4. $100.
  5. $35.
  6. $105.
  7. as a package.

(3) [Monopoly extension with fixed proportion: 36 pts]

  1. PS = 600 - (Q/100).
  2. MRS = 600 - (Q/50).
  3. Q = 29,000, PS = $310, PC = $510.
  4. Profit = $8,410,000.
  5. MCC = $220.
  6. MRC = 800 - (Q/50).
  7. Q = 29,000, PC = $510.
  8. Profit = $8,410,000.
  9. No need to prevent this merger because it has no effect on consumer surplus nor on the monopolist's profit. So the merger does not affect social welfare.

II. Critical Thinking

The effect of the merger on profit and social welfare depends on first, whether the merger increases in market power, and second, whether the merger creates cost savings. It seems unlikely that the merger would increase market power because both the grocery industry and agriculture are highly competitive markets with no firm having large market share. If the merger creates cost savings, then it will increase social welfare. If the merger does not create cost savings, it will have no effect on social welfare--but then the firms will have little incentive to merge.

Version B

I. Multiple Choice

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

II. Problems

(1) [Motivations for vertical mergers: 16 pts]

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

(2) [Tying: 28 pts]

  1. $15.
  2. $20.
  3. $25.
  4. $110.
  5. $45.
  6. $135.
  7. as a package.

(3) [Monopoly extension with fixed proportion: 36 pts]

  1. PS = 500 - (Q/100).
  2. MRS = 500 - (Q/50).
  3. Q = 23,000, PS = $270, PC = $570.
  4. Profit = $5,290,000.
  5. MCC = $340.
  6. MRC = 800 - (Q/50).
  7. Q = 23,000, PC = $570.
  8. Profit = $5,290,000.
  9. No need to prevent this merger because it has no effect on consumer surplus nor on the monopolist's profit. So the merger does not affect social welfare.

II. Critical Thinking

Same as Version A.

[end of answer key]