Statements Final Exam BESS December 2020_Solutions:

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Statement 1 The European Commission has found evidence that manufacturers in market X agreed to impose their retailers to abstain from making the manufacturers’ products appear in price comparator websites. STATEMENT TO DISCUSS: This agreement is likely to produce anticompetitive effects.

The statement is UNCERTAIN. Not appearing in the price comparator websites increases search costs for consumers. Therefore consumers are less reactive to price changes, which makes undercutting the rivals’ price less profitable and increases market power. However, not appearing in the price comparator websites, by making the market less transparent for suppliers, makes it more difficult to monitor each other and to enforce a collusive agreement.

Statement 2 Consider a market in which three firms produce homogeneous goods, have the same marginal cost c and the same capacity. The capacity of each firm is insufficient to satisfy the entire market demand at any price pÎ[c, pm ], but it suffices to satisfy one third of the demand at the monopoly price. STATEMENT TO DISCUSS: The presence of capacity constraints facilitates the enforcement of a collusive agreement.

The statement is UNCERTAIN. On the one hand the presence of capacity constraints limits the deviation profits: by slightly undercutting the rivals’ price a firm manages to capture the entire market demand, but its capacity is insufficient to satisfy it. This facilitates the enforcement of a collusive agreement by decreasing the short-term benefit of a deviation. On the other hand, the presence of capacity constraints increases the punishment profits, since the Nash equilibrium of the one-shot game exhibits prices above marginal costs. This decreases the long-term cost of a deviation. The overall effect on the ability to enforce a collusive agreement is uncertain.

Statement 3 In country X, there exist 4 firms active in the production of cement. Barriers to entry in this market are very high due to environmental regulation. Demand of cement is predictable and not subject to shocks. Each firm communicates to the Trade Association of Cement Producers data concerning monthly sales, actual prices and privately negotiated discounts. The trade association publishes these data on a monthly report available to all the firms active in the industry. Firms 1 and 2 plan to merge. Before the merger, the market shares of the firms are the following: Firm 1: 30%; Firm 2: 30%; Firm 3: 10%; Firm 4: 30%. The anti-trust agency has decided to authorize the merger conditional to the fact that the involved firms sell part of their capacity to firm 3. In such a case, the market shares of the firms active on the market after the merger would be: Firm 1+2: 40%; Firm 3: 30%; Firm 4: 30%. STATEMENT TO DISCUSS: Some commentators have criticized the decision, arguing that the required divestiture of capacity will make the anti-competitive effect of the merger even more severe.

The statement is UNCERTAIN. On the one hand, the required divestiture alleviates the unilateral effect of the merger reducing the price increase that it is likely to cause, absent efficiency gains. On the other hand, the divestiture increases symmetry in the distribution of capacity. This facilitates the enforcement of a collusive agreement in a market in which, for several reasons, collusion is already a severe concern: the market is quite concentrated and concentration is increased further by the merger; there are high barriers to entry; demand is

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predictable and the role of the Trade Association makes the market very transparent, thereby facilitating monitoring.

Statement 4 Consider firm X that produces two complementary products, A and B , at a constant marginal cost cA=cB=10. There exists 100 consumers who enjoy utility U=50 from the joint consumption of the two products. The consumption of product i alone (with i=A;B ) does not produce utility.

Firm X is a safe monopolist in market A, while in market B it faces competition from four rivals that produce a perfectly homogeneous product B at a marginal cost c=0. In market B firms compete à la Bertrand. STATEMENT TO DISCUSS: When it sells the two products independently, firm X obtains the same profits as when it ties products A and B. The statement is FALSE. The presence of multiple competitors in market B, all with 0 marginal cost, implies that, under independent sales, the equilibrium price in that market will be equal to 0. Firm X does not sell product B, but it can set a price equal to 50 for product A earning profits equal to 100*(50-10)=4000. Instead, under bundling, firm X sets a price equal to 50 for the bundle, making profits equal to 100*(50-10-10)=3000. Selling the two products independently is more profitable for firm X than bundling: it benefits from the fact that intense competition in market B drives the price of product B down to zero, which allows firm X to increase the price of product A and increase its profits.

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