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Prof. Davide Vannoni
Industrial Economics II
December 2012
Answer the following question (straight to the point, formal analysis is welcome but
unnecessary)
1) Imagine the following vertical structure of a market, with one monopolist upstream
firm (U1) that manufactures a good and one monopolist downstream firm that
distributes it (D3).
U1
D3
Imagine that, in such a situation, the final price is P=20 and the price charged by the
upstream monopolist is w=15. Assuming marginal production costs for the upstream firms
equal to c=10, which do not change after a merger or after entry of new firms:
a) Find 3 different market structures characterised with a final equilibrium price P= 15;
b) Find a market structure in which the final price P is equal to 10;
c) Find a market structure in which the equilibrium price P is between 10 and 15;
d) Find 2 market structures in which the equilibrium price P is between 15 and 20.
(Hint: imagine entry of firms at upstream and downstream stages, choose the type of
competition in the upstream stage and in the downstream stage, and imagine eventual
mergers in one stage or in both stages)
Answer two of the four following questions (straight to the point).
2) Using models with product differentiation, discuss the principle of maximum
differentiation versus the principle of minimum differentiation.
3) Explain the difference between mergers with unilateral and co-ordinated effects. What
are the similarities and the differences if price competition is at stake as compared to
the case where quantity competition is at stake?
4) Explain and distinguish the concepts of strategic complements and substitutes.
Illustrate how these concepts are used in understanding the strategic interaction
between incumbents and entrants (refer to Fudenberg and Tirole’s “animal farm”)
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5) Choose the correct answer(s) and explain.
These factors make collusion easier (for what concerns recession/boom you need to
specify the reference model):
a. Multimarket contact, firm asymmetry and low number of firms
b. Economic recession, firm symmetry and cross shareholdings
c. Absence of information lag, firm symmetry and economic boom
Answer the following question (straight to the point).
6) Consider a market in which there are M identical firms and a market with identical
demand in which there are N identical firms (with M>N). In each market competition
is in prices and goods are homogeneous.
- Find the discount factor above which it is convenient to collude in each of the two
markets (separately) and tell how such discount factor can be related to the Herfindahl
Index of concentration.
- Suppose now that all N firms compete in both markets and that under a collusive
agreement market shares must be split equally between firms. Find the discount
factors above which it is convenient to collude in both markets, taking into account the
effect of multimarket contact.
- Does MMC facilitate collusion? How the new discount factors can be related to the
Herfindahl indices of concentration?
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