Jan-May 2021, End-Semester Examination
HS 2320 Economics of Industrial Organization
Problem Set, Take Home Exam
Total: 10 Marks
1. Consider the model of multi-market contact: Firm 1 has cost c in Market 1, while Firm 2 has
a cost ̅. The situation is reversed in Market 2. Demand is the same in both markets: consumers
are willing to buy q units for a price of up to
(that is, for ≤ , quantity demanded does
not depend on price). It is assumed that c < <
. In each period, firms set prices in both
markets simultaneously. Determine the minimum value of the discount factor such that the
optimal collusive solution is stable.
(3 Marks)
2. Consider an industry with one upstream firm and n downstream firms that compete a la
Cournot. Show that the optimal wholesale price is strictly between marginal cost and monopoly
price.
(4 Marks)
3. Dull Computers produces laptop computers (a high-quality good) for $300 each, or desktop
computers (a low-quality good) for $200. There are 100 potential buyers each of whom will
buy either one or none. Buyers are either businessmen (who value laptops at $1200 and
desktops at $1000 each) or students (who value laptops at $940 and desktops at $800 each).
Assume that if a buyer obtains the same consumer surplus from buying either good, the buyer
will choose the higher-quality product.
(a) Under pure bundling, Dull sells only laptops. What are Dull’s profits if he prices laptops so
everyone buys (call this inclusive pure bundling)?
(b) If Dull decides on pure bundling but prices them so only businessmen buy (call this
exclusive pure bundling), what are his profits as a function of the number of businessmen (x)?
(c) If Dull decides on mixed bundling (i.e., produces both laptops and desktops), he would like
to target the desktops to students and the laptops to businessmen. What will he charge for
desktops and what will he charge for laptops? Explain your reasoning.
(3 Marks)