Management Engineering - Business & Industrial Economics

Full exam

BUSINESS AND INDUSTRIAL ECONOMICS [G-O] Final exam June 21 st 2023 NAME AND SURNAME ________________________________________________________________ STUDENT ID________________________________________________________________ Multiple choice questions 1) Consider a Bain, Sylos Labini and Modigliani model with absolute cost advantages. In industry A, the market price is 50. In industry B, the market price is 80. All other things equal, what does this imply? a) Incumbents in industry A have higher costs than incumbents in industry B. b) The threat of new entrants in industry B is a priori higher (before considering market price). c) Entry barriers in industry B are higher. BONUS d) All the other options are correct. 2) Firms A and B are competing according to a Stackelberg oligopoly. The inverse demand function is P = 250 – 2Q. The total cost function for both firms is TC = 5 + 2q. What is the quantity produced by the follower? a) 31. BONUS b) 62. c) 124. d) None of the other answers is correct. 3) Please gauge the validity of the following statements: a) In principle, the double marginalization problem should require the intervention of ex-ante regulation in order to be solved. b) In principle, the double marginalization problem should not require any regulatory intervention in order to be solved. BONUS c) In principle, the double marginalization problem should require the intervention of ex-post regulation (i.e. antitrust) in order to be solved. d) In principle, the double marginalization problem should require the intervention of both ex- ante and ex-post (i.e. antitrust) regulation in order to be solved. 4) Consider a monopolist with demand Q = 280 – 4p and marginal cost MC = 50. There are no fixed costs. Determine the difference in social welfare between these two scenarios: a) single-price monopolist b) discrimination of 1°. a) 300. b) 200. BONUS c) 400. d) 600. 5) There are two cities: Hove and Brighton. Electricity service distribution in both areas is a natural monopoly. The two monopolies and the two areas are identical in every aspect (e.g. n° consumers) except for two crucial factors: 1) consumers of Hove are much more price-sensitive than those of Brighton, which conversely are very reluctant to change their consumption patterns even in the presence of high electricity prices; 2) fixed costs of providing the service in Hove are much higher than those needed in Brighton. On the basis of this information, from a theoretical point of view, which strategy the regulator should pursue in the two different geographical contexts, among the following options: a) In both areas the regulator should try to implement a 1 st best solution. b) In Brighton the regulator should pursue a 1 st best solution, while in Hove also a 2 nd best solution would be ok. c) In both areas the regulator should try to implement a 2 nd best solution. d) In Hove the regulator should pursue a 1 st best solution, while in Brighton also a 2 nd best solution would be ok. BONUS 6) AI is a software for performing machine learning analyses. The company is able to find an exogenous characteristic (student vs. professional analyst) that is able to segment the markets in the two corresponding sub-markets. From one side, Students exhibit an inverse demand function given by the following expression: Ps = 4 – Qs. On the other side, professional Analysts exhibit an inverse demand function given by the following expression: Pa = 14 – Qa. The total cost function for producing and distributing the software is given by: TC = 2 + 2Qi where i = s, a. Which is the maximum amount of profits achievable by AI? a) 22.5. b) 26. c) 34. d) 35. BONUS 7) Which of the following statements is true? a) When Wimbledon's Centre Court has the legal maximum number of 15,000 spectators, watching a match there is non-rival because so many people are watching it. b) A tennis racket is non-rival, because one person can use it today while another can use it tomorrow. c) Motorways are excludable, because people could be charged tolls for using them. BONUS d) National Health Service hospitals are non-excludable, because patients are not charged for using them. 8) What is a drastic innovation? a) A synonym for radical innovation. b) An innovation that will lead the innovator to act as an unconstrained monopolist. BONUS c) An innovation that will lead the innovator to act as a constrained monopolist. d) An innovation that will lead to any change in the market structure. 9) Consider the famous Fisher Body-GM case study and individuate the most correct statement among the following ones, concerning the evolution over time in the governance of their relationship: a) In a first stage (beginning of 1900s), the relationship evolved from market to an hybrid form of governance (i.e. equity alliance) because of the increase in physical asset specificity of Fisher Body’s investments. BONUS b) In a second (and last) stage (1920s), the relationship evolved from market to an hybrid form of governance (i.e. equity alliance) because of the increase in site specificity of Fisher Body’s investments. c) In a first stage (beginning of 1900s), the relationship evolved from market to a hierarchical form of governance (i.e. acquisition) because of the increase in site specificity of Fisher Body’s investments. d) In a second (and last) stage (1920s), the relationship evolved from a hierarchical form of governance (i.e. acquisition) towards an hybrid one (i.e. equity alliance) because of the increase in physical asset specificity of Fisher Body’s investments. 10) Imagine that labour market is perfectly competitive and high ability workers are considering to signal their ability through education. Firms pay workers their expected productivity (i.e., w = a), conditional on their education level, e. Specifically, the expected productivity of high-ability workers is a H = 200 and their cost of education (per unit of education) is c H = 20, while the expected productivity of low-ability workers is a L=100 and their cost of education (per unit of education) is cL= 5. Find the interval level of education of e H that allows high-ability workers to credibly signal their ability on the labour market. a) 10 < ������� < 40 . b) 10 < ������� < 30. c) 5 < ������� < 20 . d) None of the other answers is correct. BONUS General question (GQ) Goldenrod is an extremely successful firm active in the production of various chemical products, such as detergents, toothpaste, and dish-washing liquids. After studying the potential of the NMN (Nicotinamide mononucleotide) molecule for anti-aging, it is evaluating the possibility to diversify into the nascent anti-aging industry. Based on this information, and drawing on the contents of the BIE course, write a critical analysis of the relevant factors that Goldenrod needs to consider before diversifying. Structured question (SQ) 1) Consider a market where we have an incumbent (neutral-to-risk) monopolistic firm (Monopoly profit = 150) and a potential entrant (new firm); where both firms have the possibility to buy a patented innovation on an exclusive basis from an R&D lab. The probability perceived by the incumbent that the new firm will acquire the patent (and enter) is equal to 20%. In a scenario of incremental (i.e. gradual) innovation, considering that duopoly profit for each firm would be equal to 30: 1a) what the incumbent will be willing to bid at maximum? (1 pt.) 1b) what the rival firm will be willing to bid at maximum? (1 pt.) 2) The rival firm enters into the market, and the duopoly is symmetric (i.e. firms are equal in every single aspect) where each of the firm is obtaining a profit of 30. Both firms recognize their strategic interaction, and realize that by colluding they can split equally the monopoly profit which is 150 as said before. 2a) Express the game in its normal form (i.e. as a one-shot game), and by describing what “type” of game this game is, identify the Nash Equilibrium (or equilibria). (2 pt.) Now suppose that the game is repeated an indefinite length of time with probability p. In case of collusion, firms plan to adopt grim strategies (they collude until no one cheats, if one firm starts cheating the opponent will cheat forever). 2b) Is collusion possible? For which probability p? (2 pt.) 3) After some years, the 2 firms are considering merging one with the other. The global demand curve they face is p = 50 – 5q. Their actual total cost function is equal to TC = 40q. In the ex-ante merger scenario, both firms are at the Bertrand equilibrium, while the ex-post merger scenario will lead to: a total cost function for the merged firm equal to TC = 35q, and the possibility to set a price for the good of p = 42,5 (i.e. monopoly price). 3a) Grounding on the Williamson’s trade-off model, compute Social Welfare (made by consumer surplus + producer surplus) both in the ex-ante merger and the ex-post merger scenarios. (3 pt.) 3b) In your view, will the EU Commission approve this type of merger? Why yes or no? (1 pt.) Solution to the SQ 1a) 150 – [0.8*150 + 0.2*30] = 24. 1b) 30 – 0 = 30. 2) Firm B Firm A Cheat Collude Cheat 30;30 150;0 Collude 0;150 75;75 2a) The only Nash equilibrium is Cheat; Cheat (both players have dominant strategies), the game is a typical prisoner’s dilemma game, since the outcome Collude; Collude Pareto dominates the resulting Nash equilibrium. 2b) Yes collusion is possible for p > 75/120 (= 0.625) since it has to be for collusion to be convenient over cheating that: 75/(1-p) > 150 + 30p/(1-p). See Slide no. 8 of Antitrust I. 3a) Social Welfare ex-ante merger: (10*2)/2 = 10. Social Welfare ex-post merger: [(15+7.5)*1.5]/2 = 16.875. 3b) In spite of the gain in Social Welfare, the merger would lead to a decrease in allocative efficiency (and thus a reduction in Consumer Surplus), so the EU Commission, following its current course of action (more oriented towards maximising Consumer Welfare rather than Social Welfare), is likely to deny the merger between the two companies.