EC337 Industrial Economics 2 Department of Economics, University of Warwick

Market Economics, Competition and Regulation

PROBLEM SET 2

Answer all three questions CONCISELY and CLEARLY (excessively lengthy answers and unclear work

may be penalised). Insert answers electronically or by hand. Upon completion upload your document

as a pdf file in the eSubmission facility. The maximum mark for each question part is shown.

Submission deadline before 23.55 on Wednesday 7 January 2015

1. On predation (see lecture 18).

a. Describe the Areeda-Turner test and explain the purpose of the test. 1 mark

b. Provide a hypothetical example of a case where the Areeda-Turner test results in a

false negative. 1 mark

2. Refer to section 17.4.1 in the Belleflamme-Peitz textbook (pages 455-57).

a. Assuming a linear inverse demand function p(q) = a - bq and two upstream firms

with marginal cost c supplying two downstream Cournot competitors, calculate the

subgame perfect equilibrium wholesale price w* and retail price p* for the case

where a=9 and c=3. 3 marks

b. What vertical and horizontal externalities might provide incentives for the two

upstream firms to merge? 2 marks

3. In the Google/DoubleClick acquisition reviewed by the European Commission (EC) in 2008 (see

merger decision m4731), a number of competitors feared the transaction would result in the

application of vertical foreclosure. What factors did the EC set out as necessary for vertical

foreclosure to be possible and what evidence persuaded the EC that it would not be possible?

Answer In no more than 500 words – indicate your word count. See section 7.3.1.1 in m4731. 3

marks

Dr. Chris Doyle, Module Leader EC337, 30 November 2014