Note : Final exam questions will appear exactly as listed below except that some of the

parameter values might change. Question 1-3 are taken from the potential test 1 and test 2 questions that were not asked on test 1 or test 2. Students must answer 2 out of 3 questions. One question is based on test 1 and test 2 material (Question 1-3) and 2 questions are from material after test 2 (Question 4-7).

Question 1: Price Discrimination

a) (10 marks). Explain why third-degree price discrimination is profitable and why price

discrimination can either increase or decrease welfare. Explain why basing price on buyer characteristics can increase profits. Give examples.

b) (10 marks). Demonstrate the impact of price discrimination on profit and welfare by solving  the third-degree price discrimination model done in class for the parameter values indicated below.

Third Degree Price Discrimination Model

pi  = ai  − bQi i  = 1,2, MC = c

Parameter values : a1  = 32, a2  = 40, b = 1, c = 4

c) (10 marks). Explain the motives for the use of coupons in the breakfast cereal market. Explain whether the use of coupons in the breakfast cereal industry is consistent with third degree price discrimination.

d) (10 marks). Do either (i) or (ii).

(i)  Explain the various factors which affect price dispersion in the airline industry.

(ii) Explain price discrimination in the car market. Explain why and how internet selling has affected a car dealer’s ability to price discriminate.

a)  (10 marks). (i) Discuss the credibility and profitability of the following strategies: Limit pricing, Buyout, Market Pre-emption and Predation. (ii) Explain how capacity and price evidence can   be used to determine whether a firm has engaged in predation.

b)  (10 marks). Solve the “Stackelberg-Limit Pricing” model done in class for the parameter

values indicated below to determine for what values of the market size parameter ‘a’ (i)

entry is not blockaded and (ii) both limit pricing and Stackelberg outputs are credible and (iii) entry accommodation at the Stackelberg equilibrium is more profitable than entry deterrence via limit pricing.

Stackelberg-Limit Pricing

P = a – Q, MC = c, FC = F

Parameters : c = 80, s = .75, F = 100

c) (10 marks). In the Exclusive dealing and Uncertain Entry model explain why exclusive dealing  contracts are accepted by buyers and are profitable for incumbentseven if they do not deter entry. Explain why exclusive dealing contracts reduce welfare if they result in entry deterrence. Illustrate the profit and welfare consequences of exclusive dealing by solving the “Exclusive Dealing and Uncertain Entry” model done in class for the parameter values indicated below

Exclusive Dealing and Uncertain Entry

Incumbent cost: c, Entrant cost: ce = cL or cH. Prob(cL) = p, Prob (cH) = 1 – p, Buyer WTP = v Parameter Values: v = 10, c = 5, cL = 3, cH = 4, p = .3

d)  (10 marks). In the Exclusive Dealing and Economics of Scale model explain under what

circumstances exclusive dealing contracts are accepted by buyers, deter entry and are

profitable. Explain why such contracts are welfare reducing. Solve the Exclusive Dealing and Economics of Scale model for the parameter values indicated below to show that exclusive  dealing is only profitable if markets are sufficiently small (i.e. N is low).

Exclusive Dealing and Economies of Scale

N buyers, Buyer demand: q = a - p, AC falls for Q ≤ Q*, AC = c, Q > Q* Parameter Values: a = 12, c = 4, Q* = 200

b)  (10 marks). Suppose there are two markets: A and B. Firm 1 and Firm 2 operate in both

Market A and Market B and play a Multi-market Bertrand-Grim Strategy. Firm 3 and Firm 4

operate in Market B only and play a single-market Bertrand-Grim Strategy. Inverted demand  is given by P = 60 – Q in each market. Marginal cost for each firm is constant and equal to MC = 20.  The discount factor is ρ = 0.7.

i.      Determine if collusion at the monopoly price in both markets is sustainable. If so then indicate the sustainable range of market shares for firm 1 and firm 2 in Market A

(S1(a) , S2(a)) and for firm 1, firm 2, firm 3 and firm 4 in Market B (S1(b) , S2(b) ,  S3(b) , S4(b)).

ii.      Now suppose there are no multi-market firms. Determine if collusion at the monopoly  price in both markets is sustainable. If so then indicate the sustainable range of market

shares for firm 1 and firm 2 in Market A (S1(a) , S2(a)) and for firm 3, firm 4, firm 5 and firm

6 in Market B (S3(b) , S4(b) , S5(b) , S6(b)).

c) (10 marks). (i) Explain the workings of real estate cartels. (ii) Discuss the various ways in

which price fixing can be detected. (iii) Explain how antitrust enforcement reduces cartel

formation. (iv) Explain the leniency program and discuss the impact of this program on cartel formation.

d)  (10 marks). Discuss the evidence regarding the factors which determine cartel success.

Question 5: Mergers

a)  (10 marks). (i) Explain why mergers are always profitable in Differentiated Bertrand but are   only profitable in Cournot provided cost efficiency gains are sufficiently large or markets are sufficiently concentrated. (ii) Explain why non-merging firms (i.e. outsiders) benefit from a merger in both Differentiated Bertrand and Cournot. (iii) Explain why merger waves occur in Cournot. (iv) Explain howelasticities determine the impact of merger on mark-ups in

Differentiated Bertrand.

b)  (10 marks). Demonstrate the profit and welfare consequences of merger by solving the

‘Cournot Mergers with Variable Cost Savings’ model done in class for the parameter values indicated below.

Cournot Mergers with Variable Cost Savings

P = a – Q, Pre-merger : n firms, MC = c, FC = F

Post-merger: n – 1 firms, Outsider MC = c, FC = F, Insider MC = c – x, FC = 2F

Parameter values : a = 90, c = 30, x = 12, n = 4

c) (10 marks). Explain why vertical mergers in successive oligopoly are profitable and under what circumstances they give rise to foreclosure effects. Solve the “ Vertical Mergers in Successive Oligopoly” model done in class for the parameter values indicated below and  verify that vertical merger is profitable and indicate whether or not foreclosure has occurred..

Vertical Mergers in Successive Oligopoly

P = a - Q

Integrated firm MC = 0, Non-integrated dealer MC = w, Non-integrated manufacturer MC = 0

Pre-merger: nI integrated firms,n nonintegrated dealers,m non-integrated manufacturers

Parameter values : a = 120, nI = 3, n = 2, m = 2

d)  (10 marks). Discuss the results from the empirical horizontal and vertical merger literature.

Question 6: Vertical Integration

a) (10 marks). Explain and give real-world examples of the problems which arise when

contracts are incomplete, and assets are specific. Explain and give real-world examples of how these problems can be overcome or mitigated.

b) (10 marks). Explain the economizing theory and its main predictions. Explain at least one piece of empirical evidence that supports the theory.

c) (10 marks). Explain the assumptions and predictions of the Property Rights Theory (PRT). Use PRT to explain why the type of insurance (life, term/substandard) determines whether

insurance companies use an in-house sales force or a broker.

d) (10 marks). Describe and explain vertical integration and contracting in either the Pepsi/Coke or GM/Ford examples.