Assignment:
Read the following article which describes Maid of the Mist, a company which has been selling ferry tours of Niagara Falls from the U.S. side of the Niagara gorge since the 1840s, https://goo.gl/9FHqrv
a.) Why does the government allow Maid of the Mist to act as a Monopoly in this industry? Why doesn't the government allow ferry tours of Niagara Falls to be offered by say, 20 different providers, instead of just one?
b.) Economists generally prefer competitive markets to monopolies because competition results in the maximum market surplus. Do you think it would be a net positive change from society's perspective if greater competition existed in themarket for ferry tours in Niagara Falls? Explain.
2. (12) Staples and Office Depot, the two largest office retailers, recently tried to merge. The proposed merger was blocked on the grounds that it violated antitrust law. The FTC's ruling can be found here: https://www.ftc.gov/system/files/documents/cases/051016staplesopinion.pdf
a.) The FTC argued that the Herfindahl-Hirshmann Index (HHI) would have increased from 3270 to 6265; the companies had been argued that the post-merger HHI would have been below 2000. Explain how there can be such a large disparity in the estimates of the HHI (what determines whether the estimate is high or low).
b.) The ruling notes that the HHI is not the only the sole determinant as to whether a large merger is approved or rejected. Explain what other major factors in addition to the HHI are considered in the approval decision?
c.) Do you think the court was correct to grant the injunction (block the merger) or not? Explain.
3. Fill in the blanks in the following production table which represents a non-price discriminating (single price) monopolist. Then answer the following questions.
Q P TR MR TC MC ATC
0 100
1 100 ___ ___ 140 ___ ___
2 90 ___ ___ 180 ___ ___
3 80 ___ ___ 220 ___ ___
4 70 ___ ___ 260 ___ ___
5 60 ___ ___ 300 ___ ___
6 50 ___ ___ 340 ___ ___
7 40 ___ ___ 380 ___ ___
8 30 ___ ___ 420 ___ ___
a. (2) What is the profit maximizing quantity and price for this monopolist?
b. (2) What do their profits equal?
c. (3) Use the Lerner Index to calculate the price elasticity of demand at the profit maximizing quantity.
d. (3) How much deadweight loss (loss in market surplus) results from this monopoly?
e. (3) If this represented a perfectly price discriminating monopolist, what is the equilibrium quantity and deadweight loss?
4. (16) Read the following article on price discrimination: www.ccs.neu.edu/home/cbw/pdf/imc151-hannak.pdf then answer the following questions.
a. Briefly explain the difference between price discrimination and price steering.
b. Thearticle notes that some sites charge higher prices to new customers, while others charge higher prices to returning customers. Briefly explain what this decision depends on (what factors would an online retailer consider before making the decision of whether to give a discount or charge a premium to a customer)?
c. Explain how Orbitz and Cheaptickets price discriminate between returning (logged-in) customers and new customers. Given how they price discriminate, what do you know is true regarding the estimated price elasticities of returning customers vs. new customers?
d. Do you think consumers would be better off if these types of price discrimination were not allowed? Explain.
5.(6) Movie theaters use both time of day and individual characteristics like age to segment consumers, even though the cost of the movie is the same across segments.Suppose a movie theater determines that the elasticity of demand for movie tickets is -2.0 for senior citizens and -1.5 for adults under age 65. Use the Lerner index to determine the ratio of prices between adults and seniors. In percentage terms, how big a price premium should be charged to the group that pays the higher price?
6. (15) Microsoft sells two types of office software, a word processor it calls Word, and a spreadsheet it calls Excel. Both can be produced at zero marginal cost. There are two types of consumers for these products, who exist in equal proportions in the population: authors, who are willing to pay $120 for Word and $40 for Excel, and MBA students, who are willing to pay $50 for Word and $150 for Excel.
a. Ideally, Microsoft would like to charge authors more for Word and MBA students more for Excel. In reality, why would it be difficult for Microsoft to do this?
b. Suppose that Microsoft execs are deciding whether to sell Word and Excel separately or bundle them together in a package called Office. What price should Microsoft set for Word and Excel if they are sold separately? What price should Microsoft set for the package? What will Microsoft's profit be from a representative group of one author and one MBA student under each scenario? Should Microsoft bundle their products or sell them separately?
c. Suppose that instead of a zero marginal cost, Word and Excel cost $35 each to produce - so the bundle costs $70 to produce. Recalculate the answers to part given these costs.
7. (15) Suppose that two clothing manufacturers, Lands' End and L.L. Bean, are deciding what price to charge for very similar field coats. The cost of producing these coats is $100. The coats are very close substitutes, so customers flock to the seller that offers the lowest price. If both firms offer identical prices, each receives half the customers. For simplicity, assume that the two firms have the choice of pricing at prices of $103, $102, or $101. The profit each firm would earn at various prices (Lands' Ends Profit, LL Bean's Profit) is shown in the payoff matrix below.
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LL Bean
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|
|
|
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$103
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$102
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$101
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|
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$103
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($150, $150)
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($0, $220)
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($0, $120)
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Lands' End
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$102
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($220, $0)
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($110, $110)
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($0, $120)
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$101
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($120, $0)
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($120, $0)
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($60, $60)
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a. What is the Nash equilibrium and expected profits to LL Bean and Lands' End of this game?
b. Suppose Lands' End and L.L. Bean decide to collude and jointly determine prices? Is this collusion likely to work. Briefly explain why or why not. (Note: don't worry about the legality of collusion in your answer).
c. Suppose that in hopes of raising prices, L.L. Bean announces the price for its coat early in the summer (before Lands' End announces their prices). Represent this using a sequential game tree diagram. Will this strategic move be successful for LL Bean? Explain.
8. Suppose you run a large company's marketing department and are responsible for deciding whether or not to advertise in the Super Bowl. Your team of analysts estimate that for each advertisement, your firm would generate $3.5 million in additional revenue for the company. It costs $4.5 million to run a 30-second advertisement. Therefore, for each 30- second advertisement, your company would lose $1 million in profit.
a) Explain why it could still be a good business decision to purchase an advertisement, even though you know in advance that your company would lose $1 million in profit?
b) (6) Depict this situation with a game theory payoff matrix. Your company (A) and a major competitor (B) have two potential strategies: to advertise or to not advertise during the super bowl. The payoffs in each cell represent what happens to your profit. If you both advertise your payoffs are negative $1 million each. If neither company advertises,the payoffs are $0 each. Create payoffs in the other two cells such that the Nash equilibrium is that both your firm and your competitor advertise, and lose $1 million each.
9. Read the following article regarding review incentiveshttps://goo.gl/IMN6fVand use it to answer the following questions.
a. )(3) Construct a sequential game (with a game tree) in which a customer and provider have the option of giving either a positive or a negative review to one another. Make the customer the first mover and the provider the second mover.
b.) (5) Create payoffs (which could represent profit or utility) to illustrate the "Barney World" outcome. Specifically, a customer receives bad service and would like to give a negative review to the provider. However, the customer knows that if s/he gives the provider a negative review, the provider will give a negative review in response. The Nash equilibrium should be that both the customer and provider give each other positive reviews, even though the customer would prefer (would have a higher payoff) to give a negative review.
c.) (3) Do you think this situation represents a prisoner's dilemma? Explain.