Econ 170

Take Home "Midterm" (To be done on your own)

Due 12/2
1. Consider an industry served by 3 rms. Inverse market demand is given
by P = 100 :1Q. Firm i produces with constant marginal cost production
technology with marginal cost ci .
a.) Assuming the rms compete ala Cournot. Find equilibrium output, price,
rm prot, and consumer surplus as a function of the rmscosts assuming
c1 = c2 = c3 = c.
b.) Assume, initially rm costs are c1 = c2 = c3 = 40. Suppose that rms 2
and 3 announce a merger. Call the new marginal cost of the merged rm
cM
40. The Justice Department wants to predict the likely eects of
the merger and thinks coordinated eects arent an issue. Write down
expressions for the change in price, prots, and consumer surplus as a
function of the new costs.
c.) An economist at the Justice Department thinks no e ciencies will result
from the merger (cM = 40). What will the merger do to Total Surplus/Consumer Surplus? Should we block the merger or allow it to proceed? Do you believe the economists conclusion? Why or Why not?
d.) Conditional on the merger being proposed by rms 2 and 3 what is the
maximal marginal cost for the merged rm we can expect to result from
the merger? Relative to the current situation, what impact would the
merger have on prices and total and consumer surplus in this worst case
scenario? What is the minimal level of e ciencies required to cause Total
Surplus to increase? To make Consumer Surplus increase? (If solving
for the exact cm is too di cult, you can nd the greatest integer cm
numerically)
e.) Suppose we think there will be no e ciencies associated with the merger but
instead the rms are merging to enhance their ability to collude. Assume
rms compete repeatedly over time. Find the maximal discount rate such
that perfect collusion can be supported in the 3 rm equilibrium. Find
the maximal discount rate such that perfect collusion can be supported
in the post-merger equilibrium (assuming no e ciencies). What do you
make of the statement "even though we have observed no coordination
prior to the merger, we might observe it after"
f.) Suppose the Justice Department identies a potential entrant that could
enter the market and produce at cost c4 = 40 by making a sunk investment
of K. Assuming the "worst case scenario" for the costs of the merged
rm, nd the greatest K such that there will be entry. How does this K
vary with cm ? Is there any level of post merger costs that would make
the merger protable if it was followed by entry of another rm? (Again,
it is ne to do this analysis numerically if the algebra gets too nasty)
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g.) Discuss some techniques the Justice Department might use to predict the
likely consequences of this merger. (You can be creative here)
2. Read The Art of Standards Wars by Carl Shapiro and Hal Varian posted
under the monopolization tab on the course website.
a. Citing sources and examples you can nd online, how would Shapiro and Varian classify the upcoming competition between X-Box One and Playstation
4 in their classication scheme? What are some of the "key assets" and
tactics being used by each of the rms? From the perspective of the
network issues discussed in the article how do you think this round of
competition will dier from previous rounds?
b. What are some of the challenges standards wars pose for antitrust?
do you think antitrust should treat them?

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