review session midterm #2 - march 28, 2016faculty.ses.wsu.edu/espinola/review session midterm...
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Review Session Midterm #2 - March 28, 2016
Review Session Midterm #2 - March 28, 2016
Chapters 7, 8 and 9 (R&D)
March 25, 2016
Review Session Midterm #2 - March 28, 2016
Midterm #2
One question about concepts
Three Exercises
One Bonus Question
Chapters 7, 8 and 9 (pages 221-232)
Review Session Midterm #2 - March 28, 2016
Midterm #2
Location Models
Suppose two �rms selling an identical product
Assume that production is costless
However these two �rms are located in di¤erent points of thecity
Each consumer buys one unit
τ is the transportation cost
Review Session Midterm #2 - March 28, 2016
Midterm #2
Location Models
Utility function of a consumer located at point x:
Ux =�
�pA � τ jx � aj if he buys from A�pB � τ jx � (L� B)j if she buys from B
Indi¤erence Point
Review Session Midterm #2 - March 28, 2016
Midterm #2
The four-�rm concentration ratio
I4 � ∑4i=1 si and IHH � ∑N
i=1 (si )2 "The Her�ndahl-Hirshman
Index"
Review Session Midterm #2 - March 28, 2016
Midterm #2
Merges (takeovers, acquisitions, integration)
Three general categories (Federal Trade Commission)
Horizontal mergerVertical mergerConglomerate merger
Why do merges occur?
Horizontal merger among �rms producing complementarygoods
Review Session Midterm #2 - March 28, 2016
Midterm #2
Horizontal Merger
Proposition 8.1: Under Cournot market structure, a mergeramong �rms leading to an increase in concentration does notnecessarily imply an overall welfare reduction.
There exist a trade o¤ between product e¢ ciency and thedegree of monopolization
What would happen if �rms play Bertrand?
Review Session Midterm #2 - March 28, 2016
Midterm #2
Vertical Merger
Merger between Supplier of an intermediate good andproducer of the �nal good.
Assume Bertrand price competition for the upstream marketand Cournot quantity competition for the downstream market.
Review Session Midterm #2 - March 28, 2016
Midterm #2
Entry Barriers
There can be many reasons why entry may not occur:
Cost advantages of the incumbent �rmseconomies of scaleproduct di¤erentiation advantages (reputation)learning experiencesconsumers�loyalty
Review Session Midterm #2 - March 28, 2016
Midterm #2
Entry Deterrence
Blockaded entry: the incumbent is not threatened by entry
Deterred entry: The incumbent modi�es its behavior in orderto deter entry. If prices are lowered, then we say that theincumbent exercises limit pricing
Accommodate entry: Entry occurs, and the incumbent �rmmodi�es its action to take into account of entry that occurs.
Bain-Sylos postulate: the entrant believes that theincumbent would maintain the same output after entry that itdid before entry.
Can we question the validity of the Bain-Sylos postulate?
Review Session Midterm #2 - March 28, 2016
Midterm #2
Limit pricing as cost signaling
Game:
Solving the game assuming a high-cost incumbent
Proposition 8.11: A low cost incumbent would produceq11 = 5.83 and entry will not occur in t = 2
Review Session Midterm #2 - March 28, 2016
Midterm #2
Investment in R&D:
$I
Prob. of discovering α
Profits from discovery$V
Profits fromdiscovery $V/2
Prob. of discovering α2
Review Session Midterm #2 - March 28, 2016
Midterm #2
NonCooperative R&D
Cooperative R&D
Spillover effect :
cApple (R&DApple, R&DMicrosoft) = 50 R&DApple β R&DMicrosoft