Management Engineering - Business & Industrial Economics

Full exam

12.7.2023 Solutions - BIE Exam Garrone Multiple-choice questions (10 points) Please tick the letter of the correct answer 1. Consumption of freshwater in South Europe agriculture is very high. This contributes to create water stress in a few regions. European agriculture ministries are subsidizing the adoption of precision irrigation equipment that allows farmer to save water by at least 30% (keeping production equal or higher). This type of equipment • Is an expansion supply-side response to water stress, because it will add new water resource to the available stock. • Is a water-efficient, demand-side management response to water stress, because it saves water without sacrificing agricultural production. • Is a substitute supply-side response to water stress, because farmers have to replace older irrigation equipment it will add new water resource to the available stock. • Is a water-efficient, demand-side management response to water stress, because it will cause a reduction of farmers’ water expenses for water 2. The incumbent knows that a few companies are considering whether or not to enter the market where it runs its business. Therefore it expands its production capacity in the country, adding assembly lines that have been designed specifically for its products. Thanks to this investment, it is making a commitment to stay in the market. In other words, • The investment rules out the unprofitable scenario of a price war with entrants • The investment is a signal of a tough reaction upon entry toward entrants • The investment makes the scenario of a price war with entrants credible • The investment makes the offer of additional volume for responding to additional demand credible Explain your choice in few words A strategy that makes a “price war with entrants credible” is the exact definition of the incumbent’s commitment in entry games. The answer about the scenario of unprofitable price wars is wrong, because price war is a menace for discouraging entrants, not a likely scenario, nor a goal for the incumbent. In fact if the incumbent does not make the commitment, entrants will enter, but then a price war and its losses would be irrational for both parties (there will be accommodation of the entrant). Two other answers are out of scope. Based on the text we can’t conclude that the investment also works a signal, or that the incumbent needs to show credibly its ability to serve further demand. 3. Choose the best definition of vertical foreclosure. • All the cases in utilities when a network monopolist does not ensure to the end consumers a fair and equal access to the network • All the cases when an operator that monopolizes a market A and is vertically integrated in a competitive market B does not ensure a fair and equal access to the output of market A to its competitors in market B • All the cases when an operator that monopolizes a market A and is vertically integrated in a competitive market B acquires those competitors that are developing innovative projects in market B and are a competitive threat • All the cases in digital markets when a bottleneck operator grants a fair and equal access to bottleneck only to the providers of apps that are complementary to the bottleneck services 4. The use of market-based approaches to environmental degradation, such as PPV or VPP, is not frequent because • The distribution of benefits to polluters and victims is inequal, and they do not ensure allocative efficiency • They are not allocatively efficient, even if they minimize the transaction costs between polluters and victimes. • They are not allocatively efficient, even if they grant a good level of equity • Transaction costs between polluters and victims are large, and the distribution of benefits to the 2 groups depends on whether PPV or VPP is chosen 5. Venture capitals suffer from information asymmetries related to the quality of the technological innovation brought by innovative high-tech startups • A possible consequence is underinvestment in highly innovative startups, because of adverse selection • A possible consequence is underinvestment in highly innovative startups, because of moral hazard • A possible consequence is the disbursement of funds in several rounds after intermediate milestones have been completed, because of adverse selection • A possible consequence is the disbursement of funds in several rounds after intermediate milestones have been completed, because of moral hazard 6. Firms that are regulated through a cost-plus approach • Are incentivized to pursue the maximum productive efficiency in their operations • May not raise as much debt capital as firms regulated with a price-cap approach • Offer a stable remuneration on capital invested to their debtholders and shareholders • Are more likely to undertake cost-efficient process innovation 7. Supply-side strategies aim to increase the availability of natural resources. In agriculture fertilizers of mineral origin are considered the standard fertilizer. Producing fertilizers from agricultural wastes is: • A supply-side strategy based on the expansion of the available stock of a natural resource, because it increases the amount of fertilizers available • A supply-side strategy based on substitution of the finite natural resource, because it does not use minerals to produce fertilizers • A supply-side strategy based on the optimization of resource supply infrastructure • None of the above, it is actually a demand-side strategy 8. Consider an industry where two firms (Firm 1 and Firm 2) compete by choosing the production capacity of their plants, and they cannot observe the other’s decision while making theirs. The two firms have homogeneous costs. Which statement is FALSE? • A process innovation that reduces the cost of Firm 1 leads Firm 1 to have higher profits, by producing a lower quantity and charging higher prices • The two firms produce the same quantity and have the same profits • The social welfare would be larger if Firm 1 could observe Firm 2 decision before choosing its production capacity • If a very large number of firms enters the industry, market price and aggregate quantity approximate the outcomes of perfect competition 9. The government of your country is interested in fostering the growth of small-medium enterprises (SMEs) that offer solutions for energy-efficient buildings. Indeed, they have been shown to be more innovative than larger competitors in delivering sustainable innovation, and to be able to attract capital from sustainability-oriented funds and investors. However, reports by the Ministry of Economic Development show that their growth is mainly limited by the fact that, on average, they produce at an average cost which is much larger compared to the one of their larger competitors. Which is the main market imperfection to tackle? • Scale economies • Adverse selection • Knowledge externalities • Coordination failures 10. Which one of these is an example of transactional collaboration between business and non profit organizations? • Cause-related marketing initiatives • In-kind donations of products or services • Joint development of supply chain sustainability protocols • Job market inclusion projects Structured Question (10 points) An emerging car maker has developed a new hybrid engine with excellent driving and environmental performances, and has protected it with an European patent. It has designed and industrialized two types of city-cars based on the new engine. Bella is a basic version, stripped from any frills. Totem is a top tier version. The costs are the same for the two versions, 12 [000€/car]. Bella requires the miniaturization of some devices, while Totem requires more sophisticated materials and on-board technologies, which however are outweighed by Bella extra-costs due to the miniaturization tasks. The car maker is considering the pricing strategy for Bella and Totem. Its business development department has collected the following data. - The European market that the new offer may reach is estimated to include overall 100 million customers, of whom 20 million (H) have a higher income and 80 million (L) have a lower income. - H’s willingness to pay for Bella (B) is equal to 25 [000€/car], while for Totem (T) it is equal to 35 [000€/car]. L’s willingness to pay for B is equal to 15 [000€/car], while for T it is equal to 20 [000€/car]. - The sales department has explained that they can’t say if a prospective customer belongs to L type or H type, neither in the online markets nor in the showrooms. In summary, the willingness to pay table is as follows. [000€/car] | WTP_B | WTP_T | -------------------------------------------------------- L (80 Million) | 15 | 20 | -------------------------------------------------------- H (20 Million) | 25 | 35 | -------------------------------------------------------- i. Which type of price discrimination is the car maker able to practice? Explain shortly your answer. The carmaker can practice price discrimination by self selection, by applying versioning to cars. We are not said that the individual willingness to pay is observed, and perfect price discrimination can be ruled out. The sales work force does not recognize if the customer is L or H type at purchase time because of adverse selection. Group price discrimination is not possible. ii. Show how the car maker can set the prices B and T if it decides to practice price discrimination. We search for 2 prices for B and T that keep L and H groups separated in two different purchase choices. - Participation constraint that ensures that L customers will buy B p_B