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ECON 480: Industrial Competition and Monopoly

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Question;ECON 480: Industrial Competition and Monopoly;Practice problems: Final Exam;1 Market foreclosure;1. (Vertical Mergers) Consider the market for solar-powered;vehicles served by two firms;(A and B). The demand for these vehicles is given by Q = 2?;P. Firm S is a monopolist;in the market for solar panels. Firm S produces solar panels;at MC = 0 and sells solar;panels to both Firm A and Firm B at price w. Firm A and Firm;B convert one solar panel;into the final good, which is sold at price P. Assume that;Firm A and B cannot affect Firm;S?s choice of w. Assume that Firm A and Firm B play a;quantity competition game.;a) Find the equilibrium of the market for solar-powered;vehicles. Note: The solution;will depend on w.;b) Find Firm S?s optimal price for solar panels, w.;c) Assume now that Firm S and Firm A merge. Assume that Firm;S transfers solar;panels to Firm A at no cost (wA = 0). Find the optimal price;at which the merged;firm sells solar panels to Firm B, wB.;d) Is market foreclosure achieved as a consequence of the;vertical merger?;e) Why does the merger increase welfare? Explain.;2. (Bundling) Consider the market for web browsers. Assume;that there are two firms selling;web browsers (homogeneous product): Microshot (M) and Escape;(E). There is one;firm selling a word processor: Microshot (M). Assume that N;= 1000 consumers populate;this market and that firms compete in prices. Consumers;value owning the word;processor in VP = 3 and value owing the web browser in VWB =;2. Microshot produces a;unit of the web browser at MCWB,M = 1 and a unit of the word;processor at MCP,M = 0.;Escape produces a unit of the web browser at MCWB,E = 0.;There is a fixed cost of operation;F = 100 that any active firm must pay.;Assume that Microshot moves first and announces whether it;will bundle the word processor;and the web browser. Escape moves second and decides whether;to exit the mar-;1ket.;a) Use backward induction to find the equilibrium of the;game.;b) Does the equilibrium involve market foreclosure?;c) How does welfare change in equilibrium if bundling was;prohibited?;2 Innovation;3. (Intellectual Property and the Incentives to Innovate);Consider the market for a homogeneous;product. The demand for this product is given by Q = 1? P.;There are two firms;serving this market: Firm A and Firm B. Both firms produce;at a constant marginal cost c;with c < 1/2. Firm A, however, has a project that would;reduce its marginal cost to zero.;Undertaking this project would cost I dollars. Assume that;Firm A and Firm B compete;in prices.;a) Assume that there is a law that would prevent Firm B from;copying Firm A?s innovation.;For what values of I would Firm A invest in the project?;b) Assume that there is a law that would only partially;protect Firm A?s invention. That;is, if Firm A?s innovates, Firm A?s marginal cost drops to;zero and Firm B?s marginal;cost drops to c/2. For what values of I would Firm A invest;in the project?;c) How does intellectual property protection affect the;incentives to innovate?;4. (Competition and the Incentives to Innovate) Consider the;market for a homogeneous;product. The demand for this product is given by Q = 1? P.;Consider the existence of N;serving this market. All firms produce at a constant;marginal cost c, with c < 1/2. Firm;A, however, has a project that would reduce its marginal;cost to zero. Undertaking this;project would cost I dollars. Assume that the N firms;compete in prices. Assume that;there is a law that would prevent any firm from copying Firm;A?s innovation.;a) Assume that N = 1, that is, that Firm A is a monopolist.;How much does Firm A;gain when implementing the project?;b) Assume that N = 2, that is, that Firm A faces the;competition of Firm B. How much;does Firm A gain when implementing the project?;2c) How does competition affect the incentives to innovate?;5. (Patent Length and the Incentives to Innovate) Consider;the market for a homogeneous;product. The demand for this product is given by Q = a? P.;There are two firms serving;this market: Firm A and Firm B. Both firms produce at a;constant marginal cost c, with;c < 1/2. Firm A, however, has a project that would reduce;its marginal cost to c? x;where x is chosen by the firm. Undertaking this project;would cost x;2/2 dollars. A patent;would protect Firm A?s invention for T periods (that is;after the expiration of the patent;Firm B can copy Firm A?s technology). Assume that Firm A and;Firm B compete in prices.;Assume that the discount rate is?.;a) Find Firm A?s optimal level of investment as a function;of the patent length, T.;b) How much does Firm A invest when T = 0? Use your answer;to part a).;c) How does Firm A?s investment change with an increase in;patent length, T? Use;your answer to part a).;3

 

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