EC0-6002Y: Industrial Organization and Competition Economics - University of East Anglia

Economics Assignment Help

  1.  In 2008 Tesco opened its most remote supermarkets in the Western Isles, Orkney and Shetland. Tesco became so dominant in these places that shoppers called those Tescotowns. In this problem we concentrate on one of these Tescotowns, where Tesco is de facto the only store in town. Tesco’s manager estimates that the demand function is D = 45 ? 3P and the cost of operating the shop is 5 × A. [To solve this problem you may find convenient to let the firms choose prices.] (a) Find Tesco’s optimal profit based on the manager’s estimation of demand and cost functions. Another business is considering opening a store in Tescotown and trying to compete with Tesco. The new store offers the same products as Tesco. In our simplified modelling we consider the products offered by the stores to be a compound homogeneous product. The operating cost of the new entrant is expected to be 20. Both stores choose the optimal price. (b) What is the equilibrium profit in the market? We now return to the situation in (a). After the opening of the Tesco store the manager realises that because of variation in weather conditions the demand happens to be high, DH = 60 ? 3P half of the time and low, DL = 30 ? 2P the other half. (c) What is the profit if price discrimination is not allowed? (d) What is the profit if price discrimination is allowed? Which situation between no price discrimination and price discrimination is preferred by Tesco’s manager? Is the answer what you expected? Discuss. [Base your answer on a comparison of profits in the two situations]. Tesco’s manager smells an opportunity of complementarity and decides to open a gas station next to Tesco. The gas station has its own demand DG = 5 ? PG, but requires a sunk set up cost S and there are no unit costs. Because of complementarity, the new demand function for Tesco supermarket is D = 90 ? 3P. (e) What is the maximum sunk set up cost to open the gas station that Tesco’s manager would be willing to accept? [To answer this question you need to compare the new joint profits derived from the supermarket and gas station against the profit obtained in (a)]. 2. In Norwich there are (10 × A ? 5) identical farms selling turkeys (assumed for the purpose of this exercise to be homogeneous). The market demand is P = 10 ? Q, with Q = P10×A?5 i=1 qi. Each farm has a marginal cost of 5. Farms compete in quantities. (a) Calculate the equilibrium profit of each farm. (b) Two of the farms (say farms 1 and 2) are considering a merger. You are hired as an economist to provide evidence (using algebra) on whether the merger should go ahead or not. Write a brief report to the farmers about your recommendation, showing your results. (c) How much should the marginal cost change to make the merger indifferent from farms’ point of view? Suppose now that two farms, say farms (10 × A ? 5) and (10 × A ? 6) are leaders in the industry, whereas the others are followers. Two of the followers, say farm 1 and farm 2, decide to merge. (d) Does the merger increase the price in the market? Discuss. 3. Chalk Hill Brewery (C) and Norwich Bear Brewing Co (N) brew identical beers, and compete for the annual demand Q = 10A ? P. Because their products are identical, if one charges a lower price than the other, all customers will want to buy from the lower-priced firm. If they charge the same price, consumers are indifferent and end up splitting their purchases about evenly between the firms. Marginal cost is constant and equal to 10 and there are no capacity constraints. (a)Use a game theoretical approach to discuss the price equilibrium in the market. (b)The two brewing companies are considering forming a cartel. What is the lowest discount factor ? that makes the cartel preferred by the two firms if both play a trigger strategy game? (c)Suppose now that neither company is certain that it would be able to detect changes in its rival’s price. A price change is detected with probability p each period after it occurs. What is the lowest probability that discourages the cartel if the discount factor is set to ? = 0.8? (d)Suppose that the profit decays by a fraction q every period. What is the maximum decay of profit that is acceptable for the cartel to be profitable if the discount factor remains set to ? = 0.8 and the probability of detection is 0.5? 4. Suppose there are two profit-maximizing firms, producing a differentiated good. Each sets its own price (pi) to maximize profit, with i=1,2. Quantities (qi) are then determined by the market demand curves: q1 = 88 ? 4p1 + 2p2 and q2 = 56 + 2p1 ? 4p2. There is no fixed cost and the marginal costs for the firms are 5A and 4A, respectively. (a) Find out and plot the best response functions of the firms. (b) What are the equilibrium profits earned by the firms, and what are the consumer surpluses generated in each market? (c) The two firms decide to merge. What will the new price that consumers end up paying to? (d)What will the effect of the merger on consumer surplus be? Supplement your answer with a graphical analysis.