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

### Version A

I. Multiple choice

(1)a. (2)b. (3)d. (4)c. (5)a. (6)d. (7)c. (8)d. (9)b. (10)d. (11)d. (12)c. (13)b. (14)d. (15)d. (16)d. (17)b. (18)a. (19)c. (20)a. (21)c. (22)d.

II. Problems

(1) [Intro to antitrust: 4 pts] Antitrust policy is enforced by two U.S. federal agencies: the Antitrust Division of the Justice Department, and the Federal Trade Commission.

(2) [Profit maximization while taking price as given: 10 pts]

1. Set MC(q) = P and solve to find q*. Here, MC(q) = 3 + (q/40) and P is given as \$8, so q* = 200.
2. Profit = Revenue - TC(q*) = P × q* - [3q* + (q*2/80)] = \$500.

(3) [Monopoly, profit maximization: 14 pts]

1. MC = dTC/dQ = 1 + (Q/20).
2. AC = TC/Q = 1 + (Q/40).
3. Rev = P × Q = 13 Q - (Q2/20), so MR = dRev/dQ = 13 - (Q/10).
4. Set MR=MC and solve to get QM=80.
5. Substitute Q* into demand equation to get PM=\$9.
6. Profit = Rev(80) - TC(80) = \$480.
7. First, find efficient quantity QE; set demand = MC and solve to get QE = 120. Deadweight loss is area between demand and MC, from QM to QE, which equals \$80.

(4) [Cournot duopoly: 14 pts]

1. RevA = 10 qA - (qA2/100) - (qAqB/100).
2. MRA = 10 - (2qA/100) - (qB/100).
3. qA* = 300 - (qB/2).
4. qA* = 200.
5. Q* = 400, P* = \$6.
6. L = 1/3.
7. Social deadweight loss = \$200.

(5) [HHI and merger guidelines: 12 pts]

1. 1950.
2. Moderately concentrated.
3. 2250.
4. Moderately concentrated.
5. (ii) "raises significant competitive concerns."
6. The postmerger HHI is greater than 1500 (but less than 2500) and the change in the HHI is greater than 100.

(6) [Vertical merger of successive monopolies: 26 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.

(7) [Cases: 10 pts]

1. Standard Oil v. U.S. (1911).
2. U.S. v. U.S. Steel (1920).
3. MCI v. AT&T (1982).
4. Utah Pie v. Continental Baking (1967).
5. Berkey Photo v. Kodak (1979).

(8) [Pricing with economies of scale: 20 pts]

1. \$1.
2. loss.
3. \$60 million.
4. \$0 million.
5. \$5.
6. neither.
7. \$0 million.
8. \$10 million.
9. \$1.
10. \$12.

1. 80 thousand kilowatt hours is the capacity of the generating system.
2. \$0.12 per kWh.
3. 80 million kWh.
4. \$0.04 per kWh.
5. 60 million kWh.
6. 90 million kWh.
7. 30 million kWh.
8. increase.
9. 10 million kWh.
10. DWL is represented by two areas: a triangle bounded by SRMC, off-peak demand, and a vertical line at 30 million kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at 80 million kWh.
11. \$1 million, total area of the two triangles.

(10) [Cross-subsidization: 10 pts]

1. Yes, the firm is a natural monopoly. If average cost slopes downward, then cost is subadditive. It is cheaper to produce any total output in one firm than in two firms.
2. City A: 12 million, City B: 4 million.
3. City A: profit, City B: loss.
4. City A: \$12 million, City B: \$12 million (so the firm breaks even).
5. The other firm will enter City A only. The other firm's average cost is less than the regulated price of \$5, provided the entrant produces at least about 10 million units of output. This action is called "cream-skimming."

(11) [Effect of regulation on quality: 14 pts]

1. 4 million.
2. 5 million.
3. 0 million.
4. \$4 million.
5. 5 million.
6. \$2 million.
7. \$6 million.

(12) [Value of a statistical life: 6 pts]

1. \$3,500,000.
2. \$2,000,000.
3. yes.

(13) [Optimal stringency of regulation: 10 pts]

1. MC per life saved = \$3 million, \$8 million, \$13.25 million, \$15 million.
2. AC per life saved = \$3 million, \$6.75 million, \$10 million, \$11 million.
3. Standard A is efficient, comparing VSL with marginal cost per life saved.

III. Critical thinking [6 pts]

• I would accuse Google of monopolization, citing the Sherman Antitrust Act Section 2.
I would argue that Google is a monopolist because it has huge market share in smartphone operating systems, and that Google is liable under the "essential facilities" doctrine outlined by the U.S. Supreme Court in MCI v. AT&T (1982). To show this liability, I would show that (1) Google controls its Android operating system (obviously), (2) as a small player, my company cannot duplicate this operating system, (3) Google has denied equal access to Android to my company, and (4) it is feasible for Google to provide sufficient technical information to give my company equal access to Android.
Alternatively, I might argue that Google is liable because it is tying its operating system to its applications.

### Version B

I. Multiple choice

(1)b. (2)a. (3)a. (4)a. (5)b. (6)b. (7)d. (8)b. (9)c. (10)b. (11)a. (12)b. (13)d. (14)a. (15)a. (16)d. (17)d. (18)c. (19)c. (20)b. (21)b. (22)d.

II. Problems

(1) [Intro to antitrust: 4 pts] Antitrust policy is enforced by two U.S. federal agencies: the Antitrust Division of the Justice Department, and the Federal Trade Commission.

(2) [Profit maximization while taking price as given: 10 pts]

1. Set MC(q) = P and solve to find q*. Here, MC(q) = 2 + (q/50) and P is given as \$7, so q* = 250.
2. Profit = Revenue - TC(q*) = P × q* - [2q* + (q*2/100)] = \$625.

(3) [Monopoly, profit maximization: 14 pts]

1. MC = dTC/dQ = 3 + (Q/50).
2. AC = TC/Q = 3 + (Q/100).
3. Rev = P × Q = 9 Q - (Q2/50), so MR = dRev/dQ = 9 - (Q/25).
4. Set MR=MC and solve to get QM=100.
5. Substitute Q* into demand equation to get PM=\$7.
6. Profit = Rev(100) - TC(100) = \$300.
7. First, find efficient quantity QE; set demand = MC and solve to get QE = 150. Deadweight loss is area between demand and MC, from QM to QE, which equals \$50.

(4) [Cournot duopoly: 14 pts]

1. RevA = 14 qA - (qA2/20) - (qAqB/20).
2. MRA = 14 - (2qA/20) - (qB/20).
3. qA* = 120 - (qB/2).
4. qA* = 80.
5. Q* = 160, P* = \$6.
6. L = 2/3.
7. Social deadweight loss = \$160.

(5) [HHI and merger guidelines: 12 pts]

1. 1350.
2. Unconcentrated.
3. 1450.
4. Unconcentrated.
5. (iii) "unlikely to have adverse competitive effects."
6. The postmerger HHI is lessthan 1500.

(2) [Vertical merger for monopoly extension: 26 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 pizzas, so there are no effects on social welfare.

(7) [Cases: 10 pts]

1. Utah Pie v. Continental Baking (1967).
2. Berkey Photo v. Kodak (1979).
3. Standard Oil v. U.S. (1911).
4. U.S. v. U.S. Steel (1920).
5. MCI v. AT&T (1982).

(8) [Pricing with economies of scale: 20 pts]

1. \$2.
2. loss.
3. \$60 million.
4. \$0 million.
5. \$8.
6. neither.
7. \$0 million.
8. \$6 million.
9. \$2.
10. \$30.

1. 90 thousand kilowatt hours is the capacity of the generating system.
2. \$0.10 per kWh.
3. 90 million kWh.
4. \$0.04 per kWh.
5. 70 million kWh.
6. 100 million kWh.
7. 50 million kWh.
8. increase.
9. 10 million kWh.
10. DWL is represented by two areas: a triangle bounded by SRMC, off-peak demand, and a vertical line at 50 million kWh; and another "upside down" triangle bounded by LRMC, peak demand, and a vertical line at \$100 kWh.
11. \$0.5 million, total area of the two triangles.

(10) [Cross-subsidization: 10 pts]

1. Yes, the firm is a natural monopoly. If average cost slopes downward, then cost is subadditive. It is cheaper to produce any total output in one firm than in two firms.
2. City A: 5 million, City B: 15 million.
3. City A: loss, City B: profit.
4. City A: \$15 million, City B: \$15 million (so the firm breaks even).
5. The other firm will enter City B only. The other firm's average cost is less than the regulated price of \$5, provided the entrant produces at least about 12 million units of output. This action is called "cream-skimming."

(11) [Effect of regulation on quality: 14 pts]

1. 6 million.
2. 6 million.
3. 0 million.
4. \$9 million.
5. 4 million.
6. \$8 million.
7. \$17 million.

(12) [Value of a statistical life: 6 pts]

1. \$3,800,000.
2. \$7,500,000.
3. no.

(13) [Optimal stringency of regulation: 10 pts]

1. MC per life saved = \$0.5 million, \$3 million, \$4 million, \$19 million.
2. AC per life saved = \$0.5 million, \$2 million, \$2.75 million, \$6 million.
3. Standard C is efficient, comparing VSL with marginal cost per life saved.