Help Firms to Avoid a Bertrand Pricing Trap - Management Assignment Help

Assignment Task:

Task:

B.1. (10 marks in total)
a) (2 marks) Briefly explain two features that can help firms to avoid a Bertrand pricing trap.
b) (2 marks) “Advertising expenditures with no direct informational content can increase market efficiency.” Is this statement true or false (provide a brief explanation)?
c) (2 marks) Is perfect competition efficient, when considering the potential for innovation? (Briefly explain your answer)
d) (2 marks) In what circumstances will predatory pricing be a successful strategy?
e) (2 marks) Briefly explain the concept of efficient rationing and briefly discuss an alternative approach.

B.2. (10 marks) Imagine you are working for a Patents Office and are considering implementing different patent lengths for different industries. Your manager has suggested that you choose either 10 years or 20 years. Which patent length would you recommend for each of industry A and B? (You can recommend the same length for both industries or different lengths but remember to justify your choices). Industry A has the following characteristics: quantity demanded changes substantially for a given percentage change in price, the marginal cost of production is low, research is challenging and expensive, and it is difficult to distinguish between a broad range of products that are made by industry A. Industry B has the following characteristics: quantity demanded changes only slightly for a given percentage change in price, the marginal cost of production is high, and research is relatively easy and cheap. Your manager suggests that the discount rate should be low (for both industries) following the coronavirus pandemic

B.3. (10 marks) As an antitrust regulator, seeking to avoid illegal collusion by firms, which of the following 2 industries would you be more worried about? (Which industry is more likely to include colluding firms?) Explain your answer by referring to the characteristics of each industry.
Industry X:
·The two largest firms in the industry have privately been discussing potential cooperation through a research joint venture
·The Herfindahl-Hirschman index is relatively low
·There has been a number of new firms entering the industry in recent years and they appear to be having success
·The industry produces goods that are considered necessities by consumers, providing for recurrent purchases and stable growth in aggregate market demand
·The firms attempt to differentiate their products with extensive spending on advertising, but the production processes and outputs are quite similar
·Firms advertise their willingness to match their competitors’ prices
·Some of the firms in the industry have corporate headquarters overseas and also compete in international markets

Industry Y:
·Firms are not interested in cooperating on research and development
·The Herfindahl-Hirschman index is high
·There have not been any new firms entering the industry in recent years
·The industry produces goods that are considered luxuries by consumers; they are not bought frequently
·The firms produce differentiated products with substantial differences in production processes and outputs
·All firms are domestic

B.4. (10 marks in total)
a) (2 marks) Identify the errors in the following sentence and provide a corrected description of best response functions for a Bertrand model in words: “The best response functions for a Bertrand model indicate that the quantity chosen by firm 1 is a decreasing function of the price chosen by firm 2 for all values of price chosen by firm 2.”

b) (2 marks) Is the following statement true or false? “The Spatial model of Bertrand competition is solved (to determine equilibrium prices) by equating marginal revenue and marginal cost of the firm and does not depend on consumer characteristics”.

Explain why this statement is true or false.
c) (2 marks) Are there any errors in the following statement? “A firm will enter an industry that was previously supplied by a monopoly if the potential entrant can charge a price that is just above the price that has been charged by the monopoly.” Briefly explain any error(s) and suggest a suitable strategy for a potential entrant, with respect to the characteristics of the incumbent.
d) (2 marks) Will there be incentives for the following behaviour by an incumbent firm(explain why or why not): (i) a low-cost incumbent pretends to be a high-cost firm through the price that it sets (ii) a high-cost incumbent pretends to be a low-cost firm through the price that it sets.
e) (2 marks) In 20 words or less, what is the central motivation of collusion compared to cheating on a cartel arrangement in a market that is likely to continue for a long but uncertain amount of time?

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