Version A

I. Multiple choice [3 pts each: 24 pts total]

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

II. Problems

(1) [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.

(2) [Tying: 21 pts]

1. price = $350 (revenue = $350).
2. price = $200 (revenue = $400).
3. price = $250 (revenue = $250).
4. price = $400.
5. revenue = $1200.
6. sell as a package.

(3) [Successive monopolies with fixed proportions: 39 pts]

1. MR_D = 17 - (Q/50).
2. P_C = 14 - (Q/50).
3. MR_C = 14 - (Q/25).

   Table of Results	(i) Successive monopolies	(ii) Vertically intetgrated monopoly
   Q = quantity of chips (and devices)	300	600
   PC = price of chips	$8
   Profit of upstream firm	$1800
   PD = price of devices	$14	$11
   Profit of downstream firm	$900
   Total upstream + downstream profits	$2700	$3600

4. The government should not block the merger. The merger makes consumers better off because the price decreases so consumer surplus is larger. The merger makes producers better off because profits are larger. The merger therefore increases social welfare.

III. Challenge question

1. Current HHI = 2139.
2. HHI after the proposed merger = 2787.
3. On the basis of the HHI calculations alone, the authorities are unlikely to approve the merger. The industry would be "highly concentrated" after the merger, and the merger involves an increase of well over 200 points, so the merger is presumed to enhance market power, according to the Horizontal Merger Guidelines section 5.3.
4. Additional information that might change this prediction would include the following:
   • Do AT&T and T-Mobile operate in the same local markets? If not, then local market concentration would not be increased by the merger.
   • Will the merger result in significant cost savings? If so, then the merger might result in lower or unchanged prices, so the authorities might approve it despite the increase in concentration.

Version B

I. Multiple choice [3 pts each: 24 pts total]

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

II. Problems

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

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

(2) [Tying: 21 pts]

1. price = $200 (revenue = $400).
2. price = $300 (revenue = $300).
3. price = $150 (revenue = $300).
4. price = $400.
5. revenue = $1200.
6. sell as a package.

(3) [Successive monopolies with fixed proportions: 39 pts]

1. MR_D = 15 - (Q/50).
2. P_C = 11 - (Q/50).
3. MR_C = 11 - (Q/25).

   Table of Results	(i) Successive monopolies	(ii) Vertically intetgrated monopoly
   Q = quantity of chips (and devices)	200	400
   PC = price of chips	$7
   Profit of upstream firm	$800
   PD = price of devices	$13	$11
   Profit of downstream firm	$400
   Total upstream + downstream profits	$1200	$1600

4. The government should not block the merger. The merger makes consumers better off because the price decreases so consumer surplus is larger. The merger makes producers better off because profits are larger. The merger therefore increases social welfare.

III. Challenge question

Same as Version A.

[end of answer key]