ECON 30524 - Bocconi University. Strategic Decision Making and Markets BESS - 30458. GENERAL EXAM. Q&A

Consider a market in which two firms produce homogeneous goods. Market demand is given by Q = 300 − 2p. Firm 1 has capacity K1 = 130 while firm 2 has capacity K2 = 70. The marginal cost of product ion is the same for the two firms and is c1 = c2 = 30. STATEMENT TO DISCUSS: The pair of prices (p1 = 50; p2 = 50) is a Nash equilibrium of the game in which firms choose prices simultaneously. Statement 2 In country X pharma companies sell vaccines to the National Health System. The Health Ministry used to organize an auction every year for the purchase of such vaccines. The new Minister of Health has proposed to organize an auction every six months. STATEMENT TO DISCUSS: The reform may reduce public expenditures for the purchase of vaccines. Statement 3 Consider two firms, A and B, having the same marginal cost c = 1. The two firms compete ´a la Cournot and the (direct) demand functions for their product are given by: qA = 4 − 4 3 pA + 2 3 pB and qB = 4 − 4 3 pB + 2 3 pA The two firms plan to merge. There are no other competitors in the market so that the merger will result in a monopolist selling both product A and product B. The merger does not produce efficiency gains. STATEMENT TO DISCUSS: The merger is not necessarily beneficial for the merging parties. (You should answer without making any calculation.) Statement 4 Consider a market with five buyers. There is an incumbent seller and a potential entrant. The entrant needs to pay a fixed cost F = 1000 to enter the market. The entrant is more efficient than the incumbent: if it enters, it makes post-entry profits equal to 350 from each (free) buyer. In case of entry the incumbent makes zero profits out of the free buyers. The incumbent enjoys a first mover advantage and can offer exclusive dealing contracts to buyers before the entrant takes the entry decision. The exclusive dealing offer involves a compensation xi to be paid to buyer i in exchange for exclusivity. In case of no entry, or of acceptance of the exclusive dealing contract, the incumbent makes monopoly profits πIm = 500 out of Strategic Decision Making and Markets BESS - 30458 each buyer. The compensation that compensates the loss suffered by a buyer for paying the monopoly price instead of the post-entry competitive price is x∗ = 850. Consider the case in which the incumbent makes contractual offers simultaneously to all the buyers and assume that buyers do not suffer from coordination failures. STATEMENT TO DISCUSS: Exclusion equilibria, in which the entrant does not enter the market, do not exist. Statement 5 Consider firm X that produces two complementary products, A and B, at a constant marginal cost cA = cB = 0. There exists one consumer who enjoys utility U = 500 from the joint consumption of the two products. The consumption of product i alone (with i = A; B) does not produce utility. Firm X is a safe monopolist in market A, while it faces two rivals in market B: they produce the same product B at a marginal cost cR = 0. Their product B has higher quality than firm X’s and when combined with product A generates utility U = 600 for the consumer. In market B firms compete in prices. The firm that sells product B to the consumer manages to extract additional rents β = 300 from advertisers. STATEMENT TO DISCUSS: When the price of product B is not constrained, bundling is more profitable than independent sales because it allows firm X to appropriate the whole advertisers’ rents.