3.          Three firms produce homogenous goods and choose quantity simultaneously.  That is, they play a Cournot game.  Inverse demand is P=360-Q, where Q=Q1+Q2+Q3.  We observe Firm 1 choose Q1=40, Firm 2 choose Q2=60 and Firm 3 choose Q3=80.  What is the marginal cost of Firm 1?

4.          How is the US approach to mergers different than its approach to collusion?  Check all that apply.

A)          Mergers get the Rule of Reason whereas collusion is illegal per se.

B)          Mergers are illegal per se whereas collusion gets the Rule of Reason.

C)         Whether a merger is illegal depends on the level of prices that result from the merger whereas whether collusion is illegal does not depend on the level of prices that result from the collusion.

D)         Mergers are tried under the Clayton Act whereas collusion is tried under the Sherman Act.

5.          The European Commission announced that it was fining a fruit manufacturer 8.9 million euros for colluding with a rival in Southern Europe.  The rival did not receive a fine.  What is a likely explanation for the lack of a fine for the rival?

A)         The executives of the rival firm are getting jail time instead.

B)         The rival will pay damages instead.

C)         The rival could show that the agreement was a reasonable restraint of trade.

D)         Only one or a few executives at the rival were involved, and the top executives were unaware.

E)          The rival informed the EC about the cartel.

6.          Suppose that currently, firms in an industry earn $200 per period, and there are infinitely many periods.  Firms may save at an interest rate of 8%.  For each new entrant, it costs $500 once to enter an industry and doing so reduces profits by $20 per period for all  firms.  If a firm enters this period, it does not earn profits until next period.  How many new firms do you expect to enter the industry?  (10 pts)

7. (20 pts) Suppose two firms produce an identical good and choose quantities simultaneously. That is, the firms play a Cournot game. Inverse demand is P = 200-Q.

a. Suppose we observe the 2 firms choose Q1=20 and Q2=20. What is the marginal cost of firm 1 and firm 2?

b. Suppose the firms merge, and become a monopolist. What is the new price and quantity?

c. Suppose that when a firm produces more than 25 units, marginal cost drops in half for all further units. What is the price and quantity after the merger? Does this feature make the merger look more acceptable to a merger authority such as the Department of Justice, and why?

d. Suppose demand is growing over time in this market. How might that change how the Department of Justice evaluates the merger?

8.          Electrolux produces kitchen appliances, such as stoves.  In 2014, Electrolux proposed to purchase the appliance business of General Electric, which was also a major supplier of stoves. The DOJ opposed acquisition under merger law, and the case went to trial in 2015.  (20 pts)

a)          The DOJ calculated market shares for the stove market as follows:

What is HHI in this case?  How much does HHI change as a result of the merger?  (For this calculation, treat “Others” as a single firm.)

The Merger Guidelines say that a market with an HHI greater than 2500 after the merger is highly concentrated, and in this case, a merger that causes an increase of more than 200 points creates a presumption of enhanced market power.  Does this merger satisfy these conditions?

Note to 2025 students: The 2500 was the cutoff in the 2010 Merger Guidelines. In class, we discussed a cutoff of 1800. The 1800 is consistent with the 2023 Merger Guidelines.

b)         The DOJ argued that HHI calculations understate the impact of the merger on competition because: “The HHI treats all firms as equally close competitors.”  In your words, if some of these firms are closer competitors than others, why would that mean that HHI calculations understate the importance of the merger?

Does the concept of Upward Pricing Pressure address this issue?  In what way?