QUIZ 9 ANSWER KEY
Monopolization and Price Discrimination
Version A
I. Multiple choice [2 pts each: 18 pts total]
(1)d. (2)d. (3)b. (4)b. (5)c. (6)b. (7)c. (8)d. (9)c.
II. Problems
(1) [Predatory pricing: 33 pts]
- $8.
- $500.
- $10.
- $980.
- $740.
- No, because expected profit for SuperSaver is less than start-up costs.
- $40.
- 100, as if it had low marginal cost.
- 90, because it will be a monopoly.
- $305.
- This is an example of predatory pricing in Town A (the demonstration market) to to maintain a reputation as a low-cost firm. By producing 100 units in Town A, ValueMart avoids revealing its high cost to SuperSaver, and thereby encourages SuperSaver to stay out of Town B. ValueMart then recoups its $100 loss in Town A with $405 in monopoly profit in Town B (the recoupment market).
(2) [Perfect price discrimination: 28 pts]
- $10.
- $14.
- $8.
- 8 million, 12 million.
- $80 million, $132 million.
- $32 million, $60 million.
- $48 million, $72 million.
- $16 million, $0 million.
(3) [Monopoly price discrimination: 8 pts]
- $3.50.
- $9.00.
(4) [Cases: 10 pts]
- MCI v. AT&T (1982).
- Utah Pie v. Continental Baking (1967).
- Berkey Photo v. Kodak (1979).
- Standard Oil v. U.S. (1911).
- U.S. v. U.S. Steel (1920).
III. Critical thinking [3 pts]
If Google's Android operating system favors its own applications over those of its rivals, most likely Google is not providing complete technical information to it rivals. This would seem to be a case of "refusal to deal" in order to extend its OS monopoly into a monopoly in the applications market, violating Section 2 of the Sherman Act.
Google's Android operating system might be considered an "essential facility" because it has a large market share of smartphones: anyone wishing to sell applications for smartphones needs access to the Android OS. According to the "essential facilities" doctrine, to show that Google is violating the Sherman Act, Google's rivals would have to show the following.
- Google controls the Android OS (obvious).
- Goggle's rivals cannot duplicate the Android OS (because Google already has huge market share).
- Google has denied the Android OS to its rivals (by witholding technical information).
- It is feasible for Google to provide access to the OS (by providing technical information).
Important cases establishing the "essential facilities" doctrine were U.S. v. Terminal Railroad Association (1912) and MCI v. AT&T (1982).
[At this date, Google is still negotiating with the European Union Directorate for Competition. However, it reached a settlement with the U.S. Federal Trade Commission in January 2013, published at http://ftc.gov/opa/2013/01/google.shtm.]
Version B
I. Multiple choice [2 pts each: 18 pts total]
(1)a. (2)e. (3)c. (4)c. (5)e. (6)a. (7)b. (8)c. (9)b.
II. Problems
(1) [Predatory pricing: 33 pts]
- $8.
- $1600.
- $10.
- $3600.
- $2600.
- No, because expected profit for SuperSaver is less than start-up costs.
- $0.
- 400, as if it had low marginal cost.
- 300, because it will be a monopoly.
- $500, that is, ValueMart's monopoly profit in Market B minus its loss in Market A.
- This is an example of predatory pricing in Town A (the demonstration market) to maintain a reputation as a low-cost firm. By producing 400 units in Town A, ValueMart avoids revealing its high cost to SuperSaver, and thereby encourages SuperSaver to stay out of Town B. ValueMart then recoups its $400 loss in Town A with $900 in monopoly profit in Town B (the recoupment market).
(2) [Perfect price discrimination: 28 pts]
- $12.
- $15.
- $11.
- 6 million, 8 million.
- $72 million, $104 million.
- $36 million, $56 million.
- $36 million, $48 million.
- $9 million, $0 million.
(3) [Monopoly price discrimination: 8 pts]
- $4.50.
- $8.00.
(4) [Cases: 10 pts]
- Standard Oil v. U.S. (1911).
- U.S. v. U.S. Steel (1920).
- MCI v. AT&T (1982).
- Utah Pie v. Continental Baking (1967).
- Berkey Photo v. Kodak (1979).
III. Critical thinking [4 pts]
Same as Version A.
[end of answer key]