# Question Collection. European Competition Policy Chair of Economic Policy

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1 Question Collection European Competition Policy Chair of Economic Policy Question 1: - Perfect Competition Suppose a perfect competitive market where all firms produce a homogenous good. Assume the cost function is: a) Derive both, the marginal and the average cost function and include them in a price-quantity diagram. b) Denominate the final market price and the quantity. Could you explain the concept behind this solution? a) b) From a theoretical point of view price has to be equal to marginal cost. But if this happens in another point than the minimum point of the average costs this will lead either to losses for the firm or to possibilities for other firms to set lower prices. Therefore in the equilibrium of a perfect

2 competitive market price has to be equal to marginal cost and to average cost. This is only possible in the minimum of average costs. Question 2: - Perfect Competition Suppose a perfect competitive market where all firms produce a homogenous good. The inverse demand function is given by 50 ; and the cost function is. a) Compute the price and quantities for the market and the single firm. b) Draw a proper graphic. c) Compute consumer and producer surplus and social welfare. a) b)! c)

3 , , ,67 Question 3: - Monopoly A Monopolist faces the following demand curve: 75 4 Establish the equation for the marginal return curve (MR) , Task Question 4: - Monopoly a) A monopolist on a market with the demand curve has constant average variable costs of 100 and fixed costs of 50. Calculate profit maximizing quantity and price. b) Now assume fixed costs of What is the new optimal output quantity? c) Now assume the cost function: Calculate again the profit maximizing quantity , Task 3.

4 a) b) ! > <0 0 The profit maximizing quantity is, in this case, a pure minimization of losses and therefore it would be better to stop production. c) ! >0 Question 5: - Monopoly Which answer(s) is/are correct? The Welfare loss in case of monopoly power: a) is equal to the profits of the monopolist. b) is equal to the amount of surplus shifted from consumer surplus to producer surplus c) exists duo to the fact that the monopolist produces less quantity than optimal. 10.4, Task 34.

5 c) is correct. This is the definition of welfare loss. Question 6: - Contestability One condition for contestability is that established firms do not lower their prices in case of market entry (possibility for hit-and-run competition). Explain why (or why not) this is a necessary assumption for the functioning of the contestability approach. If a potential entrant has to assume that the incumbent will lower his price in case of entry this decreases the incentives to enter the market. The new firm has to pay the cost of entry and is in this situation not able to set the price to the short-time minimum price (price=variable cost). The entrant has to set ad least the long-time minimum price (price=average cost) because of the sunk cost. If the Incumbent is not adjusting his price this is not a problem. Therefore this assumption is indeed necessary for the success of the contestability approach. Question 7: - asymmetric Cournot Duopoly The inverse demand function is given with The marginal costs of firm 1 are 100. The marginal costs of firm 2 are 190. a) Derive the reaction function of firm 1. b) Derive the reaction function of firm 2. c) Calculate the output quantities as interception point of the reaction functions , Task 4. a)

6 , b), c) Question 8: - Cournot Duopoly Choose the right answer: In case of homogeneous products the total market quantity of the cournot equilibrium is: a) as high as the total market quantity in the monopoly case b) lower as the total market quantity in the monopoly case c) above the total market quantity in a perfect competitive market d) between the total market quantities of monopoly and perfect competition e) no answer is correct 12.4, Task 19. d) is correct

7 Question 9: - Oligopoly Choose the right answer: To the main characteristics of oligopoly belongs a) many small firms b) low barriers for entry or exit c) the need to take the behavior of other competitors into account d) all three answers are correct e) no answer is correct 12.4, Task 21. c) is correct Question 10: - Monopsony Explain the calculus of a demander in comparison to a supplier. Explain the demander perspective to the Supply and Demand curve and differentiate the behaviour of demanders with and without market power. Suppliers maximize profits: revenue costs Demanders maximize utility: value expenditures, the optimal solution is if marginal value = marginal expenditures Demanders interpret the Supply function as average expenditures (since it gives the price they have to pay per good for a given amount of goods). The decision is made in the intercept between this curve and the Demand curve which is constituted by the marginal value. Since demanders in a perfect competitive market have no market power the supply curve is not only average but also marginal expenditures because the amount of demanded goods has no influence on the price (price taker assumption). A Demander with market power (like in a monopsony) would be able to influence the price. Therefore marginal expenditure curve is different from the average expenditure curve (supply curve). The monopsony actor would set the optimal price lower than in perfect completion. Duo to a reduction of the amount of traded goods the will be a dead weight loss like in the monopoly situation.

8 Question 11: - IO Models Compare those types of markets. number of firms in the market number of consumers in the market strategic interdepend ence free entry (and exit) positive econ. profits (long-run) Perfect Competition Monopolisti c Competition Oligopoly with Homogeneo us Goods Oligopoly with Heterogene ous Goods Monopoly Monopsony Many Many Few Few One Many Many Many Many Many Many One No No Yes Yes No No Yes Yes Yes No Yes No Yes No Yes No No Yes No Yes Yes No Question 12: - Monopolistic Competition Choose the correct answer: If a certain market is characterized as perfect competitive or monopolistic depends on: a) the existence of barriers to entry b) the degree of product differentiation c) the possibility of firms to cooperate with each other d) a and b are correct e) all answers are correct 12.4, Task 25, Answer b is correct.

9 Question 13: - Market types In which type of market the following firms act? Fill in and explain your decision. Stadtbäckerei Jena (bakery), Deutsche Bank, Mircosoft, Goggle, Facebook, Deutsche Bahn-Regio (a sub firm of Deutsche Bahn which is engaged in public transfer over middle range), McDonalds in Jena, Thalia in Jena (bookstore) Put also the following cases into the table: A bakery in a village with 600 inhabitants, a furniture shop in a city with inhabitants, a furniture shop in a village with 1000 inhabitants, a bank on the Salomon islands Monopoly Oligopoly with homogeneous Oligopoly with heterogeneous Perfect Competition Monopolistic Competition Please notice: important is the argumentation, in most places more than one answer is possible Stadtbäckerei Jena: Perfect Competition or Monopolistic Competition Deutsche Bank: Oligopoly with homogeneous products Microsoft: it depends on which part of the firm you focus -> Monopoly or Oligopoly with heterogeneous products Goggle: not possible to say for the whole firm-> depends on which part of the firm you focus - >Monopoly or Oligopoly with homogeneous products but path dependent reputation Facebook: Monopoly (today but this seems to chance) Deutsche Bahn-Regio: Monopoly products for a certain transition, for transportation regional at all oligopoly with homogenous/ heterogeneous products Mc Donalds in Jena: Oligopoly with heterogeneous products with regards to fast food but monopolistic competition with regards to restaurant market Thalia in Jena: Oligopoly with homogenous products Bakery in little village: monopoly or oligopoly with homo/hetero or perfect Furniture shop inhabitants: everything except monopoly could be argued Furniture shop 1000 inhabitants: monopoly or Oligopoly with homo/hetero depends on distance to the next village with such a shop Salomon islands bank: Oligopoly with homogeneous products or Perfect Competition

10 Question 14: - policy reactions Imagine the following situations and answering these questions: How could we describe the market? What is the underlying problem? Should competition policy react to this situation? a) A little village of 300 persons has one bakery. b) After Apple has introduced the I-Phone it was the only existing smartphone for a certain time. c) Before 2013 Germany has only 4 big electricity firms. These firms have been the owners of the electricity networks too. d) The Deutsche Post Ag is/was the only firm with the right to transport standard letters or mails. This was guaranteed by the German Federal Republic. The solutions below are only inspiration. With good arguments and explanations you could argue for different solutions. a) Depending on the distance to the next village or city and the situation there it could be Monopoly, Oligopoly or Perfect Competition. The problem is the size of the relevant market and the existence of fixed costs. Regulation is senseless. b) This was a temporary Monopoly situation. (If you would argue the relevant market is mobile telecommunication in principle than it was another situation) Innovation leads to new markets or changes in demand. Regulation would be harmful because it would destroy innovation incentives and innovation is important. c) Oligopoly with homogeneous goods (what s about green energy shares in the energy mix of the firm?). Regional monopolies on another market (the network) are transferred to the energy supply market. Regulation is needed. Price regulation has failed in the past. Better approaches are needed e.g. separate network and energy supply. d) Monopoly guaranteed by the state. Problem here is legal barrier to entry. Regulation is the problem not the solution. Question 15: - Cartel Choose the right answer: A Cartel is more likely to be successful if: a) the price elasticity of demand is low b) the cartel members have similar production cost c) the cartel members produce similar quantities d) b) and c) are correct

11 e) all answers are correct 12.4, Task 23. Answer e) is correct. Question 16: -Types of Cartels Different types of cartels are treated unequally. For examples price cartels are prohibited and norm cartels are allowed. In your opinion: should research cartels are allowed or prohibited. Discuss! There is no clear solution for a discussion question but here are some ideas: Decision should be different for strong/ big firms than for small firms (market power) Reduce protection time or forcing to publish results earlier for a cartel of powerful firms Obligation to include small competitors in the cartel Question 17: - Strategies to restrict Competition There are three different types of strategies that restrict competition. Each of these strategies contains different types of actions and has very special problems. Take the following example: One strategy to restrict competition is the Concentration strategy. One tool of this strategy is the horizontal merger. The aim of using such a tool is to achieve a higher market share. The problem is that also market power of the new firm increases. Please name one other strategy, a possible tool of this strategy and explain this tool by the help of two additional facts like aim, problem, examples or general idea, as done in the example. There are many possible answers. To get an impression: three additional examples. Negotiation strategy -> Cartel ->Agreement between legal independent firms/ price and quantity Cartel always prohibited Negotiation strategy -> vertical price fixture -> autonomous enterprises on upstream/downstream markets/ example: book trade

12 Hindrance strategy -> exclusivity and bundling -> typically between distributers and consumers/ often used in automobile industry

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