Industrial Organization

Master en Economa Industrial

FINAL EXAM (SEPTEMBER) 2008- 2009
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(You may answer the exam in Spanish if you wish)
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1. [15 points] Multiple Choice:

1. [5 points] Concentration Measures: If the equivalent number N* is 5.3 it means

that:
a) All the firms in the market are symmetrical in terms of market share
b) The Hirshman-Herfindhal Index (HHI) is 5.3
c) There are between 5 and 6 firms in the market
d) None of the above
Reason:

2. [5 points] Cournot In an asymmetric duopoly where firms compete a la Cournot:

a) The firm with the lowest marginal cost produces less.
b) Firms produce the same because they face the same equilibrium price.
c) The firm with the lowest marginal cost charges a higher price.
d) The firm with the highest marginal cost produces less quantity.
Reason:

3. [5 points] Tying Take the following table of valuations for goods X and Y, assume
marginal cost of X is 1 and marginal cost of Y is also 1. Suppose there is only 1
consumer of each type.

Consumer 1
Consumer 2
Consumer 3

Product X
4
1
0

Product Y
2
3
4

a) The monopolys profit under pure tying is 6 and under mixed tying is 8
b) The monopolys maximum profit under pure tying is 4 and under mixed tying is
8
c) The monopolys maximum profit under pure tying is 4 and under mixed tying is
7
d) The monopolys maximum profit under pure tying is 6 and under mixed tying is
7
Reason:

4. [5 points] Monopoly Price Discrimination

Suppose a monopolist observes its potential customers willingness to pay for the
good. There is no arbitraje. Suppose the willingness to pay of each of its potential
customers are {1; 0.9; 0.8; 0.7; 0.6; 0.5; 0.4; 0.3; 0.2; 0.1}. The marginal cost of the
monopolist is 0.35 y and there are no fixed costs. Choose the correct answer::
a) The monopolist sells all units at Price=marginal cost
b) The price that the last consumer pays is 0.3 and the monopolist sells 8
units of the good. The monopolist has a profit of 5.2
c) The monopolist sells 10 units and has a profit equal to 2
d) The price that the last consumer pays for the good is 0.4 and the
monopolist sells 7 units of the good. The monopolist has a profit equal to
2,45
Reason:

2.[25 POINTS] Monopoly

Suppose consumers live for two periods t=1, 2 and that a monopoly sells cars (i.e. a
durable good) that lasts for 2 periods. Thus, if a consumer purchases the product in
period 1, she will pay only once and have it for her entire life and she will not have to
buy another one in period 2. On the other hand if the monopoly rents the good than the
consumer has to pay the rent in both periods. Assume the monopolist has zero
production costs.
a) [10 points] Suppose the Monopoly decides to rent the product for price pr each
period. The inverse aggregate demand in period 1 is given by p=100-Q. (Hint:
Renting means that the monopoly faces in period 2 the same demand as in
period 1). What will be the optimal price pr in each period?

b) [15 points]Suppose the Monopoly sells the cars instead of renting them. What
are the optimal sale prices in periods 1 and 2. (Hint: solve the problem
backwards and derive p2 as a function of q1, the number of cars sold in the first
period. Then remember that when buying a car, the consumer may resell it in the
second period or what is the same has services from the car in the second period
that are worth the second period price p2. Therefore, the willingness to pay for
the car in the first period is equal to p1=100-q1+p2 i.e. we add the second period
price you just derived.)

c) [ 9 points] Which of the solutions renting or selling is preferred by the

monopolist? Why?

4. [35 points] Bertrand and Tacit collusion

Two firms compete in prices in a market for a homogeneous product. In this market
there are N>0 consumers; each buys one unit if the price of the product does not exceed
10 Euros and nothing otherwise. Consumers buy from the firm selling at a lower price.
In case both firms charge the same price, assume that N/2 consumers buy from each
firm. Assume zero production costs for both firms.
a) [5 points] Find the Bertrand equilibrium prices for a single-shot (i.e. 1 period)
game, assuming that the firms choose their prices simultaneously. Compute the
profit of each firm.

b) [12,5 points]Now suppose the game is repeatedly infinitely. Let denote the
time discount parameter. Propose a trigger price strategy for both firms yielding
the collusive prices of (pi =10, pj =10) each period. Calculate the minimal value
of that would enforce the trigger price strategy you propose.

c) [12,5 points]Now suppose that the unit production cost of firm 2 is 4 Euros but
the unit production cost of firm 1 remains zero. Find the Bertrand equilibrium
prices for the single-shot game. What are the profits of both firms?

5.[25 points] The Hotelling model

Imagine a city with one seller, seller A located at 0. The citys length is one but all
the N consumers are located at 0. As usual assume all consumers have a gross
consumer surplus equal to s and transportation costs is equal to one per unit of
distance (i.e. 1d), where d is distance to the firm, and firm A has zero marginal
costs.
a) Compute the monopoly price and profit.

b) Now suppose there is a firm B in location . What would be the equilibrium

prices and profits.