Essay Questions

Question 1

T1 - Explain what is important in determining the extent of a dominant firm’s market power?

Answer 1

1. define dominant firm
   
   1. what is market power –> ability the to price above the competitive rate
      
      1. Why is this a problem, why does this need to be defined –> reduces total welfare in the market at the expense of a consumer –> anticompetitive, lower quantity
   2. Article 102 –> prohibits the abuse of EU competitive power
   3. OFT, 2004 –> dominant firm, market power, weak competition (a fringe)
   4. Dominance 50%,40%, and in between
2. Indirect market power
   
   1. Concentration Ratio
      
      1. Doesn’t give spread across firms and firms with higher S could just be more efficient
   2. Herfindahl-Hirschman Index
      
      1. EU and US conventions
      2. Monopoly (1) and Symmetric Oligopoly (1/n)
3. Most important determinate –> PED and Lerner Index
   
   1. What is the price elasticity
      
      1. Measures the Price cost margin over its price and is equivalent to the inverse of a firms market elasticity
      2. Greater elasticity –> the less market power a firm hold, a less ability to increase price
      3. monopoly and perfect competition Lerner index
4. SSNIP test
   
   1. test identify a market what firms in that market exert competitive pressure on each other
   2. identify all close substitutes
      
      1. can they take on a 5-10% increase in price? if not there must be competitive pressure so define the market wider
   3. Based on the PED and cross-price elasticity of demand
      
      1. Show what this is and how it would affect this
   4. a firm with market power/ dominant firm has low cross-price elasticity anyways so it can raise it prices through market power
   5. However defining by only measuring competition-based, the SSNIp test is limited as a resource in defining market dominance
5. DFCF (church and ware,
   
   1. This can also be shown through a dominant firm with this profit against a competitive fringe that supplies the rest of the market –> explain the model more in-depth
   2. This is the Lerner index for a dominant firm and will be effect by these factors
      
      1. market share, dominant position, fringe share, their elasticity of supply
6. The Durability of a good could erode market power
   
   1. What is a durable good
   2. two problems it creates for a monopolist
   3. The Coast Conjecture 1972
      
      1. and assumptions and optimal price
   4. show graph
   5. Why delay with formulas
      
      1. change in WTP based on delta
   6. Strategies that can be used to avoid this
7. Conclusion –>

Question 2

T1 - Explain how the durability of a product affects the market power of a monopoly, What types of strategies can the monopoly employ in these circumstances?

Answer 2

1. define dominant firm, and monopoly what is market power –> ability the to price above the competitive rate
   
   1. Why is this a problem, why does this need to be defined –> reduces total welfare in the market at the expense of a consumer –> anticompetitive, lower quantity
   2. OFT, 2004 –> dominant firm, market power, weak competition (a fringe)
   3. Dominance 50%,40%, and in between
   4. Usually has above 60% CR –> monopoly above competitive level due to market lower
2. What is a durable good
   
   1. durable good: last a number of periods can be used more than once –> TV, cars vs perishable good
   2. 2 problems it creates for monopolist
      
      1. IN competition with itself and the price consumers are willing to pay depends upon the price tomorrow
   3. Coase Conjecture
      
      1. product durability might erode market power
         
         1. assumptions: last forever, price changes happen quickly
         2. optimal to price at the competitive rate
3. Why should the price at the competitive rate
   
   1. Durability and demand graph
      
      1. two-period –> price at p’ with q’, in the second period q-q’ will be all that is left at the new price
   2. Crude analysis
      
      1. MR=MC analysis of a marginal consumer buying in both periods should wait till the next
      2. Therefore comparing the WTP and surplus between the two periods a consumer will delay purchase is p1 > p2
      3. So if there is an infinite number of periods and if the product lasts forever and if delta = 1 then the monopolist cannot sell at p > c
4. Strategies to avoid
   
   1. Leasing
      
      1. if returned monopolist can supply consumers with high WTP again > moral hazard –> reduced quality of good by not looking after it
   2. Invest in reputation
      
      1. Disney animations –> releasing multiple firms of the same thing over time (50 year thing) need for advertisement etc.
   3. Most-favoured-customer clause
      
      1. commitment device for not lowering prices so customers may as well buy
   4. new customers
      
      1. increasing demand in period 2 may maintain the price
   5. Reduce the durability
      
      1. if products break consumers with high WTP may return next period
      2. Apples settled in 2017 after a Harvard University study found iOS upgrades purposely slowed down the processor speed of older Iphones –> referenced to batterygate –> £21 million

Question 3

T2 - Explain why Hotelling (1929, p.54) concluded that “Buyers are confronted everywhere with an excessive sameness”. Discuss the conditions for which this conclusion is not correct?

Answer 3

1. What is the Hotelling Framework
   
   1. Linear city models provide a basis for strategic entry deterrence of rival firms by incumbent firms based on consumers preferences and utilities
   2. Assumptions (3)
2. defined utility of consumer
   
   1. define graph line
   2. show utility between A and B and the marginal consumer
      
      1. how they derive their demand from the marginal consumer and those on either side of them
3. Excessive sameness - assumes fixed simultaneously
   
   1. How that the profit maximising NE is in the middle
      
      1. demonstrated demand and profit
   2. Show profit graph and Best Response graph
   3. principle of minimum differentiation
      
      1. not social optimal and actually they should by at 0.25 and 0.75 not both at 0.5
         
         1. doesn’t increase transport costs for 0.25-0.5 and 0-0.25
   4. Why has this caused excessive sameness
4. Sequential Entry
   
   1. Does not occur when a firm enters sequentially
   2. Explain assumptions
   3. Show how when firms enter they are deterred
   4. strategic deterrence can arise from this competitive entrance and benefit the consumer with some differentiations
5. A DOminate firm with sequential entry
   
   1. still, end up with strategic entry deterrence and some differentiation anyways
6. Product differentiation
   
   1. assume products are also equally differentiated
   2. assumptions
   3. derivation
      
      1. SHOW GRAPH AND HOW PRODUCT DIFFERENTIATION INCREASES CAUSES THE GRAPH TO CHANGE AND CONSUMERS ARE LESS LIKE TO SWITCH THUS LESS LIKELY TO HAVE PRICE WAR
   4. end up with maximum differentiation
7. principle of minimum differentiation
   
   1. two-stage game, how to solve for nash
   2. two effects on profit, DEMAND AND PROFIT
   3. d’Aspremont et al. 1979: maximum differentiation (price effect largest)
8. Symmetric Differentiation??

Question 4

T2 - Should a competition agency intervene in a market in which firms proliferate their brands/stores?

Answer 4

1. what a competition agency
   
   1. competition agency laws
   2. brand proliferation
2. why a competition agency may want to step in –> UK case
   
   1. explain
   2. why this is a problem
   3. what solution does the agency come up with
3. why does this happen –> need to understand the hotelling model?
   
   1. talk about the theory
      
      1. hotelling framework
         
         1. assumption and introduction
         2. utility, graphs, marginal consumer
   2. sequential entry
      
      1. dominant firm and entry deterrence
4. A real-world example of this –> US case
   
   1. A study by Schmalensee (1978) led to the result that brand proliferationwas the largest barrier to entry in the market which restricted entry over the 30-year period.