ECON 120 - Regulation and Antitrust Policy
I. Multiple choice
(1)b. (2)b. (3)d. (4)b. (5)a. (6)b. (7)a. (8)b. (9)b. (10)a. (11)c.
(1) [Welfare tradeoffs: 14 pts]
(2) [HHI and merger guidelines: 12 pts]
(3) [Upward pricing pressure: 8 pts]
(4) [Monopoly extension with fixed proportions: 17 pts]
|Table of results||(i) Upstream monopoly,
|Q = Quantity of components (and appliances)||300||300|
|PC = price of component||$5||NA|
|Profit of upstream firm||$900||NA|
|PA = price of appliances||$9||$9|
|Profit of downstream firm||zero||NA|
|Total upstream + downstream profits||$900||$900|
(5) [Tying: 28 pts]
(6) [Price discrimination: 6 pts]
(7) [Network effects: 8 pts]
(8) [Two-sided platforms: 8 pts]
III. Critical thinking
(1) The government argues for a narrow definition of the relevant market because that increases the shares of the merging firms and increases the value of the HHI, strengthening the argument that the merger would enhance market power and lessen competition. The merging firms argue for a broad definition of the market because that decreases the shares of the merging firms and decreases the value of the HHI, weakening the argument against the merger.
(2) One reason a company might insist that retail stores charge a minimum price is to incent retailers to offer attractive showrooms, test models, attentive and informed sales personnel, etc. Without the minimum retail price, discount stores and internet retailers might try to free-ride on the sales efforts of the regular stores, who might then drop the product (Telser 1960).
Another reason a company might insist on a minimum retail price is to ensure that luxury stores carry the product, and thereby implicitly certify the product's quality. Without the minimum retail price, luxury stores would face stiff competition from discount stores and internet retailers, and might then drop the product (Marvel and McCafferty 1984).
[end of answer key]