microeconomicsEC620 Assignment 3 Due: Monday, December 13, in class Fall 2021 Instructions:...

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microeconomicsEC620 Assignment 3   Due: Monday, December 13, in class      Fall 2021  Instructions: Assignments must be written using a word processor (i.e. hand-written  assignments will not be accepted) and submitted in class as a hard copy. Students can  complete assignments individually or in a group of 2 or 3 students.  Question 1 : Limit Pricing and Asymmetric Information (40 marks)    A market consists of an incumbent and an entrant who face constant marginal cost and  an inverted demand given by P = 24 − Q. The entrant’s costs are common knowledge and  are equal to marginal cost of cH = 12 and a fixed entry cost F = 10. The incumbent’s  marginal costs are not known by the entrant and are either cH = 12 or cL = 6. Prior to  observing the incumbent’s period 1 output the entrant believes that there is a 60%  probability that the incumbent is low cost. The firms play a two stage game. In the first  stage the incumbent is a monopolist and chooses output which is observed by the  entrant. In the second stage the entrant (i) forms beliefs about the incumbent’s costs  based on the incumbent’s period 1 output and (ii) decides on whether or not to enter.  The entrant enters if they believe their expected profits to be positive. If entry occurs  firms engage in Cournot competition. In deciding on period 1 output the incumbent  maximizes the discounted sum of period 1 and period 2 profits where ρ = 0.9 is the  discount factor assigned to period 2 profits. For each of the proposed strategies given  below determine if     (i) the low cost incumbent’s period 1 output (?? 1(??)) is a best response to the  entrant’s entry strategy   (ii) the high cost incumbent’s period 1 output (?? 1(??)) is a best response to the  entrant’ entry strategy   (iii) the entrant’s beliefs are consistent with the incumbents’’ period 1 output  choices and the entrant’s entry choice is rational given their beliefs.    a) (10 marks). Case 1   High cost incumbent period 1 output : ?? 1(??) = 6    Low cost incumbent period 1 output : ?? 1(??) = 9    Entrant beliefs and entry strategy   If ?? 1 ≥ 7 entrant believes incumbent is low cost and stays out   if ?? 1  2 single-product firms   Competition     Differentiated Cournot  Demand     pi = a – qi – dQ-  Single product Cost    ?? ? = ??? + ?    Multi-product Cost   ?? ? = ?(??1 + ??2) + 2? − ?  a) (5 marks). Solve for the pre-merger equilibrium outputs and profits per firm.  b) (10 marks).  Solve for the post-merger equilibrium outputs and profits per firm for a  merger between 2 single product firms.   c) (5 marks). Now let a = 130, c = 10, n = 5, d = ½. For what values of x is merger  profitable? Does a profitable merger raise welfare?  Question 3 Horizontal Mergers in Successive oligopoly. (20 marks)  Consider a successive oligopoly model consisting of N vertically integrated firms, n non- integrated dealers and m non-integrated manufacturers. The marginal cost of the  integrated firm and non-integrated manufacturer is equal to c. The marginal cost of the  non-integrated dealer equals the wholesale price (w) charged by the non-integrated  manufacturers. Retail demand is given by P = a – Q.  a) (10 marks). Solve for the equilibrium output and profits of each firm, the retail price  (P) and the wholesale price (w).    b) (10 marks). Let the pre-merger market structure be N = N*, n = n* and m = m*.  Determine for what combinations of N*, n* and m* the mergers below are profitable.  Does the market structure of the stage that is not experiencing a merger determine  whether or not the merger is profitable?   i)  A horizontal dealer merger of the two non-integrated dealers  ii)  A horizontal manufacturer merger of the two non-integrated manufacturers  Fall 2021  EC620 Assignment 3 Page | 3    Question 4: Stackelberg Follower Mergers with Increasing Marginal Cost (20 marks)  Pre-merger market structure   1 leader  Followers: ns = n > 2 single-plant, nm = 0 multi-plant   Competition     Stackelberg  Demand     P = a – Q   Single plant follower Cost   ?? ? = ??? + ??? 2    Multi-plant follower Cost  ?? ? = ?(??1 + ??2) + ?(??1 2 + ??2 2 )  Leader Cost    ?? = ??? a) (10 marks). Solve for the following variables as functions of ns, nm and a – c      Profits of the leader, single plant followers and multi-plant followers   Industry output  b) (5 marks). Determine for what integer values a 2-follower merger that lowers ns from n  to n – 2 and raises nm from 0 to 1 is profitable  c) (5 marks). Let a – c = 60. Pick an integer value of n > 2 that results in profitable merger.  Determine if the merger enhances welfare

Komalavalli · Accepted Answer

a. Case 1
High cost incumbent period 1 output q11(CH) =6
Low cost incumbent period 1 output q11(CL) =9
Here q11(CL) =9 >7
q11(CH) = 610
q11(CH) = 6 720 +2F
 The merger will be profitable.
Yes the profitable merger will raise a welfare.

EC620 Assignment 3 Due: Monday, December 13, in class Fall 2021 Instructions: Assignments must be written using a word processor (i.e. hand-written assignments will not be accepted) and submitted in...

Answer To: EC620 Assignment 3 Due: Monday, December 13, in class Fall 2021 Instructions: Assignments must be...

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