ECON 180 - Regulation and Antitrust Policy
Drake University, Spring 2015
William M. Boal

Course page: www.cbpa.drake.edu/econ/boal/180
Blackboard: bb.drake.edu
Email: william.boal@drake.edu

ANSWER KEY: ANTITRUST POLICY ON VERTICAL MERGERS AND VERTICAL RESTRAINTS

Quiz 8 Version A

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

Quiz 8 Version B

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

Test 8 Version A

(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) [Vertical merger for monopoly extension: 52 pts]

  1. MRC = 600 - 2Q.
  2. PS = 300 - Q.
  3. MRS = 300 - 2Q.
    Table of results (i) Upstream market monopolized,
    downstream market competitive
    (ii) Vertically integrated monopoly
    Q = Quantity of software (and computers) 140 140
    PS = price of software $160
    Profit of upstream firm $19,600
    PP = price of computers $460 $460
    Profit of downstream firm $0
    Total upstream + downstream profits $19,600 $19,600

  4. The government has no reason to block this merger. There are no effects on profit or the price of computers, so there are no effects on social welfare.

(3) [Tying: 28 pts]

  1. $350.
  2. $200.
  3. $250.
  4. $1000.
  5. $400.
  6. $1200.
  7. package.

Critical thinking [10 pts]

  1. The most plausible explanation is that the luxury handbag company wants retailers to supply display space, salespersons, and promotion activities that stimulate demand for the handbags. Retailers will be reluctant to provide such services if they can be undercut on price by no-frills discount retailers--online, mail-order, or brick-and-mortar stores--that provide no such services but charge lower prices. The no-frills discount retailers will free-ride on the services provided by the other retailers. So the luxury handbag company seeks to enforce a retail margin that will prevent the full-service retailers from being undercut. [This idea is due to Lester Telser (1960).]

    A slightly different but equally plausible explanation is that high-quality retailers "serve as the consumer's agent in ascertaining the quality or stylishness" of the handbags. Discount retailers free-ride on this service. Again, the luxury handbag company seeks to enforce a retail margin that will prevent the full-service retailers from being undercut. [This idea is due to Marvel and McCafferty (1984).]

Test 8 Version B

(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) [Vertical merger of successive monopolies: 52 pts]

  1. MRC = 600 - 2Q.
  2. PS = 300 - 2Q.
  3. MRS = 300 - 4Q.
    Table of results (i) Successive monopolies (ii) Vertically integrated monopoly
    Q = Quantity of software (and computers) 70 140
    PS = price of software $160
    Profit of upstream firm $9800
    PP = price of computers $530 $460
    Profit of downstream firm $4900
    Total upstream + downstream profits $14,700 $19,600

  4. The government should not try to block this merger. The merger will lower price and increase profit, so both consumers and producers benefit (a Pareto improvement!). The merger increases social welfare.

(3) [Tying: 28 pts]

  1. $170.
  2. $100.
  3. $120.
  4. $500.
  5. $200.
  6. $600.
  7. package.

Critical thinking [10 pts]

[end of answer key]