Industrial Organization

Master en Economa Industrial

FINAL EXAM 2008 - 2009
You have 2 hours to answer the exam
(You may answer the exam in Spanish if you wish)
Name:____________________________________DNI:____________

PLEASE DO NOT WRITE HERE

1. [10 points] Multiple Choice. Pick the correct answer and give your reason below.

1. [5 points] Is the Hirshman-Herfindhal Index (HHI) a good indicator of the DWL in a

market?
a) Yes, because the higher if HHI the higher is concentration and therefore profits
b) No, not always
Reason:

2. [5 points] If an industrys demand function becomes less elastic, the Cournot

equilibrium implies:
a) a decrease in all firms market power.
b) an increase in all firms market power.
c) it should not affect the equilibrium output of any of the firms.
d) it should not affect the equilibrium price.
Reason:

2.[25 POINTS] Monopoly and Price Discrimination

Suppose a monopoly in Spain serves consumers in all Iberian Peninsula. The individual
demand from the Spanish is given by Ps=16-qs and from the Portuguese Pp=8-2qp. The
number of consumers in each market is respectively Ns and Ns/2. The marginal cost is 1
and is the same for both countries.
a) [ 8 points]Suppose the European Commission forces the monopoly to charge a
uniform price in each country (suppose the Monopoly may charge a different
uniform price for Spain and Portugal if it wishes) which prices Ps and Pp would
the monopoly charge? Compute the monopolist total profit.

b) [ 8 points]Suppose the European Commission allows the monopoly to perfectly

price discriminate conditional on the monopolist paying a tax t=1 per unit sold.
Would the monopolist engage in first-degree price discrimination?

c) [ 9 points] In which case a) or b) is the deadweight loss larger? Compute the

values of the DWL in both cases a) and b).

3. [15 points] Monopoly - 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.

Consumer 1
Consumer 2
Consumer 3

Product X
4
3
0

Product Y
3
3
4

a) [7,5 points] Find the monopoly price of a package under pure tying:

b) [7,5 points] Find the optimal product and package prices under mixed tying. Which
of the strategies a) or b) gives the highest profit?

4. [25 points] Bertrand

Suppose two duopolists are engaged in Bertrand competition. The demand function is
Q(p)=2p for 0p2. Suppose unit costs are originally c2=1:5, c1=1. Then an outside
innovator discovers a new technology that leads to a lower unit cost, c*= 0:75. The
outside innovator sells the exclusive right to use the new technology to the highest
bidder.
4.1. [8 points] How does the equilibrium solution change if the innovation is acquired
either by firm 1 or by firm 2? Also compute the associated change in social surplus (=
consumer surplus+ producer surplus).

4.2. [8 points] Who will get the technology? Is the outcome efficient?

4.3. [9 points] Suppose 20 years go by and the patent to the technology expires. Now N
firms have access to this technology and have costs c*=0.75. Moreover, suppose the
discount factor equals 5/6. Firms compete infinitely many periods. Assume the regulator
does not interfere with the market as long as the Hirshman-Herfindhal index is below
1/5. In case the regulator interferes price will be set at marginal cost. How many firms
could maintain an equilibrium, where aggregate profit equals the monopolys profit and
profits as well as production is divided equally among them? And if the discount factor
decreases to 2/3 would this equilibrium still hold?

5. [25 points] The Hotelling model

Imagine a city with two sellers A and B located at 0 and 1 respectively. The citys
length is larger than one, i.e. there are potential consumers to the left of A and to the
right of B. All consumers are uniformly located along the city. As usual assume all
consumers have a gross consumer surplus equal to s and transportation costs that are
linear with the distance (i.e. td), where d is distance to the chosen firm, and firms
have equal marginal costs =c.

0
A

1
B

a) [5 points] What is the location of the indifferent consumer between buying from
A and buying from B? What are the locations of the consumers that are just
indifferent between buying and not buying?

b) [5 points] Compute the firms total demand

c) [5 points]Suppose the government regulates the price i.e. pA=pB=pbar. What is

the maximum value of pbar such that the market between A and B (i.e. the
segment [0,1]) is covered.

d) [5 points]Would firms A and B prefer to locate in the point given the

regulated prices?

e) [5 points]And if prices were free, would firms A and B prefer to locate in ?