Sugestes de respostas s questes selecionadas do BDSS

Cap 8:

1; 3; 7; 8; 9;

Cap 9:

2; 5; 6; 8; 9

Cap 10:

5; 7; 8; 10

Cap 11:

1; 4; 6; 7; 10
Cap 8

1. Why are the concepts of own and cross-price elasticities of demand essential to competitor
identification and market definition?
The magnitude of consumer responses to changes in a product markets (or industrys) price is
measured by the own-price elasticity of demand, which equals the percentage change in a product
markets sales that results from a 1 percent change in price. If an industry raises price and
consequently loses most of its customers to another industry (or industries), we conclude that the
market under consideration faces close substitute products (or the product market competes with
other
product markets). Measuring the own-price elasticity of demand tells us whether a product faces
close substitutes, but it does not identify what those substitutes might be. We can identify substitutes
by measuring the cross-price elasticity of demand between two products. The cross-price elasticity
measures the percentage change in demand for good Y that results from a 1-percent change in good
X. The higher the cross-price elasticity, the more readily consumers substitute between two goods
when the price of one good is increased.

3. How would you characterize the nature of competition in the restaurant industry? Are there
submarkets with distinct competitive pressures? Are there important substitutes that
constrain pricing? Given these competitive issues, how can a restaurant be profitable?
The restaurant industry can be described as exhibiting monopolistic competition as there are many
sellers in the market but each seller is slightly differentiated from the rest. A restaurant can be
horizontally differentiated by the type of cuisine its serves, the quality of the food, the service, the
ambience and dcor, and the location. The prices that can be charged for these differentiating
features are constrained in large part by the geographic location of the restaurant and the local
competition. Consumers will tend to not travel long distances for their meal, no matter how
differentiated the product. The consumers will weigh the convenience of the location against the
price of the meal and so cross-price elasticity of demand may be high. Substitutes to restaurant meals
are home-prepared meals and frozen dinners. The restaurant will be profitable if it has a superior
location. Failing that, a restaurant can be profitable by creating a loyal following for its horizontally
differentiated product, so that consumer demand is relatively inelastic.

7. Numerous studies have shown that there is usually a systematic relationship between
concentration and price. What is this relationship? Offer two brief explanations for this
relationship.
Leonard Weiss summarized the results of price and concentration studies in over 20 industries,
including cement, railroad freight, supermarkets, and gasoline retailing. He finds that with few
exceptions, prices tend to be higher in concentrated markets. Consider an industry with a high
concentration ratio because there are a small number of Cournot competitors. If each firms share of
industry sales is large, the divergence between a firms private gain and the revenue destruction
effect
from output expansion is small. Hence, total industry output and price are closer to the levels that
would be chosen by a profit-maximizing monopolist. Alternatively, an industry with a high
concentration ratio that has a small number of sellers is able to engage more successfully in tacit
collusion.

8. The relationship described in question 7 does not always appear to hold. What factors,
besides
the number of firms in the market, might affect margins?
An important source of variations in price-cost margins across industries is due to regulation,
product
differentiation, the nature of sales transactions, and the concentration of buyers.
Also, it is difficult to control for the way in which price cost margins are calculated. Since the
predictions of economic theory pertain to the market between price and marginal cost, price-cost
margins should be computed using marginal cost. However, accounting cost data usually allow the
researcher to infer average cost rather than marginal cost.
9. The following are the approximate market shares of different brands of soft drinks during
the 1980s: Coke40%; Pepsi30%; 7-Up10%; Dr. Pepper10%; all other brands10%.
a. Compute the Herfindahl for the soft drink market. Suppose Pepsi acquired 7-Up.
Compute the post-merger Herfindahl. What assumptions did you make?
.42 + .32 + .12 + .12 = Herfindahl index = .16 + .09 + .01 + .01 = 0.27
If Pepsi and 7-Up merged:
.42 + .42 + .12 = Herfindahl index = .16 + .16 + .01 = 0.33
The assumptions of the above include that the market shares of firms in the industry do not
change as a result of the merger of two players (Pepsi and 7-Up).

b. Federal antitrust agencies would be concerned to see a Herfindahl increase of the

magnitude you computed in (a), and might challenge the merger. Pepsi could respond by
offering a different market definition. What market definitions might they propose? Why
would this change the Herfindahl?
Pepsi should consider a market definition that would cause the market shares of firms to appear
more fragmented. That is, Pepsi should attempt to increase the size of the denominator that
determines its market share. For example, Pepsi might argue that the market definition is the
junk food market, which includes chips and candy. This would have the effect of making the
market Pepsi competes in more fragmented.
Cap 9

2. How are commitments related to sunk costs?

A commitment is a difficult-to-reverse action or investment that alters the subsequent competitive
interaction between a firm and its rivals, presumably to the advantage of the firm making the
commitment. A sunk cost is a cost that has already been incurred and cannot be recovered. In order
for an action or investment to serve as a commitment, rival firms must believe the firm who made
the
investment will, indeed, alter their future behavior. The key to the credibility of the firms strategic
commitment is irreversibility. If a firm could recover the cost of its strategic commitment after it was
set in motion, much credibility would be lost. Therefore, the higher the proportion of an investment
that is sunk, the more likely that investment would serve as a strategic commitment.

5. Use the logic of the Cournot equilibrium to explain why it is more effective for a firm to
build capacity ahead of its rival than it is for that firm to merely announce that it is going to
build capacity.
The purpose of a commitment is to alter the future behavior of the firm and of the firms rivals in
such a way as to improve the net present value of the profits of the firm making the commitment. If a
firm announces a capacity expansion, but the firms announcement is not credible, the behavior of
rival firms will not be affected by the announcement. Hence the announcement has no strategic
effect
whatsoever if the firms credibility is in doubt. If the firm actually builds the capacity, rival firms
have no choice but to alter their behavior in response to the expansion of capacity. If the firms are
Cournot competitors, firms will react by choosing a lower capacity if their rival has expanded their
capacity. Had the firm simply made an announcement rather than actually building the capacity,
rival
firms could have chosen higher capacity forcing the announcing firm to reneg on its
announcement
as its best response to its rivals ignoring its initial announcement.

6. An established firm is considering expanding its capacity to take advantage of a recent

growth
in demand. It can do so in two ways. It can purchase fungible, general-purpose assets that can
be resold close to their original value, if their use in the industry proves unprofitable. Or it can
invest in highly specialized assets that, once they are put in place, have no alternative uses and
virtually no salvage value. Assuming that each choice results in the same production costs once
installed, under what choice is the firm likely to encounter a greater likelihood that its
competitors will also expand their capacity.
In order to be effective, commitment must be visible, understandable, and irreversible. The key is
irreversibility. In general, a significant investment in a highly specialized relationship specific asset
has a high commitment value. The value is greater because the asset has no other use. As the
question states, once the plant is build the firm has no option but to utilize it within this particular
industry. This sends a strong signal to the competition and they behave less aggressively. Hence if
the firm invests in a fungible asset there is higher likelihood that its competitors will also expand
their capacity.

8. Indicate whether the strategic effects of the following competitive moves are likely to be
positive
(beneficial to the form making them) or negative (harmful to the firm making them.)
a. Two horizontally differentiated producers of diesel railroad engines-one located in the U.S.
and other located in Europecompete in European market as Bertrand price competitors.
The U.S. manufacturer lobbies the U.S. government to give it an export subsidy, the amount
of which is directly proportional to the amount of output the firm sells in the European
market.
Given that the two firms are competing as Bertrand price competitors, Stage 2 tactical variables
are strategic complements. U.S. government subsidy would reduce U.S. firms marginal costs in
Europe, reducing the price. This makes Firm 1 tough (i.e., no matter what its European
counterpart charges Firm 1 would charge a lower price with the subsidy). This shifts Firm 1s
reaction curve inwards (see Figure 9.4) moving Bertrand equilibrium southwest. Firm 2 would
follow and reduce price (though by not as much as Firm 1), this hurts Firm 1 and strategic effect
is negative.
b. A Cournot duopolist issues new debt to repurchase shares of its stock. The new debt issue
will preclude the firm from raising additional debt in the foreseeable future, and is expected
to constrain the firm from modernizing existing production facilities
Since the firms are competing in a Cournot industry their actions are strategic substitutes. Firm
1s decision to buy back its shares of stock is a soft move, because it constrains it from making
investments in modernizing its production facilities.
Hence this kind of commitment makes Firm 1 soft. This means that no matter what level of
output Firm 2 chooses, Firm 1 will produce less output. This corresponds to inward shift in Firm
1s reaction curve (see Figure 9.2) and has a negative strategic effect since this allows Firm 2 to
respond more aggressively.

9. Consider two firms competing in a Cournot industry. One firm, Roomkin Enterprises, is
contemplating an investment in a new production technology. This new technology will result
in efficiencies that will lower its variable costs of production. Roomkins competitor, Juris Co.,
does not have the resources to undertake a similar investment. Roomkins corporate financial
planning staff has studied the proposed investment and reports that at current output levels,
the present value of the cost savings from the investment is less than the cost of the project, but
just barely so. Now, suppose that Roomkin Enterprises hires you as a consultant. You point
out that a complete analysis would take into account the effect of the investment on the market
equilibrium between the Roomkin Enterprises and Juris Co. What would this more complete
analysis say about the desirability of this investment?
Roomkins corporate financial planning is considering only the direct effect of the investment in the
new production technology. A more complete analysis would also consider the strategic effect of
this project on the market equilibrium. As summarized in Figure 9.6, the impact of a strategic
commitment on the market equilibrium
depends on whether the two firms are strategic complements or strategic substitutes and on whether
the commitment makes the firm tough or soft. As the two firms are competing in Cournot
industry, their tactical variables are strategic substitutes. In other words, if Roomkin Enterprises
increases production, Juris Co.s reaction would be to decrease production. The investment will
make
Roomkin Enterprises tough (i.e. Roomkin Enterprises will produce more output than it would have
had it not made the commitment). As shown in Figure 9.6, Roomkins investment would cause Juris
Co. to react less aggressively and to decrease production. Thus, this investment would have a
positive strategic effect and, since its direct effect was barely negative, the overall effect would
probably be positive and so the investment would be desirable.
Cap 10:

5. Firms operating at or near capacity are unlikely to instigate price wars. Briefly explain.
Firms who lower price earn less on every unit they sell up to the quantity they sold before the price
reduction. However, this loss can be offset by an increase in units sold due to the now lower price. If
a firm is at or near capacity, its ability to expand quantity sold is constrained and hence the firm
cannot recover the forgone profits from selling each unit at a lower margin. The capacity-constrained
firm has little incentive to initiate a price reduction.
Firms are more likely to instigate price wars when excess capacity exists. For example, if a firm is
experiencing excess capacity, and a new firm enters the market, the new entry will induce even
greater excess capacity on the part of the incumbent. If there are economies of scale in production,
the costs of idle capacity may rise with the degree of idleness. This suggests that the incumbent will
fight harder to retain market share under excess capacity conditions, and that prices are likely to drop
with entry. The firm with excess capacity may lower its price in order to retain or steal market share.

7. Suppose that you were an industry analyst trying to determine whether the leading firms in
the
automobile manufacturing industry are playing a tit-for-tat pricing game. What real world
data would you want to examine? What would you consider to be evidence of tit-for-tat
pricing?
Circumstantial evidence of tit-for-tat pricing is relatively easy to find. Public pricing behavior, like
the advance announcement of price changes and the use of commitments to meet the lowest
available
price, support price coordination and stability, as does simplified pricing behavior such as having
annual pricing reviews. However, hard evidence of tit-for-tat pricing is much harder to come by,
unless firms are foolish enough to put a collusive agreement in writing. You would want detailed
data on historical prices and firm profits in an attempt to discern pricing patterns that support
aboveaverage
industry profitability. One such telltale pattern is a punishment strategy, where all firms
lower price to punish a renegade firm that reduces its price unilaterally. Then, after a period, all
firms raise their price back to the previous, higher level. However, firms can always argue that
external circumstances are responsible for the price moves. Furthermore, if collusion is extremely
effective, you would not observe punishment behavior at all.

8. Studies of pricing in the airline industry show that carriers that dominate hub airports
(Delta in
Atlanta, USAir in Pittsburgh, and American in Dallas) tend to charge higher fares on average
for flights in and out of the hub airport than other, non-dominant carriers flying in and out of
the hub. What might explain this pattern of prices?
There are several reasons why dominant hub airlines can charge higher prices than non-dominant
carriers flying in and out of the hub. First, the convenience that a hub airline provides creates a
differentiated product for which the airline can charge a premium. Second, the frequency that hub
airlines provide reduces the number of substitute flights available for consumers. This shifts the
demand for the hub airline out, reducing the price elasticity for the hub airlines flights. And finally,
smaller airlines may reduce prices below the hub airline prices because the dominant airline has little
incentive to retaliate with a price war.
10. Consider a duopoly consisting of two firms, Amalgamated Electric (AE) and Carnegie-
Manheim (C-M), that sell products that are somewhat differentiated. Each firm sells to
customers with different price elasticities of demand, and, as a result, occasionally discounts
below list price for the most price-elastic customers. Suppose AE adopts a contemporaneous
most favored customer policy, but C-M does not. What will happen to AEs average
equilibrium price? What will happen to C-Ms average equilibrium price?
By adopting a contemporaneous most favored customer clause (MFCC), AE precludes itself from
discriminating between price-elastic and price-inelastic customers. Whereas before it was price
discriminating, now it will charge all customers the same price. Margins on inelastic customers will
fall and margins on elastic customers will rise.
The common price for AE will most likely be higher than the average price without the MFCC.
Presumably AE adopted the MFCC to increase its profit. This implies that the margin increase on
elastic customers will be greater than the margin decrease on inelastic customers.
Now that AE will charge a higher price to the elastic customers, CM does not have to discount as
aggressively in order to compete for these customers. Its profit-maximizing price to elastic
customers
will increase, though not as much as AEs. As a result, CMs average equilibrium price will increase
as well.
Cap 11

1. Dunne, Roberts, and Samuelson found that industries with high entry rates tended to also
have
high exit rates. Can you explain this finding? What does this imply for pricing strategies of
incumbent firms?
Production exhibiting low economies of scale (a condition that weakens entry barriers) and requiring
little or no investment in specialized assets (a condition that weakens exit as well as entry barriers) is
frequently observed in industries exhibiting high entry and high exit. Consider the following
scenario: Firms in an industry with no entry barrier face increased demand. If these firms begin to
earn positive profits, entry occurs, especially if there are little or no exit barriers. As demand turns
down, firms exit the industry. If barriers to entry or exit existed, this industry might not exhibit this
pattern.
Given that an industry with no entry or exit barriers is susceptible to hit and run entry, we would
expect the firms within this industry to price closer to marginal cost to discourage some of this
activity.

4. Under what conditions do economies of scale serve as an entry barrier? Do the same
conditions
apply to learning curves?
Economies of scale can serve as an entry barrier when the investment made by the incumbent is a
sunk cost. Incumbent is unlikely to quit when competition intensifies. If the investment is not a sunk
cost (reversible investments, general purpose assets) then there will be no entry barriers even if there
are economies of scale.
Learning curve effects are similar to sunk cost effects. The high cost of production during the
learning period can serve as an entry barrier, the same way sunk cost investments do.

6. Why is uncertainty a key to the success of entry-deterrence?

Entry deterring strategies include limit pricing, predatory pricing, and capacity expansions.
Limit Pricing: If entrants operated in a world of certainty, it would be difficult to find a rational
explanation for limit pricing. In general, entering firms must be uncertain about some
characteristic of the incumbent firm or the level of market demand. The incumbent wants the
entrant to believe that post-entry prices will be low. If the entrant is sure about the factors that
determine post-entry pricing, it can calculate the incumbents payoffs from all possible post-entry
pricing scenarios and correctly forecast the post-entry price. If the entrant is uncertain about the
post-entry price, however, then the incumbents pricing strategy could affect the entrants
expectations.
Predatory Pricing: As with limit pricing, predatory pricing would appear to be irrational if
entrants operated under certainty. If, however, entrants lack certainty, then price-cutting by an
incumbent may affect the entrants expectations of the incumbents future pricing strategies.
Operating under uncertainty makes it more difficult for the entrant to rule out a bad post-entry
scenario and therefore predatory pricing may, indeed, discourage entry.
Excess Capacity: Unlike predatory pricing and limit pricing, excess capacity can deter entry even
when the entrant possesses full information about the incumbents costs and strategic direction.
If the incumbent is holding an entry-deterring level of capacity it is actually in the incumbents
interest to convey this information to would be entrants. If, however, the incumbent is unable to
hold an entry-deterring level of investment, then the incumbent might hope the entrant is
uncertain about the level of capacity the incumbent actually holds.
7. An incumbent is considering expanding its capacity. It can do so in one of two ways. It can
purchase fungible, general purpose equipment and machinery that can be resold at close to its
original value. Or it can invest in highly specialized machinery that, once it is put in place, has
virtually no salvage value. Assuming that each choice results in the same production costs once
installed, under which choice is the incumbent likely to encounter a greater likelihood of entry
and why?
The investment that is more visible, understandable, and irreversible is more likely to deter entry. In
general, a significant investment in a highly specialized relationship specific asset has a high
commitment value. The value is greater because the asset has no other use. Essentially the firm
whose
investment has no outside option has increased its own exit barrier. Exit barriers can limit the
incentives for the firm to stop producing even when the prevailing conditions are such that the firm,
had it known with certainty that these conditions would prevail, would not have entered in the first
place. Given the firm is less likely to exit during poor industry conditions, entry is less attractive as
industry downturns will generate lower overall profits than if firms could redeploy their assets to
other uses. As the question states, once the plant is built the firm has no option but to utilize it within
this particular industry. This sends a strong signal to the competition and they behave less
aggressively. Hence if the firm invests in a fungible asset there is higher likelihood that entry will
not be as deterred.

10. Consider a firm selling two products, A and B, that substitute for each other. Suppose that
an entrant introduces a product that is identical to product A. What factors do you think will
affect (1) whether a price war is initiated, and (2) who wins the price war?
Given that the incumbent is producing two substitute goods, the incumbent has more to lose if a
price
war erupts. The reason is, if the incumbent lowers the price of good A to match the price of the
entrants identical offering, the incumbent loses revenues on good B as well as on good A because
customers who used to purchase good B will substitute toward good A. If exit barriers are minimal,
the incumbent might prefer to exit the market for good A rather than endure a price war. The
incumbent is more likely to stay and fight if exit barriers are high and/or good A and B are weak
substitutes. Clearly the probability of a price war decreases if the level of demand for these goods is
high relative to the combined capacities of the firms.