ECF5040 Industry Economics - mid exam solution / answers - Acquisitions, Productivity, and Profitability: Evidence from the Japanese Cotton Spinning Industry
In the exercises "TFU" you are required to say whether the claim
is True/False/Uncertain. You will get the majority of the credit for explaining thereasoning behind why the claim is True/False/Uncertain. Each TFU question is worth5 points.
1) TFU
The higher the sunk entry costs in an industry, the more concentrated this industry isin equilibrium.
2) TFU
Suppose there is a new company that starts rail service (passenger and freight)between Melbourne and Sydney. The purchase of the trains to start this service areconsidered sunk entry costs.
3) TFU
Consider cost curves of firms. As long as we are in a range of production such that asquantity increases, AC decreases, while the MC curve is above the AC curve, we are ina situation of economies of scale.
4) TFU
In case of a manufacturing firm it is sufficient to excel in R&D and thus new productdevelopment to sustain one's competitive advantage in the industry.
5) TFU
It is sufficient to be producing the product in the industry which is the standard (e.g.standard sized and material nuts and bolt, standard window sizes, intel
microprocessor, etc.)in order to capture value in the industry.
6)TFU
Firms competing on prices in equilibrium will always result in price equals marginalcost and thus zero profit for the firms.
7) TFU
Limit pricing and predatory pricing are not sensible strategies form the perspective of theincumbent, because it means that the incumbent needs to keep prices lower than in theabsence of the threat of entry forever. By accommodating entry, the incumbent could achievehigher profits.
In the longer question format you need to answer the questions posed below ina concise but precise fashion.
8) LONGER QUESTION- 12 points
8a) What is collusion?
8b) What are ways in which collusive agreements arise? Explain two conceptually differentways in which they can arise.
8c) Is it easy or hard to sustain a collusive agreement? Why?
9) LONGER QUESTION-8 points
9a) What is the difference between economies of scale and economies of scope? Please explainwhat both of these concepts mean, and then explain the difference.
9b) Can both economies of scale and economies of scope characterize a firm's production at agiven point in time or only one of them can be present? Please explain.
10) LONGER QUESTION-8 points
10a) Which one is more helpful in increasing a new entrant's market share: a fixed costadvantage or a marginal cost advantage? Why?
10a) How is this different, if at all, when the existing firms in the market are backed by thegovernment? Why?
11) LONGER QUESTION- 18 points
11a) What is double marginalization? When does it arise?
11b) Consider an upstream manufacturer and a downstream manufacturer(Upstream sells to Downstream, Downstream then sells to consumers). Before theymerge to be vertically integrated, they are both monopolists in their product'smarket. Does vertical integration necessarily increase both producer surplus andconsumer surplus in the economy? Why or why not?
11c)List at least two distinct reasons why vertical integration might happen in reallife! Explain the logic behind those reasons.(This is a general question, you do notneed to assume the setup in 11b).)
12) RESEARCH PAPER-24 points
a)What is the question this paper answers?
b) What does the paper find?
c)What does physical productivity or quantity productivity (TFPQ) mean specifically in thecontext of this paper?
d) What does revenue productivity(TFPR) mean specifically in the context of this paper?
e) The authors have very detailed data relating to cotton spinning. Why is the number of daysa plant operated a useful variable in this paper?
f) What happens to TFPQ and TFPR after a plant is acquried? Why?
13) BUNDLING QUESTION-40 points
Netscape's Mosaic was the most successful internet browser in the mid 1990s. Microsoft at thesame time was selling the Windows operating system very successfully. Microsoft thenintroduced Internet Explorer which is an internet browser, so it has the same function asNetscape's Mosaic. Assume for the sake of this problem that Microsoft's Windows is the onlyoperating system on the market and that the only two browsers are Internet Explorer andMosaic. In order to use the internet, one needs both an operating system and an internetbrowser. Windows is compatible with both internet browsers and it is technologically possibleto install both browsers on a computer, even at the same time if one wishes.
Consider a country of 30M people in which there are three types of consumers, 10M of eachtype.
1.internet explorer(IE) fans: their maximum willingness to pay (mWTP) for IE is $100, theirmaximum WTP for M is $50
2. mosaic(M) fans: their maximum WTP for M is $100, their maximum WTP for IE is $50
3. serious mosaic fans: their maximum WTP for IE is $50 and their maximum WTP for M is$199
Each consumer has a maximum WTP for Windows of $400. Companies are not able to seewho is what type of customer, so companies cannot set a different price say for M fans andserious M fans. They can set the prices of their products and that's it.
For simplicity, assume that the marginal cost of both firms is 0 for the browsers and also forthe operating system.
a)Currently Microsoft is selling Windows, Microsoft is also selling Internet Explorer andNetscape is selling Mosaic. What are the prices they set if they are profit maximizing? Pleaseexplain. What is each consumer type's surplus from their purchase? Please explain.P_windows=?
P_IE=?
P_mosaic=?
b)What is the profit of each of the companies? Explain.
c) Now Microsoft bundles its operating system and browser. Consumers are not able to buythe operating system only or IE only, they are only available as a bundle.
What price should Microsoft set for the bundle if it is profit maximizing? Please explain yourlogic.
What is the surplus of each type of consumer from their purchase from Microsoft (if they buyit)?
What is the profit of Microsoft from selling this bundle? Please show in detail the componentsof the profit.
d) What price should Netscape set for Mosaic if it wants to maximize its profit? How manyMosaic browsers will it sell? What is consumer surplus for each type of consumer from buyingfrom Netscape now (if they buy from Netscape)? What is Netscape's profit? Please explainyour logic when you answer all subquestions.