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AnswerstoPracticeProblems

Chapter1
NoPracticeProblemsinthischapter.

Chapter2
2.1
1.ProfitMaximizationimpliesMC=2q+10=P.Hence,q=(P10)/2.
2.With50firms,horizontalsummationoftheindividualmarginalcostcurvesyields:QS=50(P10)/2=
25P250.
3.Equilibrium:P=$30andQ=500.
4.q=(P10)/2=10.Revenue=Pq=$300.Totalcost=100+q2+10q=$300.Profit=0.
2.2
1.Inversedemandcurveis:P=(6,0009Q)/50.Hence,MR=120(18Q/50)=120(9Q/25).
2.MC=10+Q/25.EquatewithMRtoobtain:Q=275.Atthisoutput,P=$70.50.
3.Totalrevenue=$19,387.50.Eachplantproduces5.5unitsandincursatotalcostof$185.25.Eachplant
earnsarevenueof$387.75.Profitateachplantis$202.50.
2.3
1.Consumersurplusistheareaofthetriangleabovetheequilibriumpricebutbelowthedemandcurve=
(1/2)($120$30)500=$22,500.Producersurplusistheareaofthetrianglebelowtheequilibriumprice
butabovethesupplycurve=(1/2)($30$10)500=$5,000.TotalSurplus=$22,500+$5,000=$27,500.
Note:Surplusisamarginalconcept.Producerfixedcostisnotconsidered.
2.Totalsurplusfallsbyareaofdeadweighttriangle.Heightoftriangleisgivenbyreductioninoutputwhich
is500275=225.MarginalcostatQ=275is$21.Baseoftriangleisgivenbypricelessmarginal=
$70.50$21=$59.50.Sodeadweighttrianglehasareaequalto:=(1/2)($49.50)225or$5,568.75.The
newtotalsurplusisthecompetitivesurpluslessthedeadweightloss=$27,500$5568.75=$21,931.25.
2.4
1.EfficiencyrequiresP=MC.Marginalcostis$10.So,P=$10(Q=30)isefficientoutcome.
2.Profitmaximizationrequiressettingthemonopolyprice.BecauseinversedemandisP=25Q/2,MR=
25Q.EquatingMCandMRthenyields10=25QorQ=15andP=$17.5isprofitmaximizingoutput
andprice.
3.WelfarelossisWL=0.5($17.5$10)(3015)=$56.25.
2.5
1.PresentvalueofincrementalcashflowsfromdrivingoutLoew=$100,000+

$10,000=$16,629.DrivingoutLoewisnotagoodinvestment.
2.PresentvalueofincrementalcashflowsfrombuyingLoew=$80,000+

$10,000=$3,330.Thisisagoodinvestment.

Chapter3
3.1
1.CR4A=70%CR4B=76%.HIA=2698HIB=1660.IndustryAhasonefirmthatdominatestheindustry.
IndustryBhasfivefirmsthatcontrol90percentoftheproduction.Butthesefivefirmsmaycompete
fiercely.TheHerfindahlHirschmanindexseemstobettercapturethegreaterpotentialformonopoly
powerinIndustryA.
2.Withthemergerofthethree,secondlargestfirmsinIndustryA,thenewvaluesare:CR4 A=80%HI=
2992.Bothmeasuresrise.

Chapter4
4.1
1.Inthiscase,wehavediscreteandnotcontinuouschangesinoutput.Hencewehavetousetheaverage
valueofmarginalcostatoutput11.Thisiscalculatedastheaverageofthemarginalcostofincreasing
outputfrom10to11units($137)andthemarginalcostofincreasingoutputfrom11to12units($165),
whichisjust$151.Averageorunitcostat11unitsisequalto$1407/11=$127.91.Hence,S=AC/MC=
$127.91/151=0.8470.85.
4.2
1.AC=TC/q=50/q+2+0.5q.AC(q=4)=16.5AC(q=8)=12.25AC(q=10)=12AC(q=12)=12.167
AC(q=15)=12.833.
2.MC=TCperunitchange.Fordecreases:TC=50+2q+0.5q2[50+2(q1)+0.5(q1)2]=2+q
0.5.Forincreases:TC=50+2(q+1)+0.5(q+1)2[50+2q+0.5q2]=2+q+0.5.Theaverageof
thesetwovalueis2+q.
3.S>1forq<10S=1forq=10S<1forq>10.

Chapter5
5.1
1.Totalmoviegoersisthesumofdaytimeandeveningmoviegoers.Notethatweassumethepriceisthe
sameinthedaytimeandintheevening.Thisallowsustoderiveanoveralldemandfunctionfordaytime
andevening,whichisQTotal=10010PD+14010PE=24020P.Themonopolistmaximizestheprofit
function=Q(Pc)=(24020P)(P3),whered/dP=30040P=0.SolvingleadstoP=7.5,QD=
25,QE=65,and=405.
2.Withthirddegreepricediscriminationthemonopolisttreatsdaytimeandeveningastwoseparate
markets,soPDandPEcanvary.ProfitforthedaytimeisD=QD(PDc)andprofitfortheeveningisE
=QE(PEc).Plugginginthedemandequations,wegetD=(10010PD)(PD3)andE=(140

10PE)(PE3).SettingdD/dPD=0anddE/dPE=0,wefindPD=6.5,PE=8.5,QD=35,QE=55,D=
122.5,E=302.5.Totalattendanceis90asinpart(a),butaggregateprofitisnow425.
5.2
1.Thechowderisbeingsoldinthreedistinctmarkets.Tosolve,wecanfindseparateequilibriaforeach
market.Firstdefinetheprofitfunctionforeachmarket,whichisjusti=Qi(Pici).Substituteinthe
demandequationandthemarginalcostforeachmarket.ForBostonthisisB=(10,0001,000PB)(PB
1),forNewYorkitisNY=(20,0002,000PNY)(PNY2),andforWashingtonitisW=(15,000
1,500PW)(PW3).Takethefirstderivativedi/dPiandsetitequalto0tofindtheprofitmaximizingprices.
ForBostonthisis$5.50,forNewYorkitis$6,andforWashingtonitis$6.50.Pluggingpricebackintothe
demandequationgivestheequilibriumdailyquantity.TheseareQB=4500,QNY=8000,QW=5250.
Quantitiesaregiveninunitsperday.
2.Plugpriceandquantitybackintotheprofitequationstofindthedailyprofitineachmarket.B=$20,250,
NY=$32,000,W=$18,375.
5.3
1.Totalwelfareisthesumofconsumersurplusandproducersurplus(profit).Consumersurplusisthetotal
amountsavedbyallconsumerswhopaidlessthantheywerewillingtopayforthemovie.
Geometrically,onagraphofpriceandquantityinthemoviemarket,consumersurplusisthetriangle
boundedontheleftbytheyaxis(thelineQ=0),ontopbythedemandcurve,andonthebottombythe
pricecurve(P=P).
Inthenondiscriminatorymarket,thetheater'sprofit=405.InversedemandcurvesarePD=10
QD/10andPE=14QE/10.Fromthesecurvesitisclearthatthereservationpriceoftheconsumerswith
greatestwillingnesstopayinthedaytimeandeveningmarketsare10and14,respectively.The
consumersurplusissumoftheareasofthetriangleswithheights(107.5)and(147.5)andbases25
and65.Totalconsumersurplusis(107.5)(25)+(147.5)(65)=242.5.Totalsurplusis405+242.5
=$647.5.
Inthediscriminatorymarket,consumersurplusisonceagainthesumoftheconsumersurplusesinthe
daytimeandeveningmarkets.Totalconsumersurplusis(106.5)(35)+1/2(148.5)(55)=212.5.
Totalsurplusis425+212.5=637.5,whichis$10lessthanthenondiscriminatorytotalsurplus.

Chapter6
6.1
1.Becausethedemandcurveislinear,itmustbethelinethatpassesthroughthetwopoints,(5,$40)and
(10,$25).Theslopeofthislineis($40$25)/(510)=3,soP=3Q+b.Pluginapointandsolvefor
btofindtheinversedemandequation,P=553Q.Thereservationpriceoftheconsumerwiththe
greatestwillingnesstopayis$55,thepricewhenquantityis0.Atthispoint,thegoodisatitsscarcest,so
onlytheconsumerwithgreatestwillingnesstopaywillbuythegood.
2.Wecanthinkoftotaldemandasbeingthesumofdemandforafirstunitanddemandforasecondunit.
Becauseeveryconsumeriswillingtopay$8lessforthesecondunit,thedemandcurveforasecondunit
isjustthedemandforthefirstunitshifteddownby$8,orP=473Q2.PlugginginP=34,wefind7first
unitswillbesoldand4.333secondunitswillbesold,foratotalof11.333unitssold.

6.2
1.Thepriceperrideshouldbesetatmarginalcosts,whichisk+csop=k+c.Thenumberofridesbought
atthispriceisq1.TheadmissionfeeTshouldbesettoconsumersurplusatthispricep,whichisthe
areaunderthedemandcurveandabovek+c.
2.Thepriceperridep=0atwhichpricethenumberofridesboughtisq2.Theadmissionfeeshouldbeset
toconsumersurplusatthisprice,whichisthetotalareaunderthedemandcurve.
3.InPolicyA,thepark'sprofitpercustomerisT.Thepriceperridejustcoverscosts.InPolicyB,thepark's
profitpercustomerisTminusthecostofq2rides.However,thecostofeachrideisonlyc,because
thereisnoneedtoissuetickets.Totalprofitwillbetheareaunderthedemandcurveminusaboxof
dimensionscbyq2.Whichpolicyisbetterisuncertainwithoutfurtherinformation.PolicyBgainsprofit
whoseareaisthetrapezoidboundedbyc,k+c,andthedemandfunction,butlosesprofitgivenbythe
triangleabovethedemandcurveandbelowc.

6.3
1.

2.Ifthenumberofhighandlowdemandcustomersisthesame,thenforeachhighdemandcustomer
thereisonelowdemandcustomer.Thus,foreachpair,theprofitisprofitfromalowdemandpackage

plusprofitfromahighdemandpackage.Thissumisgreatestwhenthelowdemandpackagehas4units
andthehighdemandpackagehas12units,sothatcombinedprofitis$24+$56=$80.
3.Foreachhighdemandcustomer,therearenowtwolowdemandcustomers.Wewanttopickthelow
demandpackagetomaximize2*profitlow+profithigh.Thisismaximizedwhenthelowdemand
packagehas6units,sotheprofitfrom2lowdemandcustomersand1highdemandcustomeris$108.
4.Fromthetable,theprofitmaximizingpriceswouldbe$54forthelowdemandpackage,and$120forthe
highdemandpackage.Wewanttoknowatwhatratiotheprofitfromonlysellingthehighdemand
packageexceedsthatofsellingthehighandlowdemandpackages.Thisisequivalenttoaskingwhen
$72*NHigh>$44*NHigh+$31.50NLow.ThisequalityreducestoNHigh/NLow>1.125.Therefore,the
monopolistshouldonlyofferthehighdemandpackagewhentheratioofhighdemandtolowdemand
customersisgreaterthan1.125.

Chapter7
7.1
1.Heshouldlocateinthemiddle,wherehewillhavethegreatestaccesstoconsumers.Consumerswillbuy
fromHenryaslongasthepriceplusthetravelcostislessthanthereservationprice,orP+.5d<10,
wheredisthedistancefromHenry'sintenthsofamile.ThemarginalconsumerwillbelocatedwhereP+
.5
=10,or
=202P.Thenumberofcustomersisjust2
,becausepeoplecometoHenry'sfrombothdirections.However,2
cannotexceed21,becausethatisthemaximumnumberofpeopleinthetown.Henry'sprofitis=2
(Pc)=2(202P)(P2).Tomaximizeprofit,wesetd/dP=0andsolveforP,whichinthiscaseisP=
$6.Atthisprice,
is8sothetotalnumberofcustomerssuppliedis16,and=$64.
Withthemobilesmithy,Henrycanchargeeverycustomertheir$10reservationprice,butthetravelcost
of$0.75pertenthofamilecutsintohisprofits.Henrywillvisitconsumersaslongas.75*d+2<10,so

=10.67.ThiswouldimplyHenrywouldservice21.33customers,butbecausethereareonly21
customers,Henryjustserveseveryoneinthetown.Heearns$10inrevenuefromthepersonathis
position,$9.25fromthetwonextnearestconsumers,$8.50fromthetwosecondnearestconsumers...
givinghimrevenueminustransportcostsof$10.00+2(9.25+8.50+7.75+...+2.50)=$127.50and
profitof$125.50$42=$85.50.Theprofitfromtravelingisclearlygreaterthantheprofitfromstayingin
thesameplace,soHenryshouldtravel.
7.2

1.Thedemandcurveforagivenqualityisalinewithslope1/z,crossingtheyaxisatP=4.Asz
increases,thelinesbecomeshallowerastheslopegetscloserto0,butalwayscrosstheyaxisatthe
samepoint.
2.Forz=1,P=4QandC=1.Profit=Q(4Q)1.TheprofitmaximizingoutputisQ=2.Forz=2,P
=4Q/2andC=4.Profit=Q(4Q/2)4.TheprofitmaximizingoutputisQ=4.Forz=3,P=4
Q/3andC=9.Profit=Q(4Q/3)9.TheprofitmaximizingoutputisQ=6.
3.Forz=1,P=2and=3.Forz=2,P=2and=4.Forz=3,P=2and=3.Thequalitychoiceofz
=2leadstothehighestprofits.
7.3
1.BothtypeAandtypeBcustomersarewillingtopaymoreasqualityzincreases.Thefirmshouldsetzas
highaspossible,soz=2.Thefirmshouldthensetpricetoextractalltheindirectutility,soPA=20(2
)andPB=20.
2.Thefirmshouldoffertwoproductsonlyif20Na>10(Na+Nb),orNa>Nb.WeknowNa=NandNb=(1
)N.Substitutingin,weseethatthefirmshouldoffertwoproductsonlyif>.Ifthisisthecase,thefirm
shouldofferahighqualityandalowqualityproduct.QualityfortypeAza=2,andqualityfortypeBzb=
20z1/(2010)=2z1.Pa=20(2
)andPb=20*10
/(2010)=20
.Forthe<case,thefirmproducesonlyonegoodandza=zb=2.Thefirmwillpricetoselltoboth
typesofconsumers.
3.If
=0,thentheonlyrestrictionontypeAcustomersisthattheywillonlybuyaproductwhosequalityis
greaterthan0.ThisrestrictionisimplicitfortypeBcustomersaswell.Profitsarestillincreasinginz,
though,sothefirmshouldsellonlyoneproductatqualityz=2.Atthisquality,typeAcustomersare
willingtopay$40andtypeBcustomersarewillingtopay$20.ThepriceshouldbeP=$40if40N>
20(1)N+20N,or>2/3.If<2/3,thepriceshouldbeP=$20.

Chapter8
8.1
1.Thecableoperatorshouldsetthepricetomaximizeprofitsfromeachservice.Theprofitmaximizing
pricesare$11fortheBasicServiceand$15fortheDisneyChannel.IfthepricefortheBasicServiceis
$11,thenfamilies,hotels,andpensionerssubscribe,andthecableoperatormakesprofit=11*33*3
=24.IfthepricefortheDisneyChannelis$15,thenstudents,schools,andyoungadultssubscribe,and
profitis=15*33*3=36.
2.ThebundledserviceistheBasicServiceandtheDisneyChanneltogether.Noticethatthereservation
pricesforthebundledserviceforstudents,families,hotels,schools,youngadults,andpensioners,are
respectively$20,$20,$20,$20,$17,and$17.Thus,thepriceofthebundleshouldbe$20.Thepricesof

individualitemsmustbe$17,sothatyoungadultsandpensionerswillstillbuytheindividualservices.The
profitfrommixedbundlingis=20*4+17*28*32*3=$84.Students,families,hotels,andschools
buythebundledservice.YoungadultsonlybuyDisney,andpensionersonlybuyBasic.Thecable
companyisclearlybetteroffwiththemixedbundlingstrategy.
3.Thebestthatthecableoperatorcandowithmixedbundlingispricethebundleat$20andtheindividual
servicesat$17,asinpart(b).Thisgenerateszeroprofitfromsalesofthebundle,becausethemarginal
costofthebundleis$20and$7eachfromsalesofDisneytoyoungadultsandBasicServiceto
pensioners,givingatotalprofitfrommixedbundlingof$14.Thebestthatthecableoperatorcandois
pricetheBasicServiceat$14,sellingthistohotelsandpensioners,andtheDisneyChannelat$15,
sellingthistostudents,schoolsandyoungadults.Profitfromthisstrategyis=14*22*10+15*3
3*10=$23.
8.2
1.Iffilmissoldseparatelyfromthecamera,thenthepricechargedtolowandhighdemandcustomers
mustbethesame.WecanfindtheoveralldemandQTotal=QHigh+QLow=282P.Noticetheprofitis
composedoftwoparts:Profitfromthefilmandprofitfromleasingthecamera.Theprofitfromfilmisfilm
=1000*(16P)(P2)+1000*(12P)(P2).Thefeeforleasingthecameraiswhatwouldhavebeen
consumersurplusforthelowdemandcustomers,butall2,000customersnowhavetopayit,socamera
=2000*(12P)2.Totalprofitis=1000(P2+8P+88),sod/dP=1000(2P+8)=0,andP=4.
Withthe8and14shotvarieties,thereisnochargeforfilmandallprofitcomesfromthelease.The8
shotcameraleasemustbepricedsoastoleavenosurplusforthelowdemandcustomersbutbeless
attractivetohighdemandcustomersthanthe14shotvariety.Likewise,the14shotvarietymustnot
generatesurplusforthelowdemandcustomers,andmustbeattractivetohighdemandcustomers.
Whenthelowdemandcustomerstake8shots,theyareeffectivelypayingapriceof$4pershot,andare
receiving$32insurplus.Thusthepriceofthe8shotcamerashouldbe$32+$4*8=$64.Atthisprice,all
oftheconsumersurplusisextractedfromthelowdemandcustomersandturnedintoprofit.However,
highdemandcustomerscanbuythispackageandget$8*8+$32$64=$32ofsurplus,because8
shotsareworth$8apiecetoahighdemandcustomer.Thatmeansthatthe14shotcameramustbe
pricedtoleavehighdemandcustomerswithatleast$32ofsurplusiftheyaretochooseitoverthe8
shot.14shotsareworth$2apiecetothehighdemandcustomer,andafterpaying$2*14theyalsoget
$98ofconsumersurplus.Therefore,thepriceforthe14shotshouldbejustlessthan$98+$2*14$32
=$94,sothe14shotshouldbepricedat$93.99toensurethehighdemandcustomerswillbuy.Notice
thatthehighdemandcustomerstillmakes$32.01ofconsumersurplusfrombuyingthe14shotcamera.
Profitis=1000*($648*$2)+1000*($93.9914*$2)=$113,990.
a.Ifthereare1,000lowdemandcustomersandNhhighdemandcustomers,thenfromthetextweknow
theprofitfromsellingthe14shotand10shotvarietiesis=1000*($7010*$2)+Nh*($8814*$2)=
$50,000+Nh*$60.Ifonlythe14shotisoffered,thencamerasareonlysoldtothehighdemand
customers,butthepricedoesnothavetobediscountedtomakesurethereisatleast$32ofsurplus,so
profitis=Nh*($12614*$2).Rowlingwillonlysellthe14shotvarietyif98Nh>50000+60Nh,whichis
truewhenNh>1316.
b.Forthe14shotand8shotvarieties,profitfromsellingthe14shotand8shotis=1000*($64
8*$2)+Nh*($93.9914*$2)=$48,000+Nh*$65.99.Ifonlythe14shotisoffered,thenonceagainthe
pricedoesnothavetobediscountedtomakesurethereisatleast$32ofsurplus,soprofitis=Nh*

($12614*$2).Rowlingwillonlysellthe14shotvarietyof98Nh>48000+65.99Nh,whichistruewhen
Nh>1500.

Chapter9
9.1
1.TheuniqueNashequilibriumis:(Suspense,Suspense).Ineachoftheotherthreepossibleoutcomes
(Romance,Romance),(Romance,Suspense),and(Suspense,Romance),atleastonefirmhasan
incentivetoswitchitsstrategy.
9.2
1.BestResponse:q1=22.5q2/2,andviseversaforq2.Hence,q1=q2=15.Q=30P=$40and1=2
=$450.
9.3
1.BestresponsefunctionforUntel:qU=2.5qC/2bestresponseforCyrox:qC=2qU/2.qC=1qU=2
Q=3P=$60C=$20millionU=$80million.IfcC=$20,thenq1=q2=1.67P=$53.33.Hence,U
=C=$55.55million.

Chapter10
10.1
1.Bestresponsefunctionforq1is:q1=45q2/2.Bysymmetry:q2=45q1/2.Hence,inequilibrium:q1=
q2=30.Therefore,marketpriceis:P=$20$Q/5=$8.1=2=$180.
2.P1=P2=P=$2and1=2=0.
10.2
1.MarketoutputQ=qS+qR.AtpriceP=$110,Q=2400,whichisthecombinedcapacityofthetwo
resorts.IfPepallRidgesetsapricepSR=$110,theresidualdemandcurveforSnowRichardsisQ=
800060pSR,orpSR=133.33Q/60.ThemarginalrevenuecurveisMR=133.33Q/30.Onthe
interval0Q1400,marginalrevenueisgreaterthanmarginalcost,soSnowRichardswouldincrease
productiontoitscapacityof1400.Conversely,ifSnowRichardssetsitspricepSR=$110,theresidual
demandcurvefacingPepallRidgeisQ=760060P,orP=126.67Q/60.Themarginalrevenuecurve
isMR=126.67Q/30.Marginalrevenueisgreaterthanmarginalcostontheinterval0Q1000,so
PepallRidgewillincreaseproductiontoitscapacityof1,000.Therefore,inthecapacityconstrainedNash
equilibrium:pS=pR=$110qPR=1000qSR=1400andPR=($110$10)1000=$100,000SR=
($110$10)1400=$140,000.
10.3
1.Assumetheentiremarketisserved.BestresponsefunctionforCheapCuts:pCC=

.Likewise,bestresponsefunctionfortheRitzis:pR=

.Witht=$5andcCC=$10,CheapCutshasabestresponsefunctionofpcc=0.5pR+$7.50.Incontrast,
TheRitzhasabestresponsefunctiongivenby:pR=0.5pCC+$12.50.Forevery$1inonefirm'sunit
costtherival'soptimalpricerisesby50cents.
2.Equilibriumprices:pCC=t+

cCC+

cR=$18.33pr=t+

cCC+

cR=$21.67.Whenthetwofirmshadthesameunitcostc=10,thenpCC=pR=$15.Pricesrisenow
becausecRhasrisenandthisinducesariseinpR.Inturn,becausepricesarestrategiccomplements,
theriseinpRpermitsasimilarriseinpCC.

Chapter11
11.1
1.q2=70q1/2.
2.q1=70q2=35P=$95profittofirm1(leader)=$2,450profittofirm2(follower)=$1,225.
3.q1=q2=46.67Q=93.33P=$106.67.Profittofirm1=profittofirm2=$2,177.77.Firm1losesandfirm
2gainsasgamebecomesCournotratherthanStackelberg.Consumersenjoymoreoutputandlower
pricesunderStackelberg.
11.2
1.WestEndwillbeonitsbestresponsefunction:pWE=(pEE+c+t)/2.DemandforEastEndis:pEE=(pWE
pEE+t)N/2t.Substitutionandprofitmaximizationthenyields:pEE=c+3t/2whilepWE=c+5t/4,or:pEE
=$17.50andpWE=$16.25.Becauseofitshigherprice,EastEndwillserveonly3/8ofthe100potential
customersor37.5.Itearnsaprofitof$7.537.5=$281.25.WestEndserves62.5customersandearns
aprofitof$6.2562.5=$390.63.
2.Pricesinthissequentialpricegamearehigherthantheyareinthesimultaneousgame.Pricesare
strategiccomplements.Withsequentialpricesetting,thefirmscanexploitthiscomplementarityand
coordinatepricestosomeextent.Note,however,thatgoingfirstisadisadvantageinthisgame.While
bothfirmsearnmoreprofitthanwhenplayissimultaneous,thefirmsettingitspricesecondearnsthe
most.
11.3
1.

2.

3.TakeAllisadominantstrategyforPlayer2.ThepromisetoplayShareisnotcredible.Anticipatingthis,
Player1willGrabthedollar.

Chapter12
12.1
1.Entrant'sresidualdemanddescribedby:q=(100Q0)Por,ininverseform:P=(100Q0)q.
2.q=30Q0/2.
3.Entrantprofit=(Pc)q100=[100Q0q40]q100Substitutinginforq,entrantprofit=(30
Q0/2)2100=0ifentryistobedeterred.Q0=40,whichimpliesthatthepricewithoptimalproductionby
theentrant[q=30Q0/2]=10,isP=$50.Theentrantwillthenearnonly$10oneachofits10units,
leavingnoprofitafterthe$100sunkcost.So,thelimitoutputisQ=

=40asthisoutputremovesanyincentivetoenter.
12.2
1.BecauseinversedemandisP=120(q1+q2),theincumbent'smarginalrevenueisMR1=120q2
2q1.theincumbent'smarginalcostforoutputlessthan

1is30,hence,equatingmarginalrevenueandmarginalcostyieldsitsbestresponsefunctionforthis

rangeofoutputof:q1=90/2q2/2=45q2/2.Foroutputgreaterthanorequalto

1,theincumbent'smarginalcostis60.Hence,equatingmarginalrevenueandmarginalcostforthis

rangeofoutput,yieldsabestresponseof:q1=30q2/2.
2.Theentrant'smarginalrevenueislikewise:MR2=120q12q2.However,theentrant'smarginalcostis
always60.So,itsbestresponsefunctionisalwaysq2=30q1/2.

3.Formonopoly,profit=(Pc)q130K1$200=(120q130)q130K1$200=(90q1)q130K1
$200.However,amonopolyfirmwillnotkeepcapacityunusedsolongasMR>MC,soitwillchooseK
suchthatK1=q1.Hence,profit=(90qI)qI30qI200=(60qI)qI$200.Maximizationthenyields,
60=2q1orq1=30.Entrant'sbestresponseimpliesthatifq1=30,q2=15.Totaloutput=45.Price=
$75.Incumbentprofit=$(7530)30$3030$200=$250.Entrant'sprofit=$(7560)15$200=
$25.
4.WithK1=32=committedvalueofq1,thenentrant'sbestresponseisq2=16.Totaloutput=48andprice
is$72.Entrant'sprofitafterentrycostis:($72$60)16=$192.Fixedcostis$200,sonetprofitis
$192$200<0.Becausetheentrantcannotearnapositiveprofit,therewillbenoentry.Theincumbent
willproduceatcapacitybecauseatq1andnorival,marginalrevenueatK1=32=q1,is$56>marginal
cost=$30.However,beyondthatoutputofq1=32,marginalcostrisesto$60,sotheincumbentwill
producenomorethanq1=32.Atthisoutputlevel,P=$88.Profit=($88$60)32$200=$696.
BecausethisexceedstheStackelbergprofit,entrydeterrenceisworthwhile.
12.3
1.Theincumbentwillfightif3>4CorifC>1.
2.ForC>1,theinitialexpenditureofCimpliestheincumbentwillalwaysfightanyentry,soentrydoesnot
occur.Theincumbentthereforeearns$(8C)byexpendingC.IfCisnotspent,entrywilloccurandthe
incumbentearns$4.50.ExpenditureCisonlyworthwhileif$(8C)>$4.50.IfC>3.50,thisconditionis
notsatisfied.

Chapter13
13.1
1.Thebankwouldhavetoaskforatleast$137.5millioninagoodyear,and$100millioninabadyear.It
willthenearn$137.5withprobability0.4and$100millionwithprobability0.6foranaverageof$115
million.Ifitneedstoearnanadditional$1.25milliontocovercosts,thenthebankcanaskfor$140.625
inagoodyearsothatitsexpectedgrosspaymentis:$116.25million.No,thereisnochangeinthe
incentiveforpredation.ThebankandNewvelcanstillexpecttomakeaprofitbyenteringinthesecond
period.
13.2
1.qL=45,qf=22.5,Q=67.5,P=$32.5L=$1,012.5f=$506.25.
2.IfthefirmsplaythestandardStackelberggameineachperiod,thentheleaderearns$1,012.5each
periodor$2,025intotal(weassumethediscountfactoris1).Ifinsteadtheleaderpredates,theninfirst
period,qL=90andL=0.Insecondperiod,qL=45andL=$2,025.Theleaderdoesnotgainfromthis
strategy(andwillactuallyloseifthediscountfactorR>1asallofthegainsfromthisstrategycomeinthe
secondperiod).
3.Offerentrant$506.25tostayoutin1stperiod.Earn$2,025$506.25=$1,518.75in1stperiod$2,025
in2ndperiod.
13.3
1.Theexpectedpredationgain=theincreasedprobabilityofNewvelfailuretimesthevalueofMicrohard's
gainwhenthishappens.Hence,thegainfrompredationis:(prob)($325$150)million.Thismust

coverthecostofpredation=$30million.SolvingforprobyieldsthelowestincreaseNewvel'sfailure
probabilityconsistentwithMicrohardpursuingpredatorypracticesisprob=17.14percent.

Chapter14
14.1
1.(Confess,Confess)istheuniqueNashEquilibrium.
14.2
1.ThethirdperiodoutcomemustbetheoneperiodNashequilibriumwithbothproducing40(thousand)
andearning$1.6millioneach.Foreseeingtheinevitabilityofthisoutcomewillthwartanycooperationin
periodand2.Hence,bothwillproduce40(thousand)unitsinthatperiodaswell.Inturn,foreseeingno
cooperationineitherperiod2orperiod3,eachfirmwillalsoproduce40(thousand)unitsinperiod1.The
threeperiodgamewillsimplybeplayedasthreeoneperiodgames.
14.3
1.Ifthefirmscolludetheysharethemonopolyprofit,soifthecartelissustainedwehaveM=

.Ifthecartelfails,perperiodprofitistheCournotNashprofitN=

.Nowsupposethatonefirmsticksbythecartelagreementtoproduce(Ac)/4bwhiletheothercheats
ontheagreement.Thecheatingfirm'sbestresponseistoproduce3(Ac)/8b,withprofitD=

.Substitutingintoequation(14.7)andsimplifyinggivesthecriticalprobabilityadjusteddiscountfactor*C
=

=0.529.
2.IfthefirmscolludetheyeachearnMperperiodasinparta.IfthecartelfailswehaveN=0.Afirmthat
cheatsonthecartelearnsD=

.Substitutingintoequation(14.7)andsimplifyinggivesthecriticalprobabilityadjusteddiscountfactor*B
=

=0.5

Chapter15

15.1
1.IfdemandisP=ABQandthereareNidenticalfirmseachwithconstantmarginalcostofc,weknow
thattheCournotNashequilibriumprofitisC=

.SubstitutingN=20,A=130,B=1andc=30givesprofittoeachfirmof$22.67.
2.Ifsixfirmsmergethisreducesthenumberoffirmsintheindustrytofifteen.SubstitutingN=15gives
profittoeachfirmof$39.06.Sothemergedfirmearnsprofitpostmergerof$39.06whereasassix
independentfirmstheyearn6*$22.67.Thismergerisnotprofitable.
3.Fromthetextweknowthatthefractionoffirmsthathavetomergeforthemergertobeprofitableforthe
mergedfirmswhenthereareNfirmsintheindustrypremergerisa(N)=

.SubstitutingN=20givesa(20)=0.8445,sothatatleast16.89firmshavetomerge.Thatis,atleast
seventeenfirmsmustmerge.Thiscanbedoublechecked.Ifsixteenfirmsmergethisleavesfivefirmsin
theindustry,eachwithprofitof$277.78,whereasaggregateprofitofthesefirmspremergeris16*22.67
=$362.81.Bycontrastifseventeenfirmsmergethisleavesfourfirmsintheindustry,eachwithprofitof
$400whereasaggregateprofitofthesefirmspremergeris17*22.67=$385.49.
15.2
1.ThegeneralequationforoutputofaCournotfirmwhenthereareNfirmsintheindustry,whenthe
marginalcostoffirmiisci(i=1,...,20)andwhenmarketdemandisP=AB.QisqCi=

,theequilibriumpriceisP=

,andprofittofirmiisCi=

.InourexampleA=180,B=1,N=3,c1=c2=30,c3=30b.ThisgivesqC1=

qC2=

qC3=

.Profitofthethreefirms,ignoringoverheadcosts,isC1=

C2=

C3=

.TheequilibriumpriceisP=

.Forfirm3tobeabletosurviveitisnecessarythat24090b>0orb<2.67.
2.Themergerleadstotheclosureoffirm3,resultinginaduopolywitheachduopolisthavingconstant
marginalcostof$30.OutputofeachfirmisqC1=qC2=

=50.TheequilibriumpriceisP=

=$80.Profitofthemergedfirmis$2500900aandofthenonmergedfirmis$2500900=$1400.
3.Themergerisprofitableif2500900a>

1800.Thisrequiresthata<

(16+180b45b2).
15.3
1.ThisisjustanapplicationofthestandardCournotequationqCi=

.So,totaloutputQ=20(100/21)=95.24.Theequilibriumpriceis$34.76.
2.Applytheequationsfromthetext.Outputofaleaderfirmisq*I=

=16.67.Outputofafollowerfirmisq*f=

=1.51.Totaloutputis516.67+101.51=98.45.Theequilibriumpriceis$31.55,lowerthantheprice
premerger.
3.ThisisjustanapplicationofthestandardCournotequation.Withfifteenfirms,totaloutputis(15/16)of
thecompetitiveoutput,or(15/16)100=93.75.

Chapter16
16.1
1.Theretailer'smarginalrevenuecurveisMR=3,000QandtheretailermaximizesprofitbyequatingMR
andMC,givingr=3,000Q,whichisalsothemanufacturer'sdemandcurve.Iftheretailerhas
additionalmarginalcostsofcDthenprofitmaximizationgives3,000Q=r+cD,whichgivesr=(3,000
cD)Qasthemanufacturer'sdemandcurve.
16.2
1.ProfitmaximizationbyWRimplies1002Q=5+WW
WW=952Q=WW'sdemandcurve.ProfitmaximizationbyWWimplies:954Q=5+WM
WM=904Q=WM'sdemandcurve.ProfitmaximizationbyWMimplies:908Q=10
Q=10WM=$50WW=$75P=$90.WM=$400WW=$200WR=$100totalprofit=$700.
2.IfWMandWWmerge,thentheircostofcombinedoperationis$15.Demandcurvefacingmergedfirmis
WW=952Q.Profitmaximizationimplies:954Q=15
Q=20.Wholesalepricetoretailerfallsto$55.Pricechargedtoconsumersfallsto$80.Profitofthe
mergedfirmis(5515)20=$800.Profitoftheretaileris(8060)20=$400.Totalprofithas
increased,themergedfirmhasgreaterprofitsandtheretailerhasgreaterprofits.Consumersareoffered
lowerprices.
IfWWandWRmerge,WWwillsupplyWRatmarginalcost,whichis5+wm.WRthenequatesMRwith
MCgiving1002Q=10+wmgivingthedemandfunctionforWMofwm=902Q.EquatingMRwith
MCgives904Q=10orQ=20.Thisgiveswm=$50.ProfittoWMis$800.Thefinalproduct(retail)
priceis$80.Profittothemergedfirmis$(801050)20=$400.
3.Ifallthreefirmsmerge,totalcostofbringinggoodtomarketis$20.MergedfirmfacesretaildemandofP
=100Q,hence,MR=1002Q=20impliesQ=40andP=60.Mergedfirmprofitis:$1600>$1200
above.
16.3
1.SupposethatWIsetsawholesalepriceofw.GImaximizesprofitbysettingMC=0.1+w=MR=1
2QgbsoQgb=0.45w/2.TImaximizesprofitbysetting0.1+w=0.750.4Qgn,sothatQgn=1.625
2.5w.ThisgivesaggregatedemandforWIofQ=2.0753worw=2.075/3Q/3.Marginalrevenuefor
WIisthenMR=2.075/32Q/3andMC=0.1.ThisgivesprofitmaximizingtotaloutputQ=0.8875.The
wholesalepriceisw=$0.396.SalesinBostonare0.252andinNewYorkare0.635.Thepriceofgizmos
inBostonis$0.748andinNewYorkis$0.623.Profitsare:WI=$0.263GI=$0.063TI=$0.081.

2.SupposethatWIsetsapricewbforwidgetsinBostonandwnforwidgetsinNewYork.GIsetsMR=1
2Qgb=MC=0.1+wb,givingderiveddemandtoWIofwb=0.92Qgb.MarginalrevenueisMR=0.9
4Qgb.EquatingwithMCof0.1givesQgb=0.2.Thewholesalepriceiswb=$0.5.TheBostongizmoprice
is$0.8.ProfitofGIis$0.04.ProfitofWIinBostonis$0.08.Similarly,deriveddemandforWIinNewYork
iswn=0.750.4Qgn.EquatingMR=0.750.8QnwithMC=0.1givesQn=0.8125.Wholesalepriceis
$0.425.TheNewYorkgizmopriceis$0.5875.ProfitofTIis$0.051andofWIfromsalesinNewYorkis
$0.264.ProfitforWIincreasedandforTIandGIdecreased.
3.SupposethatWImergeswithGIinBoston.WidgetsaresuppliedtoGIatmarginalcost.GIequatesMR=
12Qgb=MC=0.2,givingQgb=0.4.PriceofgizmosinBoston=$0.6,profitofthemergedfirmfrom
Bostonis$0.16,aggregateprofitis$0.349.NowsupposethatWImergeswithTIinNewYork.Widgets
suppliedtoNewYorkatmarginalcost.GIsetsMR=0.750.4Qgn=MC=0.2,givingQgn=1.375.Price
ofGizmosinNewYork$0.475.Profitofthemergedfirmis$0.458.SomergerwithTIispreferred.
4.i.PriceinBostonrisesandinNewYorkfalls.Thereistheoppositeeffectonconsumersurplus.
ii.PriceandconsumersurplusinBostonareunaffected.PriceinNewYorkfallsandconsumersurplus
increases.
16.4
1.Competitivepriceisequaltomarginalcostequalsr.DemandfacingWIisr=100Q,soMR=1002Q
=10forprofitmaximization,or:Q=45andr=P=$55.WIprofitis$2,025.Competitiveretailersearn
zeroprofit.
2.WIisalreadyearningthemaximumprofitpossibleinthisindustry(absentpricediscrimination).
Therefore,integrationwithoneorevenmanydownstreamretailerscannotraiseWI'sprofitsorpricePto
consumers.EvenifWIboughtalldownstreamretailers,itwouldstillmaximizeprofitsbysettingP=$55,
selling45units,andearning$2,025inprofit.
3.Competitivemanufacturingprice=marginalcost=$10.Competitiveretailprice=manufacturingprice=
$10.

Chapter17
17.1
1.TheGreatToyStore'smarginalrevenuecurveisMRR=1,0004QandtheToyStoremaximizesprofit
byequatingMRandMC,givingr=1,0004Q,whichisalsoTigerel'sdemandcurve.Tigereltherefore
hasamarginalrevenuecurveofMRM=1,0008Q.EquatingthiswiththeTigerel'smarginalcostc=
$40yieldsQ=120.FromtheTigereldemandcurve,r=10004Q,thisimpliesawholesalepriceofr=
$520.FromtheretaildemandcurvefacingtheGreatToyStore,P=1,0002Q,theretailpricewillbe
$760.
2.TheGreatToyStorewillearnprofitof($760$520)120=$28,800.Tigerelwillearnprofitof($520
$40)120=$57,600.
3.Tigerelreceivesc=$40foreachunitplusasalesroyaltyof2/3ofallsales.Hence,Tigerel'stotal
revenueis(c+0.667P)Q=$40Q+0.6667PQ=($40+666.671.333Q)Q.Itsmarginalrevenueis
therefore706.672.667Q.Equatingthiswithitsmarginalcostc=$40yieldsanoptimaloutputof:Q=
250.TheretailpricewillthereforebeP=1,000500=$500.TotalToyStorerevenuewillbe$125,000.
TheToyStorekeepsonethirdofthislesswholesalecosts=0.3333$125,000$40250=

$41,666.67$10,000=$31,666.67asretailprofit.Tigerelkeepstheremainder=$93,333.33asits
revenueleavingit$83,333.333asprofitafterproductioncosts.
17.2
1.Fromequation(17.6)wehave(106)/2=s2/2+2s2+(17.7).Hence,s=
=0.894.Fromequation(17.7),P=(10+6+s2)/2=$8.4.Fromthedemandcurve,Q=0.894(10
8.4)100=143.4.Hence,themanufacturer'sprofitis:($6$5)143.4=$143.4.
2.Ifthewholesalepricer=$7,thentheservicelevelsfallstos=
=0.775.Inturn,thisimpliesaretailpriceofP=(10+7+0.7752)/2=$8.80.Thetotalamountsoldfallsto
0.775($10$8.80)100=93.
17.3
1.Becausemarginalcostc=0,profitmaximizationisthesameasrevenuemaximization,i.e.,thefirmwill
wishtoproducewheremarginalrevenueMR=0.Whendemandisstrong,theinversedemandis:p=10
Q/100.HenceMRS=10Q/50.TherevenuemaximizingchoiceofQisthereforeQ=$500implyinga
retailpriceof$5.Whendemandisweak,theinverseddemandis:p=10Q/30,sothatmarginal
revenueinthiscaseofMW=10Q/15which,inturn,impliesanoptimaloutputofQ=150.Substitution
ofthisintotheweakcaseinversedemandcurvethenimpliesapriceof$5again.
2.Ifthe500unitshavealreadybeenproducedthentheirproductioncostissunk.Asaresult,thefirm's
marginalcostiszeroanditwillwishtoselleitherthefullcapacityof500unitsortothepointwhereMR=
0,dependingonwhichconstraintbindsfirst.WhendemandisstrongandMRS=10Q/50,thefirmwill
wishtosellall500units.WhendemandisweakandMRW=10Q/15,thefirmwillwishtosellonly150
units.Inthefirstcase,theretailpriceis$5andthefirmearnsaprofitof$2,500.Inthesecondcase,the
retailpriceisagain$5,butthefirmearnsaprofitofonly$750.Becausethesecasesoccurwithequal
probability,theexpectedprofitconditionalonhavingproduced500unitsis($2500+$750)/2=$1,625.
3.Onceboughtasablockof500units,competitiveretailerstreatthewholesalecostassunk.Therefore,
theirmarginalcostis0.Becausetheywillsellsolongaspriceexceedsmarginalcost,competitive
retailerswillsellall500unitsatthemarketclearingpriceof$5ifdemandisstrong.Whendemandis
weak,theywillcontinuesellinguntilthenumberofunitssoldis300andtheretailpriceasfallento0.
4.Letwbetheimplicitwholesalepriceperunitwhenablockof500unitsisinitiallysold.Inthecompetitive
retailsectorcase,retailprofitsnetofinitialwholesalecostsare$2,500lessw500whendemandisstrong
and0lessw500whendemandisweak.Hence,expectedretailprofitsare0.5$2500+0.50w500.
Becausecompetitiveretailersneedtoexpecttobreakeven,thewholesalepricenecessarytoinduce
competitiveretailerstostock500unitsisw=$2.50.Ifthemanufacturersetsthisprice,competitive
retailersasagroupcanbepersuadedtostock500units.Accordingly,themanufacturerwillearnaprofit
of$2.50500=$1,250.

Chapter18
18.1
1.n*=2.
2.qperdivision=15.Profitperdivision=$225.Profitperfirm=$450less($90insunkdivisioncosts)$360.

3.Q=60P=$40.
4.Puremonopoly:PM=$62.50QM=$37.50M=$1406.25less$45(sunkcostforn=1division)=
$1361.25

Chapter19
19.1
1.a=100impliesdP/dQ=0.1a=1,000impliesdP/dQ=0.0316.
2.i.MR=1000.04Q.
ii.P=$80Q=1,000.
iii.Priceelasticity(absolutevalue)=4.Elasticityofsaleswithrespecttoadvertising=1/2.
3.Ata=2,500,P=$80Q=1,000
Advertising/SalesRatio=a/PQ=0.03125.DorfmanSteinerconditionrequiresAdvertising/SalesRatio=
(1/2)/4=1/8,isnotsatisfiedhere.OptimaladvertisingratethatdoessatisfyDorfmanSteinercondition
yields:a=40,000P=$80Q=4,000.

Chapter20
20.1
1.Withamarginalcostof$28,themonopolistwouldliketopricesuchthatMR=MC.Thisimplies1004Q
=28,orQ=18.Atthisquantity,pricewouldbeP=1002(18)=$64.However,thecurrentmarketprice
withBertrandcompetitionis$60.Becausetheinnovator'sidealmonopolypriceisgreaterthanthecurrent
marketprice,thisisanondrasticinnovation.Theinnovatorhastoreducethepriceto$59.99inorderto
capturethemarket.
Saytheinnovator'snewmarginalcostofproductioniscM.ThenwewanttochooseacMsuchthatPM<
60.WeknowMR=MCand1004QM=cM,soQM=25cM/4,andPM=1002(25cM/4)=50+
cM/2..MonopolypricePM<60implies50+cM/2<60,whichinturnimpliescM<20.Inorderforthe
innovationtobedrastic,cMmustbelessthan$20.
20.2
1.Theinnovationisnondrasticifthemonopolist'sidealpriceisgreaterthanthecompetitiveprice,PM>PC.
Becausethefirmscompeteinprice,PC=cC=75.ThemonopolistwouldprofitmaximizebysettingMR
=MC,or1002QM=60,soQM=20andPM=80.Because80>75,thisisanondrasticinnovation.Ifthe
innovationreducescosttocM,equatingMRwithMCgives1002Q=cMwhichgivesQ=50cM/2and
P=50+cM/2.Forthistobeadrasticinnovationrequiresthat50+cM/275orcM$50.
2.IfthemarketisamonopolythemonopolistsetsMR=MC,or1002Q=75,orQ=12.5andP=$87.5
priortotheinnovation,earningprofitof$156.25perperiodpriortotheinnovation.Withtheinnovation
MC=60andsothemonopolistsets1002Q=60orQ=20andpriceP=80.Profitaftertheinnovation
istherefore$(8060)20=$400perperiod.ThemonopolistvaluestheinnovationatVM=$(400
156.25)/0.1=$2,437.50.
3.CournotduopolistsfacingthesamemarginalcosteachproduceoutputQD=(Ac)/3B=25/3=8.33.
Aggregateoutputis16.67andsopriceis$83.33.Profittoeachduopolistis$(83.3375)8.33=
$69.44.

4.Nowwesupposefirm1hasinnovated,soitsmarginalcostisc1=60,butfirm2hasnotinnovatedand
stillhasmarginalcostc2=75.Outputoffirm1istheduopolyoutputQ1=(A2c1+c2)/3B=18.33andof
firm2isQ2=(A2c2+c1)/3=3.33.Aggregateoutputis21.67sopriceis$78.33.
5.Profittoinnovation,theinnovatingfirmis$(78.3360)18.33=$336.11.TheinnovatingCournot
duopolistvaluestheinnovationatVD=$(336.1169.44)/0.1=$2,666.67.BecauseVD>VMthisconfirms
thattheduopolistvaluestheinnovationmorethanthemonopolist.

Chapter21
21.1
1.Ifthefirmscompeteinprice,thenpriceisdriventomarginalcost,soP=$70andQ=30.
2.Ifthefirmchoosesresearchactivityxitsmarginalcostbecomes70x.Assumingthattheinnovationis
nondrastic,theinnovatingfirmwillsetprice$70andsell30units.Theresultingprofitperperiodwhilethe
patentisinforceisthen$(7070+x)30=30x.AggregateprofitoverthelifeofthepatentisthenV(x
25)=

30x15x2=299.57x15x2.ThisequationismaximizedwhendV/dx=299.5730x=0,orwhenx10.
3.Ifthepatentdurationisreducedtotwentyyears,thenV(x20)=

30x15x2=280.97x30x2sodV/dx=280.9730x=0,and.x9.4Becauseofthedecreaseinthe
patentduration,thefirm'sR&Deffortisdecreased.
4.ThetotalnetsurplusTS(xT)=V(x,T)+CS(xT)r(x).ConsumersurplusisCS(xT)=

CSP+

CSNPwhereCSP=(10070)2/2=$450istheconsumersurplusperperiodwhiletheinnovationison
patentandCSNP=(100(70x))2/2=(30+x)2/2istheconsumersurpluswhentheinnovationgoesoff
patent.Note:Consumersurplusisthetrianglewithheight100PandbaseQ=100P.Whenthe
innovationcomesoffpatentP=cx.Whileonpatent,P=70.ForT=25,weknowfrompart(c)thatx
10andTS(1025)=2995.7+(10.909125)/(10.9091)*302/2+0.909125/(10.9091)*402/215*102
=$6,801.61.IfwehaveT=20,thenx9.4,soTS(9.420)=2809.7+(10.909120)/(10.9091)*302
+0.909120/(10.9091)**(30+9.4)215*9.42=$6799.66.Thus,totalwelfaredecreases
approximately$2ifthepatentlifeisdecreasesfrom25to20years.
21.2
1.IfonlyBMIinnovates,thenECNisshutoutofthemarketandBMImonopolizes.Facingademandcurve
ofP=1002Q,amarginalcostofc=50,andafixedcostforsettingupalabofK,BMImaximizesthe
profitfunction=Q(Pc)K=Q(100502Q)K.Thisfunctionismaximizedwhen/Q=50
4Q=0,whichiswhenQ=12.5andP=1002*12.5=75.Monopolyprofitsare=12.5(7550)K=
$312.5K.Consumersurplusistheareaofthetrianglewithheight100PandbaseQ,soCS=*25*
12.5=$156.25.

2.IfbothBMIandECNsuccessfullyinnovate,thenthetwofirmswillcompete,Cournotstyle.Outputofeach
firmisQi=(Ac)/3B=8.33.Priceis$66.67andprofitofeachfirmincludingthecostofsettingupalab,
1=2=8.33(66.6750)K=$138.89K.Consumersurplusisonceagaintheareaofthetriangle
withheight100PandbaseQ,soCS=*(10066.67)*16.67=$277.78.
3.Ifonlyonefirmsetsupalab,thenlikelihoodthatthelabissuccessfulandthefirminnovatesis=0.8,
andthelikelihoodthatthelabisunsuccessfulis(1)=0.2.Expectedprofitis0.8($312.50)K=$250
K.Ifbothfirmssetupalab,thentherearefourpossibleoutcomesforeachfirm.Theseare
1.BMIsuccessfullyinnovatesandECNdoesnot,withprobability0.80.2
2.bothsuccessfullyinnovatewithprobability0.80.8
3.ECNsuccessfullyinnovateswhileBMIdoesnot,withprobability0.20.8
4.neithersuccessfullyinnovatewithprobability0.20.2.
Ineachofthelasttwocases,BMImakesnoprofit.So,itsexpectedprofitis:0.80.2$312.50+0.822
$138.89K=$138.89K.Thepayoffmatrixis:

4.For(NoR&D,NoR$D)tobeaNashequilibrium$250K<0orK>$250.For(R&D,R&D)tobeaNash
equilibrium$138.89K>0orK<$138.89.For$138.89<K<$250onlyonefirmwilldoR&D.
5.Theexpectedsocialsurpluswithonlyonelabis0.8($312.50+$156.25)K=$375K.Withtwolabsit
is20.80.2($312.50+156.25)+0.80.8(138.89+277.78)2K=$416.672K.Twolabsare
optimalif$416.672K>$375KorK<$41.67.
21.3
1.WithCournotcompetition,firmschoosequantityasthestrategicvariable.Eachfirmwantstomaximize
theprofitfunctioni=qi(1002(qi+qi)c)=qi(402qi2qi).Thisfunctionismaximizedwheni/
qi=404qi2qi=0,whichiswhenqi=10qi/2.Becausecostsaresymmetrical,qi=qi,soboth
firmsareontheirbestresponsefunctionswhenqi=qi=6.67andQ=13.33,sopriceisP=73.33.
2. 1.ThetwofirmswillstillengageinCournotcompetition,exceptthatnowtheinnovator'smarginalcostis
50andthenoninnovator'sisstill60.Sayfirm1istheinnovatorandfirm2isthenoninnovator,then
1=q1(1002q12q250)and2=q2(1002q22q160).Thisleadstobestresponse
functionsFirm1:q1=12.5q2/2andFirm2:q2=10q1/2.Bothfirmsareontheirbestresponse
functionswhenq1=10andq2=5,soQ=15andP=70.Firm1'sprofitis1=10(7050)=$200
andfirm2'sprofitis2=5(7060)=$50.
2.Iffirm1licensestheinventiontofirm2at$10perunit,thenfirm2'smarginalproductioncostwillbe
$50becauseoftheinnovation,butthereisa$10royaltyfeeoneachunit,sotheoverallmarginalcost
isstillc2=50+10=60.However,firm1alsomakesaprofitof$10oneveryunitfirm2sells,sothe
newprofitfunctionsare1=q1(502q12q2)+10q2and2=q2(402q12q2).This,however,
leadstothesamebestresponsefunctions,becausefirm1doesnothavecontroloverq2,sothe
equilibriumquantitiesarestillq1=10,q2=5,andQ=15,andtheequilibriumpriceisstillP=70.Firm
1'sprofitis1=10(7050)+5*10=250andfirm2'sprofitis2=5(7050)5*10=50.

3.Saythatfirm1licensestheproducttofirm2forafeeK.Thenbothfirmswilltakeadvantageofthe
innovationandhaveamarginalcostc=50.Profitsare1=q1(P50)+Kand2=q2(P50)K.
BestresponsefunctionsarenowFirm1:q1=12.5q2/2andFirm2:q2=12.5q1/2.Bothfirmsare
ontheirbestresponsefunctionswhenq1=q2=8.33,Q=16.67,andpriceisP=66.67.Profitsare1
=8.33(66.6750)+K=138.89+Kand2=8.33(66.6750)K=138.89K.
Firm2willbewillingtopaythelicensingfeeaslongastheprofitfrombuyingthelicenseandusingthe
innovationisgreaterthantheprofitfrompart(i),whereitdidn'thavethelicense.Thus,aslongas138.89
K>50,firm2willbuythelicense.ThisrequiresK<88.89.
Firm1shouldpricethelicensesothatitisjustmarginallybetterforfirm2tobuythelicense,sotheprice
shouldbeK=88.88.Firm1'sprofitswillbe1=138.89+88.88=$227.77.Firm2'sprofitswillbe2=
138.8988.88=$50.01.Notethatinthisexampletheinnovatorwouldprefertheroyaltytothefixedfee.

Chapter22
22.1
1.Theconsumerwhoisindifferentbetweenbuyingthegoodandnotbuyingishasbasicvaluationvi
satisfyingthecondition(0.4+6f2)vM=p.Hence,withp=50,wehave:vM=p/(0.4+6f2)=50/(0.4+6f
2).

2.Themarketfractionfthatisservedisgivenbyf=1vM/100.Hencewehavef=10.5/(0.4+6f2).This
equalityholdswheneitherf=0.1905orf=0.906.Thesecondsolutionisstable.

Chapter23
23.1
1.Adominantstrategyisonethatgivesyouapayoffgreaterthananyotherstrategyregardlessofwhatis
chosenbyotherplayers.Clearlyitdoesnotpaytobidmorethanyourwillingnesstopay.Youwilllose
anytimethatyouwin.Theotherstrategyyoucouldchooseistostopbiddingwhenthepriceislessthan
yourtruevaluation.SupposethattheauctionpriceispandyourtruevaluationisV.Ifp<Vandyoustop
biddingyourpayoffis0,whereasifyoubidp+
<VthenyourpayoffisV(p+
)>0.So,foranyp<V,continuingtobidisadominantstrategy.Becauseyoualsocannotgainbutmay
loseifyoubidV+
,biddingVisadominantstrategy.
23.2
1.Yourbeststrategyhereistoassumethatyouaretheonewiththehighestvaluation.Inotherwordsyou
assumethattheothersevenbiddershavevaluationsdrawnfromauniformdistributionovertheinterval
[0,200].Ifweassumethatthesebidsareevenlyspacedoutovertheintervalthenthelowestwouldbe
25(=1/8*200),thenext50(=2/8*200),thenext75,thenext100,thenext125,thenext150,andfinally

thehighestbidfromtheotherbidderswillbe175(=7/8*200).Youshouldsubmitabidof$175towinthe
auction.
23.3
1.Your$20,000estimateislikelytoohighbytheamount

$3000=

$3000=$2,333.33Ifyoubid$20,000thatistheamountyouarelikelyoverbidding.

Chapter24
24.1
1.ThemarginalrevenueforfirmAis:MR A=1000qB2qA.SettingthisequaltomarginalcostMCA=400
yieldsfirmA'sbestresponsefunction:qA=300qB/2.Bysymmetry,firmB'sbestresponseis:qB=300
qA/2.Hence,theNashequilibriumis:qA=qB=200,implyingQ=400P=$600andprofittoeachfirm
A=B=$40,000.
2.Fromequation(24.8)or(24.9),theoptimalsubsidys*=(Ac)/4.HerewehaveA=$1000andc=
marginalcost=$400.Hencetheoptimalsubsidyiss*=$150.Itfollowsfromequation(24.3)thatqA=
(1000400+2s*)/3=300.FirmB'sbestresponsefunctioninturnimpliesthat:qB=300qA/2=150.
BecausetotaloutputisQ=450,themarketpriceis$550.
1.FirmA'sprofitis:($550c+s*)qA=$300300=$90,000.
2.Thecostofthesubsidyiss*qA=$150300=$45,000.
3.Thenetgainfromthesubsidyis$90,000$45,000=$45,000
24.2
1.Ingeneral,weknowfromChapter9thattheCournotmodelwithcostdifferencesimpliesthefollowing
outputlevels:qA=(A2cA+cB)/3andqB=(A+cA2cB)/3.Beforethetariff,themarginalcostforeach
firmiscA=cB=12.Hence,priortothetariff,eachfirmhadoutput:qA=qB=88/3.So,totaloutputwasQ
=58.67implyingapriceP=$41.33.PretariffprofittofirmAis:29.33 2=$860.44.Consumersurplusin
CountryAinthenotariffcaseis:0.5(10041.33)58.67=$1720.89.Afterthetariff,firmAstillhasa
marginalcostofcA=12.However,firmBlosesscaleeconomiesandsohasanincreaseinthemarginal
costofproductiontosB=14.Tothishighermarginalcost,wemustaddtheadditional2dollartariff.
Hence,withincountryA,firmfacesanimplicitmarginalcostproductionplustariffof14+2=16for
unitssoldincountryA.Itfollowsthatafterthetariff,eachfirm'soutputwillbe:qA=(10024+16)/3=
92/3andqB=(100+1232)/3=80/3.Hence,totaloutputisQ=57.333,implyingapriceofP=$42.67.
FirmA'sprofitisnow:($42.67$12)92/3=$940.455.ConsumersurplusinCountryAisnow:0.5
(10042.67)57.33=$1643.46.Producersurplushasincreasedby$940.44$860.44=$80.
Consumersurplushasdecreasedby$1720.89$1643.46=$77.33.
AbbreviatedNewDrugApplication(ANDA),322
AbrantesMetz,374

Adams,W.J.,187
advertising,516547seealsoeconomicroleofadvertising
complements,coordination,andindustrydynamics,535537
informationand,516547
information
prestigeand,537541
pricecompetitionand,531535
informativeadvertisingandpricecompetition,546547
jointadvertisingandpricingdecisions,535
marketpowerand,519520
monopolyfirm'sprofitmaximizinglevelof,520522
practiceandtheory,518519
affiliatedvalues,646647
aftermarketrestrictions,486
Agencytheory,451452
Aggarwal,R.K.,450
aggregatedemand,102
Aghion,P.,332
Ahimud,Y.,450,450n10
AlbrechtandKhancases,464
Albrechtv.TheHeraldCo.,461
Alchian,A.A., 65
Allen,R.G.D.,195n8
AllenMylandv.IBM33F.3d194(3rdCir.1994),500
allocationalconcept,30n9
AlmostIdealDemandSystem(AIDS),415
AmericanEconomicAssociation,96

AmericanTobaccoCompanyv.UnitedStates,328
U.S.781(1946),10,10n10
Anderson,S.,529
Andrade,G.,412
anticompetitiveeffectsofverticalmergers,432436
antitrustandindustrialorganizationtheory,613
antitrustaroundtheglobe,1314
AntitrustLawIndex,1314
ChicagoSchoolandbeyond,1013
focusinthebeginning(Section1statute),7
keyantitruststatutes,excerptsfrom,1518ClaytonAct,includingkeyamendmentsofRobinsonPatman
ActandCellerKefauverAct,1618TheShermanAct,16
monopolization(Section2statute),7
newShermanActandSCP)approach,10
ruleofreasonframework,7
antitrustauthoritiesrole,collusion,370377
detectingcollusion,372375
detectionandfines,371372
leniency(amnesty)programsandcarteldetection,375377
antitrustpolicy,349
bundling,andtieinsales,196204additionaldevelopments,200204communityantennatelevision
(CATV)industry,201
predationand,339342AreedaandTurnerrule,340341AverageAvoidableCost(AAC), 341342
Baumoltests,341
towardverticalpriceconstraints,460461
applicationsbarriertoentry,196
applicationsprograminterface(API),196
arbitrageinpricediscrimination,94

Archibald,R.,529
AreedaandTurnerrule,340341
Areeda,P.E.,339n17,340
Argote,L.,79
Arrow,K.,553n5
Arthur,W.B.,621n4
Ashenfelter,O.,416n24
Ashmore,D.,416n24
asymmetricinformation,predatorypricing,327331
asymmetriesandauctions,651653
Athey,S.,377n27
AtlanticRichfieldCompany(ARCO),258
auctions,378379,637660seealsobidding
affiliatedvalues,646647
asymmetriesandfirmrivalry,651653
basictheoryandapplications,637660
commonvalueauctionsandthewinner'scurse,645646
dimensions,638
equilibriumbiddingstrategiesinEnglish,638644
industrialorganizationand,647653seealsounderindustrialorganization
oligopolypricingand,648651
privatevaluesauctions,638644
revenueequivalencetheorem,638644
schoolmilkauctions,competition,andcollusion,654657
secondpriceprivatevalueauctions,638644
taxonomy,638

types,638Dutchordescendingauction,638Englishorascendingauction,638firstpricesealedbid
auction,638secondpricesealedbidauction,638
AverageAvoidableCost(AAC),341342
averagecost,66,88
Bagwell,K.,377n27,519n7,528n14,537n18
Bain,J.S.,519,525,534
Baker,J.,416n24
Baker,J.B.,377n27
Baldwin,J.,284
Baldwin,J.R.,81n11
banking,scaleandscopeeconomiesin,8385
quasiscopeeconomies,8485
Barro,R.,549n4
BarryWrightCorporationv.ITTGrinnellCorporation,etal.,724F.2d227(1stCir.1983),340n19
basicmicroeconomics,1946
competitionversusmonopoly,polesofmarketperformance,1927
BattleoftheSexes,626627
Baumoltests,341
Baye,M.,504
BeckerandMurphyapproach,535
Becker,G.,536,537
beforeandaftermethod,inpricefixingestimation,377
Benham,L.,533
Benkard,L.,79
Benoit,J.P.,323n10
Bergson,A.,59
Berki,S.,7n6

Bernard,A.,74
Bernheim,B.D.,367n14,488n3
Bernheim,D.,478n13
Bertrandcompetition,595
andmergerwithlineardemandsystems,403
inasimplelineardemandsystem,423424
preandpostmergercases,comparison,424
premergercase,423
Bertrandduopolymodel,243247
Bertrandinaspatialsetting,250256locationconcept,251,254255
Bertrandreconsidered,247250
Bertrandpricingequilibrium,650
Bertrand,J.,243
BertrandNashequilibriumprice,409
Besanko,D.,79n10,448n8,488n3
Besen,S.M.,624n5,625
Bessen,J.,598599
bestresponse(reaction)curvesforCournotduopolymodel,225227
bidding,654seealsoauctions
complementarybidding,656
optimalbiddinginfirstpriceauctions,659660
optimalbiddinginoligopolisticBertrandcompetition,660
intosteps,654conditionalonsubmittingabidtodeterminehowmuchtobid,654655decisiontosubmita
bid,654
Birch,D.,287
Blair,R.D.,503n18
Blass,A.A., 502n16

blockpricing,127130
Blundell,R.,561
Bolotova,Y.,380
Bonanno,G.,490n9
Borenstein,S.,137,499
brandcompetitionandconsumerpreferences,257260
Californiaretailgasolinemarket,257260
Brandeis,L.,317n1
Brandenburger,A.,40n14,41n15
Brandenburger,A.B.,300
Branstetter,L.,603
Braunstein,Y.M.,1,78n9,8485
Bresnahan,T.,80
Brito,D.,405n13
Brodley,J.,342
BrookeGroupv.Brown&WilliamsonTobacco509U.S.209(1993),339,339n16
BrownShoeCo.v.UnitedStates,370U.S.294(1962),1011,10n11
Brown,C.,288
Bulow,J.,257n12,308n15,646n8
bundling,173212seealsocommoditybundlingtieinsales
incableTV,204207
todeterentry,302304
andentrydeterrence,179183
entrydeterringpurebundleprice,210
andMicrosoftCase,197200
mixedbundling,183185
optimalentrypricewithpurebundling,210

optimalmixedbundlingprices,211
optimalpricing,210212
optimalpurebundleprice,210
preemptionand,299304
productbundling,182
profitabilityand,177179
purebundling,182assustainableequilibrium,203
strategicuseof,300
Burns,M.R.,331
BusinessElectronicsCorp.v.SharpElectronicsCorp.488U.S.717(1988),460,460n3,476,476n12
butforprice(s)estimation,377
Butters,G.,533n17
cableTVservice,bundlingin,204207
Cable,J.,287
Cabral,L.,413
Cabral,L.M.B.,340n18
Cady,J.F.,534
calculusofcompetition,46
Californiaretailgasolinemarket,257260
CanadianWheatBoard(CWB),strategicsubsidiesat,669672
capacityexpansionasacredibleentrydeterringcommitment,291299
Capitalism,Socialism,andDemocracy,549
Carlton,D.W.,502n16
carteldetection,375377
Carter,T.,288
Cary,E.,637n2
Cassano,J.,448

Caves,R.E.,288n8,304,529
cement/readymixedconcretemarket,verticalintegrationin,453455
chainstoreparadox,276
Chamberlin,E.H.,8
Chen,J.,374
Chen,Y.,445,446n5,464n4
Chen,Z.,499n14
Chenery,H.,70n6
ChicagoSchoolandSCPapproach,1013
Chipty,T.,453n12
Christensen,L.,84
Clark,C.,533n17
1914ClaytonAct,7
coaseconjecture,3740
coasedurablegoodsmodel,testing,4143
Coase,R.H.,65
Coase,R.L.,38
CobbDouglascase,89
Cohen,W.,561562,561n11
Cohn,E.,78n9
collusion,370377seealsoantitrustauthoritiesrole
indistinguishabilitytheorem,373,373n22
RPMagreementsand,476478
Comanor,W.,492n11
Comanor,W.S.,519
commoditybundling,173212seealsobundlingtieinsales
antitrustand,196204

andconsumervaluation,174188consumerreservationprices,176mixedbundling,176Stigler'sinsight
into,175176undlingandprofitability,177179
commonvalueauctionsandwinner'scurse,645646
communityantennatelevision(CATV)industry,201
competitionversusmonopoly,1927seealsoundermarketperformance
competitionviainnovation,559561
CompetitiveAdvantageofNations,The,549
competitiveindustry,8081
competitivemarket
economicefficiencyandsurplusin,2830
maximizingtotalsurplus,29
profitmaximizationby,485
serviceprovisionby,485
complementarybidding,656
complementarygoods,191196
applicationsprograminterface(API),196applicationsbarriertoentry,196designandproductionfeatures,
196
firmswith,211212
andmonopolypricing,191196mergers,195
productcomplementarities,195
ComputerServiceCorporation(CSC),497
concentrationcurves,48
digressiononmergersandtheoryofthefirm,451452Agencytheory,451452Neoclassicaltheory,451
economiesassociatedwith,447449scopeeconomies,448transactionscosts,449
managerialmotives,449450
Connor,J.,380
Connor,J.M.,370n17,377n26,380
constraintsonmonopolypower,3241seealsoundermonopoly

consumerpersuasion,advertisingas,523525
informativeadvertising,525535seealsoindividualentry
contestabilitytheory,11
ContinentalT.V.Inc.v.GTESylvaniaInc.433U.S.36(1977),12n15,476n12
cooperativegametheory,214215
coownership,70n7
costcomplementarities,75
costconcepts,6667
fixedcost,66
marginalcost,6769
inmultiproductfirms,7378seealsomultiproductfirms,costsand
sunkcost,6768
costminimization,88
costsynergies,mergersand,391394seealsoundermergers
costsandmarketstructure,6872
averagecost,6869
marginalcost,6869
minimumefficientscale,70
cotenancy,70n7
Cotterill,R.W.,235
Cournotmodel/theory,11n4,222228
bestresponsecurvesfor,225
concentrationandprofitabilityin,233235
maximumoutputlevel,selecting,223
andpublicpolicy,235
rulesfor,223
variationsin,manyfirmsanddifferentcosts,228233

verticalintegrationandforeclosurein,437441upstreamanddownstreamfirm,438441novertical
mergers,437438
Cournot,A.,192,215
CournotNashequilibrium,267
CourtofAppealsfortheFederalCircuit(CAFC),601
Cowling,K.,5961
credibilityofthreatsfordynamicgames,272277
credibleentrydeterringcommitment,capacityexpansionas,291299
Crocker,K.,504
customerrelationsmanagement(CRM),53
D'Aspremont,C.,255n11,563n14
Damgaard,C.,48n1
Daughety,A.F.,394n9,397,402
Daughety'smodel,397399
David,B.,264n2
Davidson,C.,374n23,403n12,404
Davies,S.W.,55n7
Deaton,A.,415
DeBondt.R.,51n3
DeGroot,H.,78n9,84
Dehandschutter,W.V.,51n3
deMeza,D.,590n4
Demsetz,H.,65
Denicol,V.,584
deterringentryseeentrydeterrence
differentiatedproductsmarket,594n7
verticalmergersin,441446

Dinlersoz,E.,536
directnetworkeffects,82,613
divestiture,413
dominantanddominatedstrategies,217220
Domowitz,I.,60
Doraszelski,Y.78n10
Dorfman,R.,522,522n11
DorfmanSteinercondition,522
verticalpricerestraintsasaresponseto,461462
Dr.MilesCo.v.JohnD.ParkandSons,Co.,220U.S.373(1911),460n1
Dranove,D.,448n8
drasticinnovations,595597
Dunne,T.,287,287nn67
duopoly,217
Dutchordescendingauction,638,640644
DVDplayer,620621
dynamicgames,264282seealsoStackelbergmodelofquantitycompetition
chainstoreparadox,276
credibilityofthreatsandNashequilibriafor,272277subgameperfection,272273
StackelbergbeatsCournot,277280
Easterbrook,F.H.,339
Eaton,J.,661n1
econometricmethodinpricefixingestimation,377378
economicefficiency
nonsurplusapproachto,4041
andsocialsurplus,2832incompetitivemarket,2830
economicroleofadvertising,523534

consumerpersuasion,523535
Economides,N.,196,255n11,613n1
Edgeworth,F.Y.,247n4
efficiencynotion,28,28n6,32
Eichberger,J.,358n7
Eichenwald,K.,370
Eisenach,J.A.,630n8
Eisenberg,M.,92,93t
Ekelund,R.,122n1
Elzinga,K.,5455,58n8
ElzingaHogarty(1978)test,54
Englishorascendingauction,638644
entrydeterrence,284315seealsopredation
andbundling,179183
bundlingtodeterentry,302304
credibleentrydeterringcommitment,capacityexpansionas,291299Dixit'smodel,291,297298,300
excesscapacityexpansioninTexashotels,307309
informalmodelofentrydeterrence,289291
marketstructureovertime,285288
inpharmaceuticalindustry,342346
Epple,D.,79
Epstein,R.,413415
equilibriumbiddingstrategies
inDutchandfirstpriceprivatevalueauctions,640644
inEnglishandsecondpriceprivatevalueauctions,638644
Evans,D.,78n9,202203
EverydayLowPricing(EDLP),534

exclusivedealing,486
upstreamcompetitionand,487488
inUSbeerindustry,506510
exclusivesellingandterritories,486,488491
interbrandcompetition,488
intrabrandcompetition,488
experiencecurves,7879
hypotheticalexperienceorlearningcurve,79
experiencegoods,526,528
FauliOller,R.,401
FederalTradeCommissionAct1914,8
financialconstraints,predatorypricingand,324327
financialmanagement(FM),53
finitelyrepeatedgames,355358
firmrivalryandauctions,651653
firstandsecondmovers,advantages,264282
firstdegreeorpersonalizeddiscriminatorypricingpolicies,409
firstdegreepricediscrimination(personalizedpricing),119129
blockpricing,127129
calloptions,122
shoppingand,121
socialwelfarewith,134136
twopartpricing,122127seealsoindividualentry
withatwoparttariff,126
firstpricesealedbidauction,638
Firsztand,R.,92,93t
FisherEllison,S.,531

Fisher,F.,285n4,525n13,630n8
fixedcosts,66,392
fixedeffectsterm,308
fixitfirstapproach,413
flexiblemanufacturingsystems,75,156
Fluet,C.,528
factorsfacilitatingcollusion,361370centralizedsalesagency,370concentratedmarkets/smallnumberof
firms,363364frequentandregularorders,364366meetthecompetitionclause,369mostfavored
customerclause,369multimarketcontact,367368observableprices,369producthomogeneity,
368369rapidmarketgrowth,366significantentrybarriers,364technologicalorcostsymmetry,366367
tradeassociation,369
foreclosureinCournotmodel,437441
formalcostfunctionanalysisandempiricalestimation,89
Friedman,J.,227n10,362
Fudenberg,D.,323n10,661n1
fullprice,141,145
Gabaix,X.,498,499n13
Gabszewicz,J.,255n11,272
Galbraith,J.K.,519
Gale,I.,70n7
Gallini,N.,584,602
gametheory,45,214seealsostaticgames
Garella,P.,528
Gaskin,S.,289
Gayle,P.,562
Geanakoplos,J.,257n12,308n15
GEHoneywellmerger,446447
Geithman,F.E.,235

generalizedleastsquares(GLS)coefficient,510
Genesove,D.,317n1
geographyandverticalrelations,5456
ElzingaHogarty(1978)test,54
LittleinfromOutside(LIFO),54
75/90threshold,55
upstreamanddownstreamphase,relationshipbetween,55
Geroski,P.,520n9,561
Geroski,P.A.,284,287
Geweke,374
Ghemawat,P.,304,306n11
Gibrat,P.,285286
Gibrat'sLaw,285286
Gilbert,R.J.,556n8
Gilligan,T.,78n9
GINIcoefficient,48n1
Giuri,P.,592n6
Glazer,A.,534
Gleason,S.,416n24
Goldfine,D.,500
Gort,M.,55n7
governmentpolicyroleinindustrystructure,8283
Green,D.P.,529
Green,E.J.,361n9
Green,J.,220n7
Green,R.J.,223n8
Greene,W.,84

Greenhut,J.,403n11
Greenhut,M.L.,403n11
Griffith,R.,561
Griliches,Z.,606
Grossman,G.M.,533n17,537,545,661n1
Grossman,S.J.,65
grouppricingseethirddegreepricediscrimination(grouppricing)
Hall,B.H.,606
Hall,E.A.,306n11
Hall,R.,60
Harrington,J.,374
Harris,R.,291
Harsanyi,J.C.,352n5
Harstad,R.M.,373
HassWilson,D.,502
1984HatchWaxmanAct,322
Haulman,C.A.,529
Hausmann,J.,606
Hay,G.,364,368
Heckman,J.,78n9
Hohenbalkenvon,B.,305n10
Holmstrm,B.,65
horizontalmergers,386426
Bertrandcompetitioninasimplelineardemandsystem,423424premergercase,423
leaderfollowermodel,422
andthemergerparadox,388391

productdifferentiationand,403411Bertrandcompetitionandmergerwithlineardemandsystems,403
mergersinaspatialmarket,404411nopricediscrimination,405406noncooperativepriceequilibrium,
409personalizeddiscriminatorypricingpolicies,409pricediscrimination,409priceequilibriumwithprice
discrimination,410priceequilibriumwithoutamerger,407
publicpolicytoward,411414divestiture,413fixitfirstapproach,413HerfindahlHirschmanIndex(HHI),
4121968MergerGuidelines,411StructureConductPerformanceframework,412
spatialmodelafteramerger,equilibriumpricesin,425426
spatialmodelwithoutamerger,equilibriumpricesin,425
Stackelbergleaderfollowermodelwithseveralleaders,421422
horizontalproductdifferentiation,142seealsoverticalproductdifferentiation
monopolyand,144151conditions,149150fullprice,141,145optimalpricingpolicy,150outlets,
decisionsabout,146149pricingdecision,144146setupcosts,146standaloneshop,149150
monopolyand,withpricediscrimination,155157firstdegreepricediscrimination,155flexible
manufacturingsystems,156inageographicspatialmodel,156productcustomization,156uniform
deliveredpricing,155
spatialapproachto,143144
Horstmann,I.,533n17
Hosken,D.,416n24
Hovenkamp,H.J.,58n9
Hubbard,R.G.,60
Huck,S.,277280
humanresourcesmanagement(HRM),53
Hydev.JeffersonParishHospitalDistrictNo.2,etal.466U.S.2,1518(1984),202n12
Hyde,J.,380
hypotheticalexperience,79
identificationprobleminpricediscrimination,94
ImageTechnicalServices(ITS),497
imperfectcompetition,34
pricediscriminationandmonopolyversus,136139
imperfectinformation,predationand,323331

indirectnetworkeffects,82,613
indistinguishabilitytheorem,373,373n22
industrialorganization,218
antitrustpolicyand,613
andauctions,647653oligopolypricing,648651
imperfectmarketsand,3
studyof,46
industrystructure,timeandevolutionof,37
infinitelyorindefinitelyrepeatedgames,358361
informalmodelofentrydeterrence,289291
noninformativeinformativeadvertising,529531
andsignaling,525529experiencegoods,526
innovations,551558seealsoresearchanddevelopment(R&D)
competitionviainnovation,559561Schumpeterianhypothesis,560
installedbaseopportunism,499
instrumentalvariablesestimationtechnique,378
integratedfirm,484
efficientserviceprovisionat,484
profitmaximizationat,484
interbrandcompetition,488
internalrelationships,costfunctionsforfirms,65
InternationalBusinessMachinesv.U.S.,298U.S.131(1936),174n1
internationalcournotmodel,strategicsubsidiesin,662664
InternationalSaltCo.v.UnitedStates,332U.S.392(1947),201n10
internationaltrade,661675seealsounderstrategiccommitments
intertemporalconsiderationsonmonopolypower,3241seealsoundermonopoly
intertemporaltrades,3336

intrabrandcompetition,488
Jacquemin,A.,563
Jarmin,R.S.,287
1984JeffersonParishcase,202
Jia,P.,255
Joskow,P.L.,341
Jovanovic,B.,287
Ju,J.,504
Judd,K.,408n18
Jullien,B.,476
Kaldor,N.V.,519
Kalecki,M.,286
Kamien,M.I.,563,569n17
Kaplow,L.,370n17
Katz,M.,594,596
Kelley,D.,364,368
Keynes,J.M.,56
Kihlstrom,R.,528,537
Klein,B.,489
Klemperer,P.,257n12,308n15,583584,637n1,646n8,651n10
Klette,T.,590n4
Klevorick,A.K.,341342,561
Klimek,S.D.,288
Kodakcase,496499
Koller,R.H.II.,339
Kotowitz,Y.,529
Kovacic,W.E.,12

Koyak,R.,380
Krattenmaker,T.,436n2
Kreisle,N.,260n13
Kreps,D.,248n5
Krishna,V.,637n1
Krugman,P.,661n1,666
Kryukov,U.,78n10
KSRv.Teleflexcase,604
Kwoka,J.E.,12
Kwoka,J.,378,380
LaCasse,C.,373n22
Lafontaine,F.,464n5,489n8,503n18
Laibson,D.,498,499n13
Lambin,J.J.,520n9
Lambkin,M.,288
Lande,R.,380
largescaleadvertising,516547
Lattin,J.,288
leaderfollowermodel,422
hypotheticalexperienceorlearningcurve,79
LeeginCreativeLeatherProducts,Inc.v.PSKS,Inc.,No.06A179,470,478480
Lenard,T.M.,630n8
leniency(amnesty)programs,375377
Lernercondition,414
LernerIndex(LI),5657,521
ofmonopolypower,234
Lerner,J.,598n10,603

Leslie,P.,105
Lev,B.,450n10
Levenstein,M.,370
Levin,R.C.,305
Levin,R.,561,561n11
Levy,D.T.,410n22
licensing,patent,594597
beneficialeffects,596
risks,596
Lichtenberg,F.,394,412
Lieberman,M.,264n2,305
Liebowitz,S.,621n4
USandCanadianprescriptionprices,comparison,93
LittleinfromOutside(LIFO),54
Liu,J.,111
lockineffect,498
Loertscher,S.,637n1
logittransformation,42
longandthinsolution,inoptimalpatentbreadth,582
Loughran,T.,412
Lunn,J.,561
MackieMason,J.,499
Macleod,W.B.,156
Mai,C.,111
Makowski,L.,40n14,41n15
managerialmotives,inconglomeratemergers,449450
Manufacturer'sSuggestedRetailPrice(MSRP),112

marginalrevenuefunction,22
Margolis,S.,621n4
Mariani,M.,etal.,592n6
Marion,B.W.,235
market,definition,5054
concentration,52
elasticity,53
SSNIPtest,53
marketforeclosure,verticalrestraintsand,491496
privatecontracts,491492
slottingallowancesandexclusion,492496bargainingenvironment,494
marketforeclosureandverticalmergers,435436
marketperformance,1927
competitionversusmonopoly,1927longruncompetitiveequilibrium,23perfectcompetition,2124
shortruncompetitiveequilibrium,23
horizontaldemandcurve,21n2
marketdemandcurve,20
marketpower,4762
advertisingand,519520
informationand,516547
marketpredatorybehavior,297
marketsize,8081
productqualityand,166168
marketstructure,4762seealsocostsandmarketstructure
concentrationcurves,48
geographyandverticalrelations,5456
networkexternalitiesand,8182

sunkcostand,7273
marketstructureovertime,285288
randomprocessesandstylizedfacts,285288
stylizedfactsthatindustrialevolutiontheoryshouldexplain,287entryiscommon,287industrieswithhigh
entryratesalsohavehighexitrates,287newentrantsurvivalrateisrelativelylow,287smallscaleentry,
287
Marshall,A.,19,519
Marshall,R.C.,375
Marshall,W.,78n9
Marvel,H.P.,472
Marvin,B.,264n2
MasColell,A.,220n7
Maskimovic,V.,394,412
Maskin,E.,598599,651n10
Mason,E.S.,89,9n8
masscommunication,516547
Mathematicasoftwarepackage,107
Mathewson,G.F.,464n5,472n8,488,529
MatsuhitaElectricIndustrialCo.v.ZenithRadioCorp.,475U.S.574(1986),12n17
MaximumLikelihoodEstimation(MLE),606
May,D.O.,450
McAffee,R.P.,108
McCafferty,S.,472n9
1952McGuireAct,460
McGowan,J.J.,525n13
McMahon,W.,78n9,84
menupricingseeseconddegreepricediscrimination(menupricing)
1968MergerGuidelines,411

mergerparadox,388391
mergersimulation,inmergerevaluation,414417
elasticitiesestimation,415
Lernercondition,414
relevantparametersfromademandsystem,416
mergers,386426seealsoconglomeratemergershorizontalmergerssequentialmergersvertical
mergers
andcostsynergies,391394fixedcosts,mergerreducing,392Stackelbergleader,mergedfirmas,
394400variablecosts,mergerreducing,392394
evaluating,withcomputersimulation,414417seealsomergersimulation
tomonopoly,388
profitablemerger,conditionfor,390
MetropolitanStatisticalArea(MSA),412
Miao,C.,499n14
microeconomics,1946seealsobasicmicroeconomics
MicrosoftCase,bundlingand,197200
MicrosoftCorp.v.CommissionoftheEuropeanCommunities,T201/04,March24,2004,306n13
Miller,N.,376
MillerTydingsActof1937,460
Milyo,J.,534
minimumefficientscale,70
Miranda,J.,288
Mitchell,M.,412
Mitchell,W.,288
monopolypricingwith,184
monopoly,2427,142172seealsoproductvarietyandqualityundermonopoly
deadweightlossof,31

intertemporalconsiderationsandconstraintson,3241discounting,3336durablegoodsandthecoase
conjecture,3740industrystructure,timeandevolutionof,37intertemporaltrades,3336nonsurplus
approachtoeconomicefficiency,4041presentvalue,3336
marginalrevenueforamonopolist,25
monopolistandsocialsurplus,3032
monopolyfirm'sprofitmaximizinglevelofadvertising,520522
inpatentsandpatentpolicy,590592
monopolypricing,191196
complementarygoodsand,191196
networkexternalitiesand,191196
monopolyprofitandtheefficiencyeffect,preserving,557558
monopolyprovisionofnetworkservice,613617
lowfractionequilibrium,613
profitmaximizingprice,616
monopolyretailerandmonopolymanufacturer,468469
Montgomery,264n2
Moody,C.E.,529
Moore,J.,65
Morgenstern,O.,12
Morris,C.,55n7
Morrison,S.,255
Morse,B.A.,380
Moser,P.,603
Motta,M.,375
moviediscs,620621
Mowery,D.C.,561
Mucha,Z.,288
Mueller,D.C.,10n13,5961,412

Mueller,W.F,235
Mueller,W.,53n4
Mulbauer,J.,415
Muller,E.,563,569n17
Mller,W.,277280
Mullin,W.,317n1
multiproductfirms,costsand,7378
differentproductsversusdifferentversions,7778
flexiblemanufacturingsystems,75
multiproductscaleandscopeeconomies,7477
multiproductscaleeconomies,89
Mussa,M.,157n7
Myerson,R.,644n5
Nalebuff,B.,40n14,41n15,179n5,302,309,447n7
Nalebuff,B.J.,300
Nashequilibrium,216,567
fordynamicgames,272277
asasolutionconcept,221222
Nash,J.,12
Nathanson,D.A.,448
NationalCashRegister(NCR)company,338
Nelson,R.,287,561
neoclassicalapproachtofirmsizeandmarketstructure,6465
neoclassicaltheory,451
networkeffects
direct,82
indirect,82

networkexternalitiesandmarketstructure,8182
networkexternalities,81
andmonopolypricing,191196
networkissues,612636seealsomonopolyprovisionofnetworkservice
competitionandcomplementaryservices,618622DVDplayer,620621marketproblems,620movie
discs,620621pricecompetition,618VideoCassetteRecorders(VCRs),621winnertakeallfeature,
620
directnetworkeffects,613
indirectnetworkeffect,613
monopolist,profitmaximizingnetworkaccesspricefor,636
networkexternalitiesincomputersoftware,631634seealsospreadsheets
networkgoodsandpublicpolicy,628630
systemscompetitionandbattleoverindustrystandards,622628BattleoftheSexes,626627
compatibility,624PeskyLittleBrother,627628technologyadoptionquestions,622Tweedledumand
Tweedledee,624626unsatisfactoryoutcomesavoiding,623
Netz,J.,499
Nevo,A.,535
Newberry,D.,223n8
Newbery,D.M.G.,557n9
Nichols,W.H.,519
Nicholson,M.W.,1,13
Nilssen,T.,401402
Nocke,V.,412n23
Nold,F.,374n23
noncooperativegametheory,214215
noncooperativeR&D,profit,prices,andsocialwelfare,564567
researchintensityreactionfunction,565
strategiccomplements,565

strategicsubstitutes,565
noncostdeterminantsofindustrystructure,8083
governmentpolicyrole,8283
marketsizeandcompetitiveindustry,8081
networkexternalitiesandmarketstructure,8182
constantmarginalcost,98
nonconstantmarginalcost,100
nondrasticinnovation,incentiveforanoligopolisttolicense,593594
noninformativeinformativeadvertising,529531
nonlinearpricing,119141
nonpriceverticalrestraints,486511seealsoaftermarketrestrictionsexclusivedealingexclusiveselling
andterritoriesverticalrestrictions
andmarketforeclosure,491496seealsoindividualentry
nonsurplusapproachtoeconomicefficiency,4041
nonzeromarginalcosts,firmswith,211212
Nordhaus,W.,579
Norman,G.,156,213,403n11,408n18,410n21,446n5
Norman,V.,523,525n13
Normann,H.T.,277280
NorthAmericanIndustryClassificationSystem(NAICS),5051
Novshek,W.,255n11
O'Brien,D.P.,464n5,488n3,492n11
Oi,W.,122n1
oligopolisticpricecompetition,242262seealsoBertrandduopolymodel
brandcompetitionandconsumerpreferences,257260
strategiccomplementsandsubstitutes,256257
pricingandauctions,648651

twofirmoligopoly(duopoly),217
andverticalmergers,435436formaloligopolymodelsof,436446
onlyoneprofitapproach,336337
opportunitycosts,21
optimalbidding
infirstpriceauctions,659660
inoligopolisticBertrandcompetition,660
optimalchoiceofoutputandquality,172
optimalpartialmarketprice,171172
optimalpatentbreadth,582584
optimalpatentlength,579582
optimalprovisionofretailservicesversusverticallyintegratedmonopoly,466468
orderstatisticconcept,640
ordinaryleastsquares(OLS)regressions,509,538,606
Ordover,J.,286n5
Osborne,M.J.,374
Ostroy,J.,40n14,41n15
Overstreet,T.,464
Panzar,J.C.,11,37n12,64n1,7475,78n9
paradox,merger,388391
ParetoOptimality,28n6
Pastine,I.,536
Pastine,T.,536
patentlicensing,592601
patentsandpatentpolicy,578610
blockingcompetitors,592
drasticinnovations,595597

duration,579innovationgainsduring,580
incentiveforanoligopolisttolicenseanondrasticinnovation,593594competitionin,593Cournot
competitors,594
monopolypower,595597
andsleepingpatents,590592
optimalpatentbreadth,582584complicationsin,582definition,582Denicol'sproposal,584Gallini's
reasoning,584GilbertandShapiroanalysis,583Klemperer'sargument,583longandthinsolution,582
shortandfatapproach,582
optimalpatentlength,579582
patentraces,584590withaduopoly,587innovativecompetition,584R&Dinvestmentsand,589
patentthicketsandsequentialinnovation,597601
publicpolicy,595597
recentpatentpolicydevelopments,601604internationallycomparabledataconstruction,603
strengthenedprotectionofpatentrights,603
insemiconductorindustry,604607
sleepingpatent/strategy,592
socialwelfare,595597
usebyinventor'semployer,592
Peck,J.,472
Pepall,L.,272,408n18,446n5
Perry,M.K.,488n3
Perry,M.,394n8
personalizedpricingseefirstdegreepricediscrimination(personalizedpricing)
Peterman,J.,201n10
Peters,T.,548n3
Petersen,B.,60
Petrin,A.,272
pharmaceuticalindustry

entrydeterrencein,342346advertising,343345detailadvertising,345346pricing,344
Philips,L.,119,326n11,373
Phillips,G.,394,412
Phlips,L.A.,373n22
Pickering,J.F.,465
Pigou,A.C.,95n1,119
Pinkse,J.,535
Pitchik,C.,374
Poissondistribution,605
Polo,M.,375
Pope,D.,516n1
Porter,M.,548549
Porter,R.H.,373374
Posada,P.,409n19
antitrustpolicyand,339342
andimperfectinformation,323331
limitpricing,288299
marketpredatorybehavior,297
predatorypricing,288299
andreputation,337338
predatoryentrydeterrence,304307
historicalcases,304307Edmontontown,305F.2d416(1945),305marketfortitaniumdioxide,
305306preemptiveinvestmentasanexplicittacticofSouthernBellTelephone(SBT),305U.S.v.
AluminumCo.ofAmerica,148
predatorypricing,316347
asymmetricinformationandlimitpricing,327331
contractsasbarriertoentry,331337longtermexclusivecontractsaspredatoryinstruments,332336
nakedexclusion,336onlyoneprofitapproach,336337tyingcontracts,336337

andfinancialconstraints,324327oneperiodanalysis,324optimalcontract,325
MicrohardNewvelgame,318328
mythorreality?,318323McGee'sreasoning,320321
recentdevelopments,316347
andbundling,299304
presentvalue,3336
pricecompetition,268272,546seealsooligopolisticpricecompetitionsequentialpricecompetition
pricediscrimination,92,117119141,409seealsolinearpricingnonlinearpricing
facilitatingverticalmerger,434435
feasibilityof,9395arbitrage,94identificationproblem,94
andmonopoly,92118seealsolinearpricing:versusimperfectcompetition,136139
monopolyandhorizontaldifferentiationwith,155157
innewcarmarket,112115Manufacturer'sSuggestedRetailPrice(MSRP),112SZSinfixingcarprice,
112113
socialwelfarewithfirstandseconddegreepricediscrimination,134136
thirddegreepricediscrimination(grouppricing),9597seealsoindividualentry
pricediscriminatingretailer,manufacturer'soptimalcontractwhensellingto,483
pricefixing,349383
USpricefixingviolationsfine,350
pricefixing
effectsof,estimating,377380auctions,378379beforeandaftermethod,377butforprice(s)
estimation,377econometricmethod,377378instrumentalvariablesestimationtechnique,378
PrinciplesofEconomics,Vol.1,19
prisoner'sdilemmagame,351354
privatecontracts,491492
privatevaluesauctions,638644
procompetitiveverticalmergers,428432
upstreamanddownstreamprofitmaximizationwithverticalintegration,431withoutverticalintegration,431

productdifferentiation,horizontalmergersand,403411seealsounderhorizontalmergers
productvarietyandqualityundermonopoly,142172seealsohorizontalproductdifferentiationvertical
productdifferentiation
andmarketsize,166168
productvariety,questionof,151154additionalshopsoperation,154efficiencycriterion,151retailoutlets,
152154servingandtransportationcost,152153shopplacement,152toomuchvarietyhypothesis,
154
productiontechnology,6472
costfunctionsforsingleproductfirms,6472averagecost,66costconcepts,6667costvariablesand
outputdecisions,6768fixedcost,66internalrelationshipsand,65learningbydoingandexperience
curves,7879marginalcost,67neoclassicalapproach,6465sunkcost,6768
productionunit(s),75
profitconcept,21
profitmaximizingnumberofretailoutlets,171
profitabilityandbundling,177179
profitmaximizingtwopartpricing,125
ProportionallyCalibratedAIDS(PCAIDS),415
PSIv.Honeywell,104F.3d811(6thCir.1997),500
publicpolicy,595597
towardhorizontalmergers,411414seealsounderhorizontalmergers
towardverticalrestraints,501502
Pulley,L.B.,1,78n9,8485
qualityondemand,impactof,158159
quasiscopeeconomiesinbanking,8485
Quon,B.,9293
Raiff,M.E.,375
Ramanarayanan,S.,79
Ramey,G.,519n7,537n18
Ravenscraft,D.J.,412

RayAverageCost(RAC),74,89
readymixedconcreteindustry,verticalintegrationin,453455
Redding,S.J.,74
Reinganum,J.,557n9,589n3
Reiss,P.,80,561
Reisz,P.,529
Reitzes,J.D.,410n22
Renault,R.,529
finitelyrepeatedgames,355358
formaldescriptionofastrategy,355
infinitelyorindefinitelyrepeatedgames,358361
Selten'sTheorem,358
replacementeffect,556
ResalePriceMaintenance(RPM),460
andcollusion,476478
andprices,evidenceafterLeegin,478480
RPMagreementsadvantageof,472freeridingand,471472retailpricediscriminationand,462464
serviceand,471472toinsureprovisionofretailservices,464472
researchanddevelopment(R&D),548577
competitionviainnovation,559561
creativedestructioninnovation,551
marketstructureandtheincentivetoinnovate,553558competitionandthevalueofinnovation,554556
monopolyprofitandtheefficiencyeffect,preserving,557558
R&Dcooperationbetweenfirms,562570noncooperativeR&D,profit,prices,andsocialwelfare,564567
technologycooperation,568570
R&Dspilloversinpractice,570573
taxonomyofinnovations,552553appliedresearch,552basicresearch,552developmentcomponentof
R&D,552processinnovations,552productinnovations,552

toppatentreceivingindustries,550
researchintensityreactionfunction,565
researchjointventure(RJV),563,568
researchsubsidies&internationaltrade,formalanalysis,674675
retailpricediscriminationandRPMagreements,462464
retailpricemaintenance,asverticalpricerestraints,472476
retailservicesprovision,RPMagreementstoinsure,464472
revenue,21
loss,26
revenueequivalencetheorem,644
Reynolds,R.,388n4
Rhine,S.L.,78n9
Richards,D.,408n18
Riley,J.,644n5,651n10
Riordan,M.J.,340n18
Ritter,G.,7
Roberts,M.J.,288,288nn67
RobinsonPatmanActof1936,83,339
Rohlfs,J.,613,618
Roller,L.,78n9
Romer,D.,549
Rosen,S.,157n7
Rosenthal,R.W.,281n8
Ross,T.,499n14
Rotemberg,J.,361n9
ruleofreasonapproach,78,501502
Round,D.K.,520n9

Rovere,M.,92,93t
Rubinfeld,D.L.,377n27
Sakakibara,M.,603
SalaiMartin,X.,549n4
Salant,S.,388n4
Salingermodel,441
Salop,S.C.,403n11
Salvo,A.,401402
Samuelson,L.,288,288nn67
Samuelson,W.,644n5
Samwick,A.,450
Sanchirico,C.W.,377n27
Santos,M.C.,78n9
Satterwaite,M.,78n10
scaleeconomies,71,78
inbanking,8385seealsounderbanking
scaleeconomyindex,88
Scarre,C.,637n1
Schaffer,G.,464n5
schedulingstrategy,5
bridging,5
counterprogramming,5
infantprotection,5
quickopeners,5
Scheinkman,J.,248n5
Schelling,T.,12,216n3,277n7,351n4
Scherer,F.M.,339n17,340,412,561

Schmelzer,J.R.,235
Schmitt,N.,78
Schott,P.K.,74
Schumpeter,J.A.,549n4,559
Schumpeterianhypothesis,560562
evidenceon,561562
Schwalbach,J.,287
Schwartz,A.,528n14
inbanking,8385seealsounderbanking
costcomplementarities,75
multiproductscaleand,7477
Scotchmer,S.,584
ScottMorton,F.,112,317n2,342
ScottMorton,Zettelmeyer,andSilvaRisso(SZS),infixingcarprice,112113
Scott,J.T,.561
screeningdevices,106108
seconddegreepricediscrimination(menupricing),129134
highdemandconsumers,quantitydiscountsfor,132
implementationstrategies,130
incentivecompatibility,131132
lowdemandcustomers,132133
menuoptions,132
socialwelfarewith,134136
secondpricesealedbidauction,638
Selten,R.,272,276n5,358
semiconductorindustry,604607
patentlawandpatentpracticein,604607

sequentialinnovationandpatentthickets,597601
sequentialmergers,401402
sequentialpricecompetition,268272
crediblecommitment,271
Shanley,M.,448n8
Shapiro,C.S.,391n6,393
Shaw,K.,503n18
1890ShermanAct,7,10
NewShermanActand,10
ShermanAntitrustActof1890, 318
Shih,J.,111
shortandfatapproach,inoptimalpatentbreadth,582
Sidak,J.,374n23
Siegel,D.,394,412
signaling,informativeadvertisingand,525529
experiencegoods,526
SilvaRisso,J.,112
singleproductfirms,costfunctionsfor,6472seealsounderproductiontechnology
Skinner,B.,9293
sleepingpatents,590592
Sleuwaegen,L.,51n3
Smirlock,M.,78n9
Smith,D.,479480
socialsurplus,2832seealsoundereconomicefficiency
monopolistand,3032
socialwelfare,595597
withfirstandseconddegreepricediscrimination,134136

andgrouppricing,109112welfareeffects,110
sociallyoptimalnumberofretailoutlets,172
Solow,R.,549n4
Solow,R.M.,519
solutionconcept,Nashequilibrium,221222
Sorgard,L.,401402
Spagnolo,G.,375
spatialmarket,mergersin,404411
spatialmodel,403n11
afteramerger,equilibriumpricesin,425426
ofproductdifferentiation,143144
withoutamerger,equilibriumpricesin,425
Spence,A.M.,292,310,374
Spencer,B.,661n1,675
Excel,631
Lotus123,631
Multiplan,631
PlanPerfec,631
QuatroPro,631
SuperCalc,631
VPPlanner,631
Sproul,M.,380n28
Spulber,D.,65
StackelbergbeatsCournot,277280
Stackelbergleader,mergedfirmas,394400
twostagecompetition,397
Stackelbergleaderfollowermodelwithseveralleaders,421422

Stackelbergmodelofquantitycompetition,265268
CournotbeatenbyStackelberg,277280inequalityaversion,279
Cournotoutcomesand,267
Stackelberg,H.von,265
StackelbergNashequilibriumproductionlevels,267
Stafford,E.,412
StandardOilCo.ofNewJerseyv.UnitedStates,221
U.S.1(1911),7n4
StateOilv.Khan,etal,522U.S.3(1997),12n15,460461,464,470,478
staticefficiencyconcept,30n9
staticgames,214240
dominantanddominatedstrategies,217220
ofsimultaneousmoves,218
staticmodelsofoligopolyseeCournotmodel/theory
strategicinteraction,215217
Steiner,P.O.,522,n11
Steiner,R.L.,464,472n7,502n16
Stigler,G.,174n2,533n17,535
Stocking,G.,53n4
Stokey,N.L.,40n13
strategiccommitmentsandinternationaltrade,661675
Hamilton'sanalysis,661
researchsubsidies&internationaltrade,formalanalysis,674675
strategicR&Dgamewithoutsubsidies,662
strategicR&Dsubsidies,667668
strategicsubsidiesattheCanadianWheatBoard(CWB),669672
strategicsubsidiesininternationalcournotmodel,662664

strategictariffsandscale/scopeeconomies,665667
tradeagreementsascommitmentdevices,668669
twocountrycournotgame,665666productionandprofitin,665
strategicuseofbundling,300
strategycombination,215
Straume,O.D.,409n19
structurebasedanalysisdominance,1011
structureconductperformance(SCP)approach,911,234,412seealsomarketstructure
NewShermanActand,10
weaknessesin,11
subgame
definition,275
sunkcost,6768
andmarketstructure,7273
supplychainmanagement(SCM),53
Suslow,V.,370
Sweezy,P.,374n23
Switzer,S.,388n4
SylosLabini,P.,290291
Taylor,374
Taylor,C.,260n13
technologyandcost,6490seealsoproductiontechnology
learningbydoingandexperiencecurves,7879
noncostdeterminantsofindustrystructure,8083
seealsoindividualentry
technologycooperation,568570
Tedlow,R.,214n1

Teece,D.,449
Telser,L.,472n7,533
Thaler,R.,647n9
Thepot,J.,40n13
thirddegreepricediscrimination(grouppricing),9597
constantmarginalcost,99
features,95
implementing,97103aggregatemarginalrevenueequatingwithmarginalcost,101equilibriumprice,
identifying,101equilibriumquantities,identifying,101marginalrevenue,deriving,100monopolist's
marginalcostfunction,rules,102
productvarietyand,103109screeningdevices,106108
socialwelfareand,109112welfareeffects,110
twiceassteeprule,98
Thisse,J.F.,156,255n11,272,410n21
75/90threshold,55
tieinsales,188191
antitrustand,196204
commoditybundlingversus,188
highdemandconsumers,189190
lowdemandconsumers,189190
Tirole,J.,277n7,323n10,457,492n11,598n10,661n1
Toker,R.,285
toomuchvarietyhypothesis,154
totalmarketsupply,22
totalrevenue,26
tradeagreementsascommitmentdevices,668669seealsostrategiccommitmentsandinternationaltrade
transactionscostsinconglomeratemergers,449
Turner,D.F.,339n17,340

TweedledumandTweedledee,624626
twiceassteeprule,26,98,123
twodigitcodes,50
twopartpricing,122127
profitmaximizing,125
twiceassteeprule,123
tying,173212seealsocommoditybundlingtieinsales
uncertaindemand,asverticalpricerestraint,472476
competitioninducing,473
integratedmonopolistmanufacturerfacing,473
resalepricemaintenanceand,473
uniformdeliveredpricing,155
UnitedShoeMachineryCorp.v.UnitedStates,258U.S.451,201n10
UnitedStatesv.AddystonPipe&SteelCo.,85F.271(6Cir.1898),7n3
UnitedStatesv.AluminumCo.ofAmerica(ALCOA),148F.2d416(2Cir.1945),10n9
UnitedStatesv.AmericanTobaccoCo.,U.S.221U.S.106(1911),7n5
UnitedStatesv.Colgate&Co.,250U.S.300(1919),460n2
UnitedStatesv.GeneralDynamicsCorp.415U.S.(1974),12n16
UnitedStatesv.GrinnellCorp.,236F.Supp.244(D.R.I.1964),10n11
UnitedStatesv.JerroldCorporation,187F.Supp.545(1960),202n11
UnitedStatesv.Loew'sInc.,371U.S.38(1962),175n3
UnitedStatesv.MicrosoftCorp.97F.Supp.2d59(D.D.C.2000),306n12
UnitedStatesv.MicrosoftCorp.,87F.Supp.2d30(D.D.C.2000),284n3
UnitedStatesv.TransMissouriFreightAssociation166U.S.290(1897),7n3
UnitedStatesv.UnitedStatesSteelCorporation,251U.S.417(1920),8n7
upstreamcompetitionandexclusivedealing,487488
Urban,G.,289

U.S.Steelcaseof1920,8
U.S.v.AluminumCo.ofAmerica,148F.2d416(1945),305
UtahPieCo.v.ContinentalBakingCo.etal.386U.S.685(1967),10,10n12,12,323,323n9
VanReenen,J.,561
variablecosts,mergerreducing,392394
Varian,H.,122n1
Varian,H.R.,95n2
Verg,T.,478,478n13
verticalmergers,387,427458seealsounderCournotmodelprocompetitiveverticalmergers
anticompetitiveeffectsof,432436
GEHoneywellmerger,446447
indifferentiatedproductssetting,441446
oligopoly,marketforeclosureand,435436formaloligopolymodelsof,436446
pricediscriminationfacilitating,434435
inreadymixedconcreteindustry,453455
verticalpricerestraints,459485seealsononpriceverticalrestraints
antitrustpolicytoward,4604611952McGuireAct,460MillerTydingsActof1937,460
competitiveretailing,469471
monopolyretailerandmonopolymanufacturer,468469
asaresponsetodoublemarginalization,461462
retailpricemaintenanceanduncertaindemand,472476
verticalproductdifferentiation,143,157166
justoneproduct,priceandqualitychoicewith,157161
offeringmorethanoneproduct,161166incentivecompatibilityconstraint,163
profitmaximizingquality,160
qualityondemand,impactof,158159
verticalrestrictions

inaftermarkets,496501
andmarketforeclosure,491496
publicpolicytoward,501502
verticallyintegratedmonopoly,optimalprovisionofretailservicesversus,466468
Vickers,J.,490n9
vickreyauctionseesecondpricesealedbidauction
VideoCassetteRecorders(VCRs),621
Vijh,A.,412
Vives,X.,305n9,308n14
Volkwein,J.F.,78n9,84
VonNeumann,J.,12
vonHippel,E.,563
Vorrasi,K.,500
Walrasianauctioneer,637
wastefulcompetition,545
Waterman,R.,548n3
WealthofNations,The,6,69n5
Weiman,D.,306
welfareloss(WL),58
West,D.,306n10
Whinston,M.D.,220n7,367n14
Whinston,M.,338n15,412n23,478n13,488n3
White,L.J.,12
Wilde,L.L.,528n14
Williamson,O.E.,65,341
Willig,D.,11
Willig,R.,285n5,342

Willig,R.D.,37n12,7475
Wilson,T.A.,519
Winston,C.,255
Winter,R.A.,464n5,472n8,488
Winter,S.G.,287
Winter,S.,561
Wolfram,C.,223n8
Yamey,B.,S.,317n2,321n7
Yellen,J.,187
Yergin,D.,318n6
Yorukoglu,M.,536
Zanarone,G.,510
Zang,I.,563,569n17
Zettelmeyer,F.,112
Zhang,A.,213,238
Ziedonis,R.H.,515,604607
Zimerman,P.,260n13

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