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# Help with industrial organization problem set (Microeconomics)

Sun 28 Jun, 2020 11:26 am
Exercise 1

Assume that you are the producer of an arbitrary homogeneous good whose demand is given by:

Y=70-p

Where Y=y1+y2

In addition to your firm (F1) there exists another symmetric competing firm (F2). Both firms produce at average (and marginal) costs of AV = MC = € 10.

From problem set 4, we analyzed whether it was possible to establish a cartel in a so called “one-shot-game”. Now suppose that both firms interact infinitely often (at least from the firms’ perspective there is no “end” in sight). For which discount factor ρ is the cartel’s output an equilibrium output? In order to find the solution, assume that both firms choose their output by using the following trigger strategy:

It is further assumed that a deviation from the cartel agreement can be detected immediately. That means deviation can already be punished in the next period.

Exercise 2

Consider a retailer of cars that has a regional monopoly on the sale of cars of a certain brand. For each car sold he must pay a wholesale price w to the manufacturer. Moreover, he charges a final price p to the consumer. He faces a demand that is given by q = 30000 - p

a) Show the profit-maximizing price for the retailer! How many cars will be offered? (Hint: Both will depend on w!)

b) Determine the demand function faced by the manufacturer. Suppose it costs 5000 monetary units to produce a vehicle: What is the maximum profit (wholesale) price w? What is the profit of the manufacturer? Which retail price p will the retailer ask for and how much is his profit?

c) Now, consider a situation where the manufacturer also sells the cars and sets the end consumer price p. How many cars will be traded? What is the profit-maximizing price and the resulting profit? Compare your results with that in b) and explain the economic argument for the difference.

d) Alternatively, could the same result as in subtask c) be achieved by using vertical restraints? Justify your answer

Exercise 3

Vertical restraints can have ambivalent welfare effects. Which anticompetitive effects can be caused by vertical restraints? Give an economic explanation for two of these effects. (Please provide coherent and succinct answers; your answers should not exceed 10 lines).
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