Management Engineering - Business & Industrial Economics

Full exam

BUSINESS AND INDUSTRIAL ECONOMICS Final exam June 21st 2019 SURNAME - NAME (Matricola no.)____________________________________________________________ Multiple choice questions 1) Two identical firms are specialized in developing information systems for domotics (i.e. “digital home”). In parallel, they are projecting a rather sophisticated multi-platform software for the complete home automation. This software will allow residential users to manage remotely home appliances (e.g. ovens, washing machines, dish washers). Both firms want to launch their software in the market. But at the present stage the two software are incompatible. Both firms are gauging the opportunity to stipulate a partnership and launch into the market only a single software, where one firm would act as the leader and the other as the follower. In case one firm would act as the follower, it should bear a cost of 5 Million Euros in absorbing costs, but no licensing fees paid. Note that if the partnership effectively took place, this alliance would be positively seen by home-appliances producers that would not be undecided on which platform endorse in designing appliances able to communicate with the new software. Also consumers would suffer from less uncertainty. For these reasons, global revenues in case of partnership for the 2 firms would be equal to 10 Million Euros (5 Million to firm 1 + 5 Million to firm 2). If the partnership could not be stipulated, this scenario would depress the market, and in this case, global revenues for the 2 firms would be equal to 4 Million Euros (2 Million to firm 1 + 2 Million to firm 2). On the basis of this information, and supposing that there are no other costs than the absorbing ones aforementioned, please structure the question in a normal form (lead- follow) game, and indicate which is the correct answer: a) Firms will stipulate a partnership and this outcome is Pareto-efficient. b) Firms will stipulate a partnership and this outcome is not Pareto-efficient. c) Firms will not stipulate a partnership and this outcome is Pareto-efficient. BONUS d) Firms will not stipulate a partnership and this outcome is not Pareto-efficient. 2) Suppose that Italy and France have the outputs per worker in producing bikes and cars as reported below: Output per worker Country Italy France Bikes 200 300 Cars 1 2 a) Italy has a comparative advantage in producing Bikes. BONUS b) Italy has a comparative advantage in producing Cars. c) Italy has an absolute advantage in producing Bikes. d) Italy has an absolute advantage in producing Cars. 3) Consider a second-hand market for motorbikes. There are high-quality motorbikes, which buyers value at most 5000 Euros, and low-quality motorbikes, which buyers value at most 3000 Euros. High- quality sellers will accept 4000 Euros, while low-quality sellers will accept 2500 Euros. Assume: 1) buyers cannot observe quality before purchasing; 2) quality is exogenous; 3) buyers would be willing to pay the expected value of a motorbike; 4) everybody knows that the share of high-quality motorbikes in the market is 0.60. Hence: a) The market for high-quality motorbikes will be crowded out. b) Both kinds of motorbikes will be sold in the market, as buyers’ expected valuation is greater than 4000 Euros. BONUS c) The information asymmetry does not play any role here. In fact, both kinds of motorbikes will be traded because buyers’ valuation is always higher than the amount of money sellers are willing to accept (5000>4000 and 3000>2500, respectively). d) There is a problem of hidden action, which can be solved by offering buyers a proper incentive contract. 4) A steel mill jointly produces steel and pollution. Nearby there is also a fishery firm. Both firms are price takers (P steel = 8 and P fish = 10). The cost function for the steel mill is S 2 - (x - 4) 2, where S is the quantity of steel produced and x are the units of pollution. The cost function for the fishery is f 2, where f is the quantity of fish produced. a) The negative effect of pollution can be internalized by merging the two firms, but the merged firm will reach a global profit which is inferior with respect to the sum of profits achievable separately by the two firms. b) The negative effect of pollution can be internalized by merging the two firms, and the merged firm will reach a global profit which is greater than the sum of profits achievable separately by the two firms. This is a Pareto efficient outcome. c) The negative effect of pollution can be internalized by merging the two firms, and the merged firm will reach a global profit which is greater than the sum of profits achievable separately by the two firms. However, this is not a Pareto efficient outcome. d) None of the above. BONUS 5) Econometrics is a software for performing statistical and econometric analyses. From one side, Students exhibit an inverse demand function given by the following expression: Ps = 24 – Qs. On the other side, professional Researchers exhibit an inverse demand function given by the following expression: Pr = 14 – Qr. The total cost function for producing and distributing the software is given by: TC = 2 + 4Qi where i = r, s. Please indicate: 1) which is the optimal price when the two markets are considered as a global single market; 2) which are the two optimal prices when the firm implements a price discrimination of the 3 rd type. a) Single market: p = 10.5; 2) Students market: p = 14; Researchers market: p = 9. b) Single market: p = 11; 2) Students market: p = 13.5; Researchers market: p = 8.5. c) Single market: p = 11.5; 2) Students market: p = 14; Researchers market: p = 9. BONUS d) None of the above. 6) The ratchet effect: a) applies to price cap regulation and refers to the low attitude of regulated firms to pursue cost-reducing investments at the end of the regulatory period. BONUS b) applies to price cap regulation and refers to the low attitude of regulated firms to pursue quality-enhancing investments at the end of the regulatory period. c) applies to price cap regulation and refers to the low attitude of regulated firms to pursue cost-reducing investments at the beginning of the regulatory period. d) applies to price cap regulation and refers to the low attitude of regulated firms to pursue quality-enhancing investments at the beginning of the regulatory period. 7) A team of applied economists at the Politecnico di Milano is conducting a policy-evaluation exercise which aims at gauging the effects of a one-year R&D policy intervention on the Italian economic system for the year 2018. The policy program channeled in that year into the production system c.a. 200 Million Euro for supporting innovative activities of the Italian firms. After a rigorous econometric analysis the team observes that the value of R&D activities performed in the Italian production system has increased by c.a. 300 Million Euro in 2018, while all this increase has vanished in the year 2019. On the basis of this result, which of the following statements is correct: a) The policy intervention has crowded-in private R&D expenditure. BONUS b) The policy intervention has been able to generate Behavioral Additionality. c) The policy intervention has partially crowded-out private R&D expenditure. d) None of the above. 8) Consider a monopolistically competitive firm. From the point of view of remaining firms, as firms leave the industry, we can think of this as a: a) shift back in each individual firm’s MC curve. b) shift up in each individual firm’s AC curve. c) shift out in each individual firm’s demand curve. BONUS d) shift back in each individual firm’s supply curve. 9) The tragedy of the commons may arise when resources are rival in consumption and non- excludable, and this is due to the fact that: a) Users in deciding how much to use the common resource look at the marginal product rather than the average one, and the former decreases less rapidly than the latter as the intensity of usage increases. b) Users in deciding how much to use the common resource look at the marginal product rather than the average one, and the former decreases more rapidly than the latter as the intensity of usage increases. c) Users in deciding how much to use the common resource look at the average product rather than the marginal one, and the latter decreases more rapidly than the former as the intensity of usage increases. BONUS d) Users in deciding how much to use the common resource look at the average product rather than the marginal one, and the latter decreases less rapidly than the former as the intensity of usage increases. 10) In industry Alpha there are only two firms, engaging in a Bertrand competition. They are characterized by the same total cost function: TC = 50Q. Total demand in the industry is described by the following function: Q = 190 – 3P. Which of the following is true? a) Each firm is going to sell 40 units. b) Both firms are going to set the same price, which is just slightly higher than 50. c) Total demand in the industry is going to be 20 units. d) None of the above. BONUS Structured question With reference to antitrust regulation: a) Explain the reason why contemporaneous countercyclical movements in price are potentially a signal that firms are colluding in a given market. b) Imagine two firms operating in the same market repeatedly for an indefinite amount of time. Both adopt a “grim” strategy (i.e. they collude until no one cheats, if one firm starts cheating the opponent will always cheat forever). If p is the probability of repetition of the game, find the p that ensures collusion in the following game: Firm B Firm A Cheat Collude Cheat 2,2 7,1 Collude 1,7 6,6 c) Suppose homogenous consumers, each one characterized by a willingness to pay for (let’s say) jars & lids = 12 and cost for producing a jar = 3 and cost for producing a lid = 4. Following the ‘single monopoly theory’ put forward by the Chicago Law and Economics School, explain the reason why a monopolist in one market would have not any incentive to foreclose competitors and monopolize also the adjacent market. d) The ‘single monopoly theory’ argument was advanced to defend Google in the EU Antitrust case on its abuse of a dominant position in the general search engine market for giving illegal advantage to its own comparison shopping service. Without entering into all other aspects of the case , express your frank view on the merits of this specific point. a) Please see slides no. 5-6 of BIE lecture 23 on Antitrust I. b) p > 1/5. c) Please see slide no. 16 of BIE lecture 23 on Antitrust I. d) Open question. Alternative answers were possible if well-argumented and centred on the ‘single monopoly theory’. One possibility was offered by the former EU Antitrust Division, which in the following article (Amelio et al., 2018, “Recent Developments at DG Competition: 2017/2018”, Review of Industrial Organization, 53, 653- 679”) affirm that (pp. 662-663): “The strategic decision (and commitment) of Google to distribute free general search services is a core element for Google’s incentive to foreclose in adjacent markets, such as the comparison shopping services market. Only clicks on Google’s ads or Google’s comparison shopping service trigger a payment; clicks on the general search results do not. The free Google general search results generate traffic for a wide range of business that offer paid products and services. However, Google cannot directly monetise this traffic. This feature of the general search services market makes the classical Chicago School critique not applicable. The Chicago School critique argues that a dominant company should have no incentive to foreclose competitors from adjacent markets because the dominant company could make as much profit by appropriately pricing its dominant product/service and extracting all the value because of the “one monopoly profit” theory. Google’s strategic decision not to price general search services puts Google in a situation where the only way for Google to appropriate the value that is created by users’ clicks that lead to rival comparison shopping platforms is to appropriate the clicks of those users by directing them to its own comparison shopping service. Sending users to competing comparison shopping services would amount to a net profit loss and, over time, to an increasing risk of users’ bypassing Google and going directly to the competing comparison shopping services.”