Boal's Econ

ECON 120 - Regulation and Antitrust Policy
Drake University, Spring 2023
William M. Boal

EXAM 3 ANSWER KEY

Version A

I. Multiple choice

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

II. Problems

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

2000.
Moderately concentrated.
2800.
Highly concentrated.
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.

(2) [Welfare tradeoffs: 14 pts] Marginal revenue curve is a straight line with vertical intercept at $11, slope = -2/10, and horizontal intercept at 55 units.

$7.
$100.
$80.
$20.
$80.
increase.
$60.

(3) [Upward pricing pressure: 8 pts]

D_AB = 30/(100-40) = 1/3 .
D_BA = 40/(100-20) = 1/2.
UPP_A = D_AB (P_B-MC_B) - ΔMC_A = (1/3) (23-14) - (17-16) = $2.
D_AB (P_B-MC_B) = $3.

(4) [Successive monopolies with fixed proportions: 18 pts]

MR_A = 12 - (Q/5).
P_C = 9 - (Q/5).

MR_C = 9 - (2Q/5).

Table of results	(i) Successive monopolies	(ii) Vertically integrated monopoly
Q = Quantity of components (and appliances)	20	40
P_C = price of component	$5
Profit of upstream firm	$80
P_A = price of appliances	$10	$8
Profit of downstream firm	$40
Total upstream + downstream profits	$120	$160

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.

(5) [Tying: 14 pts]

$25 (bringing revenue of $50).
$15 (bringing revenue of $30).
$80.
$30.
$90.

(6) [Price discrimination: 6 pts] Pricing formula: P = MC / (1 + [1/ε]). If MC > zero and ε < -1, then P will be greater than MC.

To maximize profit, Green customers should get the higher price because their demand is less elastic.
$12.
$15.

(7) [Network effects: 8 pts]

The more users on the network, the more each user is willing to pay for access.
$0 < P < infinity.
$15 < P < $30.
$0 < P < $25.

III. Critical thinking

(1) Offsetting factors might cause antitrust authorities to approve a merger even if that merger would result in high concentration. These offsetting factors include the following. (Any two of these would suffice for full credit.)

Rapid entry of new firms would make any attempted price increase (by the merged firm) unprofitable. [See Horizontal Merger Guidelines Section 9.]
There are sufficient cost savings to cause prices to fall. [See Horizontal Merger Guidelines Section 10.]
One of the merger partners is failing and would likely exit the market without the merger. [See Horizontal Merger Guidelines Section 11.]

(2) U.S. antitrust policy restricts the conduct of dominant firms more than firms with small market share because dominant firms are usually in a better position to exclude rivals and monopolize a market. Examples include the following. (Any two of these would suffice for full credit.)

Exclusive dealing is illegal if it lessens competition. Exclusive dealing is treated by the courts under the "rule of reason," and courts require evidence of market power (usually meaning large market share) to convict--thus dominant firms are treated differently.
Tying is also illegal if it lessens competition. Formerly tying was per se illegal, but now courts require evidence of market power (usually large market share) to convict--thus dominant firms are treated differently.
Predatory pricing is illegal if it lessens competition. To show that predatory pricing lessens competition, courts now require evidence that the market is concentrated and that the predator can recoup its losses after predation, conditions that are most likely to hold if the predator has very large market share.
Refusal to deal is illegal if it lessens competition. This is most likely to occur if a dominant firm controls an essential facility, though the "essential facilities" doctrine has never been approved by the U.S. Supreme Court.

Version B