Econ 170Take Home "Midterm" (To be done on your own)

Due 12/2

1. Consider an industry served by 3 rms. Inverse market demand is givenby P = 100 :1Q. Firm i produces with constant marginal cost productiontechnology 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 assumingc1 = c2 = c3 = c.

b.) Assume, initially rm costs are c1 = c2 = c3 = 40. Suppose that rms 2and 3 announce a merger. Call the new marginal cost of the merged rmcM 40. The Justice Department wants to predict the likely eects ofthe merger and thinks coordinated eects arent an issue. Write downexpressions for the change in price, prots, and consumer surplus as afunction of the new costs.

c.) An economist at the Justice Department thinks no e ciencies will resultfrom the merger (cM = 40). What will the merger do to Total Sur-plus/Consumer Surplus? Should we block the merger or allow it to pro-ceed? Do you believe the economists conclusion? Why or Why not?

d.) Conditional on the merger being proposed by rms 2 and 3 what is themaximal marginal cost for the merged rm we can expect to result fromthe merger? Relative to the current situation, what impact would themerger have on prices and total and consumer surplus in this worst casescenario? What is the minimal level of e ciencies required to cause TotalSurplus to increase? To make Consumer Surplus increase? (If solvingfor the exact cm is too di cult, you can nd the greatest integer cmnumerically)

e.) Suppose we think there will be no e ciencies associated with the merger butinstead the rms are merging to enhance their ability to collude. Assumerms compete repeatedly over time. Find the maximal discount rate suchthat perfect collusion can be supported in the 3 rm equilibrium. Findthe maximal discount rate such that perfect collusion can be supportedin the post-merger equilibrium (assuming no e ciencies). What do youmake of the statement "even though we have observed no coordinationprior to the merger, we might observe it after"

f.) Suppose the Justice Department identies a potential entrant that couldenter the market and produce at cost c4 = 40 by making a sunk investmentof K. Assuming the "worst case scenario" for the costs of the mergedrm, nd the greatest K such that there will be entry. How does this Kvary with cm? Is there any level of post merger costs that would makethe 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 thelikely consequences of this merger. (You can be creative here)

2. Read The Art of Standards Wars by Carl Shapiro and Hal Varian postedunder the monopolization tab on the course website.

a. Citing sources and examples you can nd online, how would Shapiro and Var-ian classify the upcoming competition between X-Box One and Playstation4 in their classication scheme? What are some of the "key assets" andtactics being used by each of the rms? From the perspective of thenetwork issues discussed in the article how do you think this round ofcompetition will dier from previous rounds?

b. What are some of the challenges standards wars pose for antitrust? Howdo you think antitrust should treat them?

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