ECON 328 INDUSTRIAL ORGANIZATION EXAMINATIONS — 2022
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: daixieit
EXAMINATIONS — 2022
TRIMESTER TWO
ECON 328
INDUSTRIAL ORGANIZATION
Part A: True, False, Why Questions 1 through 5
(1) Consider a Cournot duopoly in which irm 1 has marginal costs c1 and irm 2 has marginal costs c2 > c1 . Let qi(*) denote the equilibrium output for irm i. After hav- ing found each hrm’s reaction function, the next step in solving for the equilibrium is to set q 1(*) = q2(*) . [10 marks]
(2) Consider a case of differentiated product price differentiation modeled by four irms located symmetrically around a circle. Firm A sits between Firm B and Firm D, with Firm C on the opposite side of the circle. Firm A is choosing another irm with which to merge. Firm A should merge with Firm C, because that way the new hrm (A and
C) will have the largest possible market. [10 marks]
(3) Dynamic limit pricing refers to the way in which a dominant hrm will lower its price following entry in order to drive the newhrm out of the market. [10 marks]
(4) Consider a differentiated product price competition model in which two irms are located at opposite ends of a line segment. If the two hrms merge, then the consumers will be worse off because of higher prices, but the total quantity sold can’t decrease. [10 marks]
(5) Consider a marginal cost reducing innovation. Let us say that only irms within the pre-innovation product market have the ability to innovate. The incentive to innovate is higher if the pre-innovation product market is a monopoly than if it is perfectly competitive. [10 marks]
Part B: Long Questions 6, 7, and 8.
Answer only two of the following questions.
If you take the online test, you will not get a choice.
(6) Consider a market with differentiated product price competition, modeled by two irms sitting on at opposite ends of a line segment of length 1. The intrinsic value of irm i’s product is Vi with V1 > V2 . The transport cost (faced by consumers) is α, and the marginal cost of production is c for both irms. Each consumer must buy exactly one unit, and buys from the irm that yields him the highest net value. Firm 1 and irm 2 compete by setting prices, respectively, P1 and P2 .
(a) Solve for q1 as a function of P1 and P2 . (Note: if V1 and V2 do not appear in your expression, then it is incorrect.)
(b) Use the fact that dp1
dq1 = — 2α in this model to write an expression for irm 1’s marginal revenue in terms of P1 and P2 .
(c) Set MR1 = mc1 and solve for irm 1’s reaction function. Use symmetry to arrive at irm 2’s reaction function.
(d) Is it appropriate to solve these two reaction functions by irst setting p1 = p2 ? Why (not)?
(e) Solve for the equilibrium prices and outputs. [25 marks]
(7) Consider a market for electricity which consists of two irms. One irm owns a large hydro-power dam. The second irm owns a thermal plant. There are two time periods t = 1, 2. In period t the hydro irm supplies energy ht, and the thermal irm supplies energy qt . The hydro irm has no operating costs, but faces the constraint h1 + h2 = W. The thermal irm has a constant marginal cost of mcT = c. The hydro- irm is aware of the impact his output has on price. The thermal irm is a price taker. Firms do not discount proits from one period to the next. The inverse demand in period t is Pt = at — b(qt + ht ).
(a) What condition holds for the hydro-irm’s proit maximization? In under 50 words, explain where this proit maximization condition comes from.
(b) Rewrite the above conditions as an expression in terms of the variables and pa- rameters (i.e. qt, ht, at, b, and c) of the model. Write an expression for the proit maximization for the thermal irm in terms of the parameters of the model.
(c) Use the above expressions to solve for the equilibrium price and outputs in both periods.
(d) Evaluate the allocative and productive eficiency of the equilibrium. Compare to the results suggested in class. (Hint: there is a difference.) [25 marks]
(8) Consider the case of General Electric and Westinghouse and their competition in the refrigerator market. The history of competition was: the two irms occasionally managed to get prices above marginal costs, but were subject to frequent price wars. Westinghouse announced a policy that if Westinghouse had a sale and dropped the price of any model, then they would rebate the difference to anyone who had bought a Westinghouse refrigerator in the past six months. General Electric soon made a similar announcement concerning GE refrigerators.
(a) What model of oligopoly best describes this market? Briely Explain.
(b) What would we expect to happen if General Electric had not followed the an- nouncement by Westinghouse with a similar announcement?
(c) What would we expect to happen given that GE did follow Westinghouse with a similar announcement? Why?
(d) Does the concept of conscious parallelism apply to this case? Why (not)? (e) Should a court use the rule of reason in this case? Why (not)? [26 marks]
2022-10-26