# European Competition Policy, Exercisefor the Parts Covered by Prof. Dr. Freytag

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1 European Competition Policy, Exercisefor the Parts Covered by Prof. Dr. Freytag Sebastian Spiegel LS Wirtschaftspolitik, FSU Jena Winter 2016/17 Exercise European Competition Policy 1

2 Market Analysis with IO-Models Market types assuming homogeneous goods: Perfect Competition Monopoly Cournot Oligopoly Bertrand Oligopoly Stackelberg Oligoply Monopsony Market types assuming heterogeneous goods: Monopolistic Competition Oligopoly with heterogeneous products Exercise European Competition Policy 2

3 Monopsony Buyers have a different view to the market For sellers the calculus is to maximize profits which are revenue costs For buyers the calculus is similar, they want to maximize utility which is value expenditures Market equilibrium Supply = Demand Sellers perspective: MC (determines Supply function) = AR (which is the interpretation of Demand function) Perf. Comp: = MR (duo to the price taker assumption) Buyers perspective: AE (which is the interpretation of Supply function) Perf. Comp: = ME (duo to the price taker assumption) = MV (determines Demand function) Exercise European Competition Policy 3

4 PC = Perfect Competition, MP = Monopoly MS = Monopsony

5 Calculus in Monopsony case Instead of setting MR = MC the Monopsony tries to maximize his utility by minimizing the expenditures it has to pay for the valued goods = : = + = : = = = +! = =0 0= 2 = = +2 Exercise European Competition Policy 5

6 Source: Pindyck/ Rubinfeld 2005 Exercise European Competition Policy 6

7 Numeric Example V Monopsony For some fields of study the FSU Jena is the only institute in Thuringia which demands research assistants and therefore it has a Monopsony position. Assume the inverse demand function: W= n, W is the wage of a single assistant und n is the number of assistants. The Supply could be characterized with W= n. How much research assistants the university hires and what wage did they get? Source: Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6 th edition, Upper Saddle River, NJ: Pearson Prentice Hall, Chapter 10, Task 12 (6 th edition)/ Task 14 (7 th edition). available in the library in the 6 th and 7 th edition. Exercise European Competition Policy 7

8 Solution = : = = : = = = = ! = = =0 275 =29000 =105.5 = =8909 Exercise European Competition Policy 8

9 Market Analysis with IO-Models Market types assuming homogeneous goods: Perfect Competition Monopoly Cournot Oligopoly Bertrand Oligopoly Stackelberg Oligoply Monopsony Market types assuming heterogeneous goods: Monopolistic Competition Oligopoly with heterogeneous products Exercise European Competition Policy 9

10 Exercise European Competition Policy 10

11 Exercise European Competition Policy 11

12 Exercise European Competition Policy 12

13 Numeric Example III Cournot Duopoly Two firms produce an identical good. Each firm has fixed costs of 100 and marginal costs are 10. The Demand function for the market is given with Q=900 5P, with Q=Q1+Q2. Assume that each firm has to decide about the quantity without information about the other firms decision. Calculate: Market price Market output quantity Individual quantities Profits of both firms Source:Hamilton, Jonathan and Valerie Suslow(2005): Übungen zur Mikroökonomie,, Chapter 12.3, Task 10, Exercise book for: Pindyck, Robert and Daniel Rubinfeld (2005): Microeconomics, 6 th edition, Upper Saddle River, NJ: Pearson Prentice Hall available in the library in the 6 th and 7 th edition. Exercise European Competition Policy 13

14 Solution =900 5 P and = = = = ! 5 =0 = = = = = = =283.33= = = = = = Exercise European Competition Policy 14

15 TAKE HOME TASKS Exercise European Competition Policy 15

16 Question 7: - asymmetric Cournot Duopoly The inverse demand function is given with P= Q. 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. Source: Hamilton, Jonathan and Valerie Suslow(2005): Übungen zur Mikroökonomie,, Chapter , Task 4. Exercise European Competition Policy 16

17 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 Source: Hamilton, Jonathan and Valerie Suslow(2005): Übungen zur Mikroökonomie,, Chapter 12.4, Task 19. Exercise European Competition Policy 17

18 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 Source: Hamilton, Jonathan and Valerie Suslow(2005): Übungen zur Mikroökonomie,, Chapter 12.4, Task 21. Exercise European Competition Policy 18

19 Question 10: - Monopsony Explain the calculus of a demander in comparison to a supplier. Explain the demanders perspective to the Supply and Demand curve and differentiate the behaviour of demanders with and without market power. Exercise European Competition Policy 19

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