Download ECO-3A11 Module Contact: Dr Franco Mariuzzo Copyright of

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
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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]
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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
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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
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