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UNIVERSITY OF EAST ANGLIA School of Economics Main Series UG Examination 2013-14 INDUSTRIAL ORGANISATION ECO-3A11 Time allowed: 2 hours Answer TWO questions from Section A and TWO questions from Section B. Each question in Section A is worth 20 marks and each question in Section B is worth 30 marks. Notes are not permitted in this examination. Do not turn over until you are told to do so by the Invigilator. ECO-3A11 Copyright of the University of East Anglia Module Contact: Dr Franco Mariuzzo Version 1 Page 2 Section A 1. A single firm supplies two products: 1 and 2. Product 1 is costless to produce, while product 2 has a constant marginal cost of £2. A third of the consumers are willing to pay £2 for a unit of product 1 and £5 for a unit of product 2, while the remaining two thirds of consumers have the reverse preferences. All consumers are willing to pay £6 to buy a bundle of both items. (a) If the firm offers separate prices for purchasing each item, where the price for buying product i{1,2} is pi, what is the firm’s most profitable choice for p1 and p2? (b) Can the firm make greater profit by selling the two products as a bundle if the bundle has a constant marginal cost of £2? (c) Now assuming that all consumers are willing to pay £(6+A) to buy both items, how much should the monetary value A be to make firms indifferent between selling the bundle or selling goods separately. [20 marks] 2. Suppose there are two profit-maximizing firms, producing a differentiated good. Each sets its own price pi to maximize profit, i{1,2}. Quantities qi are determined by the market demand curves: q1=100-2p1+p2 and q2=82+p1-p2. There is no fixed cost, the marginal cost for firm 1 is £2 and the marginal cost for firm 2 is £4. (a) Find the best response functions of the firms (i.e., each firm’s best price given the price set by its rival). (b) Determine the equilibrium price and quantity for each good and compute the equilibrium profits earned by each firm. (c) If the firms can act as a cartel, what prices will maximize joint profits? Will they earn more than the combined profit in (b)? [20 marks] ECO-3A11 Version 1 Page 3 3. An upstream firm M produces an intermediate good at constant marginal cost c=8, and sells its output at the price v to a downstream producer firm D. To produce one unit of the final good, the downstream firm D needs one unit of the intermediate good and incurs no costs of production. The demand function of the final consumers is Q=80−2p, where Q is the demand and p is the final good price charged to the consumers by the downstream firm. The timing of the pricing decisions is defined as follows: first the upstream firm M sets v, and then the downstream firm D defines p. (a) Find the equilibrium prices v and p and the quantity of the final good sold to consumers. (b) Find the upstream firm’s and the downstream firm’s profit, as well as the industry profit and the total welfare. (c) Suppose now that the upstream and downstream firms are vertically integrated. Find the final good price that the integrated firm would set, along with the quantity of final good it would sell and the resulting equilibrium profit. Compare the current welfare with the one derived in (b). [20 marks] TURN OVER ECO-3A11 Version 1 Page 4 Section B 4. Many diverse industries are populated by businesses that operate as “two-sided platforms.” Describe the role of platforms in two-sided markets. [30 marks] 5. In case of a symmetric market, how does the Cournot price-cost-margin relate to the number of firms and the Herfindahl–Hirschman Index (HHI)? [30 marks] 6. What is the distinction between the creative and destructive aspects of Schumpeter’s process of creative destruction? [30 marks] 7. In certain industries the production stage and distribution stage are controlled by a monopolist. Why might acquisition of the distributor be attractive for the producer? Would such a takeover damage consumers? [30 marks] 8. Discuss in detail price discrimination strategy and its welfare effects. [30 marks] 9. Discuss the following statement: “collusion could happen easily if relatively few firms are involved”. [30 marks] END OF PAPER ECO-3A11 Version 1