ECON 120 - Regulation and Antitrust Policy
Drake University, Spring 2018
William M. Boal

EXAM 3 ANSWER KEY

I. Multiple choice

(1)d. (2)e. (3)b. (4)b. (5)b. (6)c. (7)b. (8)b. (9)c. (10)b. (11)c. (12)b. (13)b. (14)a. (15)d. (16)e.

II. Problems

(1) [Welfare tradeoffs: 14 pts]

  1. $6.
  2. $100.
  3. $80.
  4. $20.
  5. 80.
  6. increase.
  7. $60.

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

  1. 1525.
  2. Moderately concentrated.
  3. 1725.
  4. Moderately concentrated.
  5. The 2010 Guidelines are actually unclear for this example. The Guidelines say that "mergers involving an increase in the HHI of less than 100 points are unlikely to have adverse competitive effects" and that "mergers resulting in moderately concentrated markets that involve an increase in the HHI of more than 100 points potentially raise significant competitive concerns and often warrant scrutiny." But the Guidelines do not address a merger than increases the HHI by exactly 100 points. So the answer could be "unlikely to have adverse competitive effects" or "raise significant competitive concerns."

(3) [Successive monopolies with fixed proportions: 26 pts]

  1. MRP = 15 - 2Q/100.
  2. PS = 12 - 2Q/100.
  3. MRS = 12 - 4Q/100.
    Table of results (i) Successive monopolies (ii) Vertically integrated monopoly
    Q = Quantity of components (and appliances) 250 500
    PC = price of component $7/th>
    Profit of upstream firm $1250
    PA = price of appliances $12.50 $10
    Profit of downstream firm $625
    Total upstream + downstream profits $1875 $2500

  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.

(4) [Tying: 28 pts]

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

(5) [Predatory pricing: 22 pts]

  1. $12.
  2. $1000.
  3. $16.
  4. $1960.
  5. $1480.
  6. No, because the start-up costs are greater than the expected profit in Town B.
  7. $80.
  8. 100. This quantity causes ValueMart to make losses in Town A, but deters SuperSaver from entering Town B.
  9. 90, because ValueMart will then be a monopoly in Town B. Profit-maximizing quantity is found by setting MR = ValueMart's true MC.
  10. $610, because ValueMart's profit will be -$200 in Town A and +$810 in Town B.
  11. ValueMart is engaged in predatory pricing to maintain its reputation as a low-cost firm. By acting as if it has low costs in Town A, the "demonstration market," ValueMart deters SuperSaver from entering Town B. ValueMart then enjoys a monopoly in Town B, the "recoupment market."

III. Critical thinking

(1) The Areeda-Turner rule states that predatory pricing has occurred if price is less than average variable cost (AVC). Acme's variable costs are $60,000 + $10,000 + $20,000 = $90,000. Therefore, Acme's AVC = $90,000/10,000 = $9. We are given that the price is $10, so Acme is not engaged in predatory pricing, even though its total cost is greater than its total revenue.

(2) According to the "Essential Facilities Doctrine,"* Upstart Software Company must show four things to win its case.

  1. Microsoft controls the App Store (which is obvious).
  2. Upstart cannot duplicate the App Store (which might be less obvious).
  3. Microsoft has denied Upstart access to Microsoft's app store (which will require some evidence).
  4. It is feasible for Microsoft to provide access through Microsoft's app store (which seem likely).
* Articulated in MCI Communications Co. v. AT&T, 708 F.2d 1081 (7th Cir. 1982).

[end of answer key]