ECON 120 - Regulation and Antitrust Policy Drake University, Spring 2019 William M. Boal

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.

II. Problems

1. \$8.
2. \$280.
3. \$200.
4. \$80.
5. \$50.
6. decrease.
7. \$30.

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

1. 1450.
2. Unconcentrated.
3. 2650.
4. Highly concentrated.
5. This merger would be deemed "presumed likely to enhance market power" because the post-merger HHI is greater than 2500 and the change in the HHI due to the merger is greater than 200 points.

(3) [Upward pricing pressure: 8 pts]

1. DAB = 30/(100-40) = 0.5 .
2. DBA = 40/(100-30) = 4/7.
3. UPPA = DAB (PB-MCB) - ΔMCA = 0.5 (20-14) - (17-15) = \$1.
4. DAB (PB-MCB) = \$3.

(4) [Monopoly extension with fixed proportions: 17 pts]

1. MRA = 12 - (2Q/100).
2. PC = PA - 4 = 8 - (Q/100).
3. MRC = 8 - (2Q/100).
Table of results (i) Upstream monopoly,
downstream competition
(ii) Vertically
integrated 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

4. This merger would not be profitable, because total profits would remain the same. This merger would not harm social welfare because the price of appliances would not change.

(5) [Tying: 14 pts]

1. \$15 (bringing revenue of \$30).
2. \$10 (bringing revenue of \$30).
3. \$20 (bringing revenue of \$40.
4. \$100.
5. \$40.
6. \$120.
7. As a package.

(6) [Price discrimination: 6 pts]

1. To maximize profit, segment B should get the higher price because its demand is less elastic.
2. \$8.
3. \$12.

(7) [Network effects: 8 pts]

1. The more users on the network, the more each user is willing to pay for access.
2. \$0 < P < infinity.
3. \$50 < P < \$70.
4. \$0 < P < \$70.

(8) [Two-sided platforms: 8 pts]

1. Substituting into the demand equations, q2 = 600 and q1 = 1200.
2. MR2 = 40 - (2q2/30) = \$0, ignoring revenue from the other group.
3. MR2 = 40 - (2q2/30) + 0.5 p1 = \$2.50, including additional revenue from group 1.
4. Recommend lowering p2 in order to increase q2, because marginal revenue (including impact on group 1) > MC2.

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).