Essays

Question 1

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

Answer 1

1. P1: What is a dom firm and Market Power? - What is a fringe (weak comp)? Why would you want to define it?
   
   1. Market Power is the ability to price above the comp level
      
      1. This is an issue because it reduces consumer welfare
      2. Lower Q produced, higher P
      3. Article 102 prevents this
   2. Dom Firm is 50%
   3. All other firms must be fringe in this case, likely 25%

• P2: What is the CR? Benefits and Downsides?
  
  1. Sum of the market shares of the first k
  2. Market share how much of the market is influenced by the firm#
  3. A higher market share is likely to have greater market power and price making power
  4. Benefit: Only require information on the first k
  5. Downside: Market defined too narrowly, doesn’t split the shares of the firms (i.e. 0.45+0.45=0.9=0.8+0.1), doesn’t account for more powerful firms being more efficient
• P3: What is the HHI? (Decimal in EU, % in USA, Pure = 1 or 10,000, Symmetric oligopoly is 1/n)
  
  1. Herfindahl-Hirschman Index
• P2: What is the Lerner Index? How do we calculate PEd and XEd? How is this relevant to Lerner?
  
  • From C&W, 2000
    
    1. Measures the market power of the firm
    2. PEd is -(dQi/dPi)(Pi/Qi)
    3. XEd is (dQi/dPj)(Pj/Qi)
• P3: What is SSNIP? How cross-price and own-price ED and how this affects SSNIP
  
  1. Small but Significant Non-transitory Increase in Price
     
     1. Tests if the firm can sustain a 5-10% increase in prices over 12 months without losing all customers:
        
        1. If it can then it is a monopoly
        2. If it can’t then it is not a monopoly and the market is a wider definition
  2. Based off own-price and cross-price Ed
     
     1. A firm with high market power will have low XEd

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 Market Power and Monopoly
   
   1. Market Power is the ability of a firm to set prices above the competitive level, making it a price maker rather than taker
   2. Monopoly is defined as a firm with >50% market share (OFT, 2004), that has this ability to price above the comp level due to its high market power
2. What is a durable good? How does it affect it? Coase Conjecture (1972)
   
   1. A durable good is a good that will last multiple periods and can have multiple uses (i.e. a washing machine)
3. How does a durable good make a monopoly less powerful?
   
   1. The monopoly is in competition with itself
      
      1. Resellers can still sell a good of quality and provide competition to the monopoly by undercutting it
      2. If the good lasts multiple periods then people won’t want to buy more after their first purchase
   2. A rational consumer won’t purchase today if they think the price will be cheaper tomorrow (Coase Conjecture (1972))
      
      1. Draw the graphs included in the attached image
      2. Do the calculations on WTP in this period and the next
4. How to get around the CC?
   
   1. See attached image:
      
      1. Leasing
      2. Invest in reputation
      3. Most Favoured Customer Clause
      4. New Customers
      5. Reduce Durabality (Planned Obselesence) (Pheobus Cartel)

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 Model?
   
   1. Assumptions:
      
      1. Firms are spaced along a number line between 0&1
      2. There is one buyer who wants to maximise their utility (V-T(Di)-p)
      3. Assumes Fixed Simultaneous Entry
2. What is Fixed Simultaneous Entry?
   
   1. Assumptions:
      
      1. 2 firms A & B with p >= 0
      2. Prices are exogenous and at a level all consumers will buy where V-k>=p
      3. c
   2. Include graph on marginal consumer
   3. Calculation on the Marginal consumer
3. Why does this cause Excessive Sameness?
4. What is product differentiation?
5. Why does Product diff make firms want to be different?

Question 4

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

Answer 4

1. What is the competition agency and why do they exist?
   
   1. Article 101, 102
2. What is proliferation?
   
   1. Brand and store
3. UK case of Store Proliferation
   
   1. What solution did the agency come to?
4. Why would they not step in?
   
   1. Hotelling model
      
      1. Sequential entry
      2. In competition firms will position themselves in a way to deter entry from rivals
         
         1. This also occurs in monopoly setting
5. The RTE cereal market (1972)
   
   1. 80 new products none from new entrants
   2. Deemed natural through competition anyway

Question 5

T3: What affects the degree of price competition in a market?

Question 6

T3: Explain the rationale for the following statement in the UK’s merger assessment guidelines: “Where products are differentiated, unilateral effects are more likely where the merging firms’ products compete closely.”

Answer 6

1. What is product differentiation?
   
   1. Measures how close two products are as substitutes to one another (i.e. how big is XEd?)
2. What are Unilateral effects?
   
   1. Unilateral effects can arise due to a merger giving 2 companies less competition and higher market power. Unilateral effects occur where the merged firm restricts its output to a value lower than either of the single firms in order to raise prices in the market
   2. This is usually a cause for concern due to the lost efficiencies to consumer and total market (CMA only cares about consumer welfare now because it’s easier to calculate and consumers need more help since they have less market power)
3. The effect of product diff on unilateral effects
   
   1. See attached photo
   2. Essentially, the closer two products are as substitutes in a differentiated market, the greater the unilateral effects are
4. We can derive the Nash equilibrium price as p^N=k
   
   1. p_i = k+p_j/2
   2. Because of this U=V-kD²-k, where D=0.5, so U=V-5k/4
   3. Monopolist wants to capture all of the consumer’s WTP, so p^M=V-k/4
   4. This shows us that as k (product diff) increases, the Monopoly price (unilateral effect) will fall

Question 7

T4: Discuss whether the following statement is true: “Cartels are far more likely if the product is fairly homogeneous between companies in the market. Considerable product differentiation has the opposite effect.”

Answer 7

1. What is a cartel?
2. What are the necessary conditions for a cartel?
3. What are the profits in a symmetric market with homogenous products?
   
   1. There are n>=2 firms (n is the number of firms in the market)
   2. MC are symmetric and >=0, f = 0
      
      1. Collusive: ௖ ௠ if both set ௠

Deviation: ௗ ௠ if one sets ௠ ௠

Punishment: ே ே ே

4. What are the profits when markets are asymmetric
5. Why does less symmetry in the market cause an incentive to deviate?

6.