Version A

I. Multiple choice [3 pts each: 21 pts total]

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

II. Problems

(1) [Motivations for vertical mergers: 12 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. $20.
2. $20.
3. $10.
4. $100.
5. $45.
6. $135.
7. package.

(3) [Vertical integration of successive monopolies with fixed proportions: 42 pts]

1. MR_P = 8 - (Q/250).
2. P_S = 5 - (Q/250).
3. MR_S = 5 - (Q/125).

   Table of results	(i) Successive monopolies	(ii) Vertically integrated monopoly
   Q = Quantity of sauce (and pizzas)	500	1000
   PS = price of sauce	$3
   Profit of upstream firm	$1000
   PP = price of pizza	$7	$6
   Profit of downstream firm	$500
   Total upstream + downstream profits	$1500	$2000

   
   
4. The government should not try to block this merger. The merger increases the quantity of pizzas, lowers the price of pizzas for consumers and raises profit (a Pareto improvement!) and thus increases social welfare.

III. Critical thinking [4 pts]

If both markets are competitive before and after the vertical merger, the merger will have little or no effect on profit or social welfare. In the market for wholesale gasoline, the demand will shift left because the merging distributor will no longer buy wholesale gasoline on the open market. Meanwhile, the supply will shift left by exactly the same amount because the merging producer will no longer sell gasoline on the open market. So the equilibrium price of wholesale gasoline will not change and there will be no effect on profit or consumer surplus. (Full credit requires a graph showing demand and supply shifting left by exactly the same amount.)

Version B

I. Multiple choice [3 pts each: 21 pts total]

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

II. Problems

(1) [Motivations for vertical mergers: 12 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. $20.
2. $20.
3. $25.
4. $105.
5. $50.
6. $150.
7. package.

(3) [Vertical integration for foreclosure with fixed proportions: 42 pts]

1. MR_P = 8 - (Q/250).
2. P_S = 5 - (Q/500).
3. MR_S = 5 - (Q/250).

   Table of results	(i) Upstream market monopolized, downstream market competitive	(ii) Vertically integrated monopoly
   Q = Quantity of sauce (and pizzas)	1000	1000
   PS = price of sauce	$3
   Profit of upstream firm	$2000
   PP = price of pizza	$6	$6
   Profit of downstream firm	$0
   Total upstream + downstream profits	$2000	$2000

   
   
4. The government should not try to block this merger. There are no effects on profit or the price of pizzas, so there are no effects on social welfare.

III. Critical thinking [4 pts]

Same as Version A.

[end of answer key]