1.
False
Suppose two firms meet in two different markets, A and B. In market A, firm 1 has 80% market share, and firm has 20%. In market B, firm 1 has 90% market share, and firm 2 has
10%. This market structure facilitates collusion. Indicate whether this statement is true, false or whether the effect is ambiguous.
The fact that both companies aren't symmetric at all (huge difference in market share), will make it difficult for them to reach an agreement = collusion.
2.
True
Indicate whether this statement is true, false or whether the effect is ambiguous.
“Product homogeneity facilitates collusion”.
AMBIGUOUS
Product homogeneity makes it easier to track deviation so that the collusion will stand easier.
3.
False
Suppose two manufacturers are engaged in a market where consumers buy goods only infrequently, e.g. durable consumer goods. Now suppose a wholesaler that sells products of both manufacturers orders an unusually high number of product units. The manufacturers have an incentive to collude now. Indicate whether this statement is true, false or whether the effect is ambiguous.
In an environment where demand is highly volatile, collusion will be harder to sustain because it is difficult to track the reason of price changes (deviation of collusive price/fall in demand).
4.
False
Suppose there are 2 firms active in one market, and they are financially independent of each other. Now firm 1 buys 40% of firm 2’s capital at the stock market and firm 2 buys 25% of firm 1’s capital. This new shareholding situation will decrease the likelihood of collusion in the product market. Indicate whether this statement is true, false or whether the effect is ambiguous.
If firms own shares of rivals, scope for collusion is enhanced because both coordination and monitoring of the rival are eased, so that deviation becomes less attractive.
5.
In a market with a very high demand elasticity there is little reason to worry about collusion.
Indicate whether this statement is true, false or whether the effect is ambiguous.
Ambiguous TRUE
If demand is very elastic, a given price cut will determine large increase in quantity demand.

9.
No
No
8.
No
6.
In a given sector there are N firms that sell directly to consumers. They sell a homogenous good which is subject to very frequent shocks, giving rise to high price instability. Every week, these firms communicate the price at which they will sell the product in the following week to the central office of their trade association. The trade association then publishes the
(following week’s) prices of all the firms in national newspapers. The national anti-trust authority got to know about this practice and finds the firms guilty of collusion and all of them are fined for illegal practices.
7.
Yes
Do you think the authority’s decision is justified?
NO
Since observability of prices and quantities helps to reach collusive equilibrium, competition policy should pay attention to practices helping firms to monitor rivals.
There are only three sellers in a given industry. One day, one of the firms sends the following fax to two of its competitors: “In the interest of fair competition, and for the sake of market transparency, we hereby inform you that the Board of our company has decided that from the next quarter our sales prices will be increased by 10%”.
Suppose you have a friend whose job is investigating whether this practice should be forbidden or allowed. Your friend thinks that this behavior is not illegal, as the firm did send the fax to all of its competitors and not only to selected ones. Your friend believes that the firm just wants to compete more. Do you agree with her/his opinion?
Private announcements (e.g. fax send to rivals) have no efficiency reasons at all, they're just meant to coordinate on collusive prices => avoids experiencing in the market. (e.g. firm announces price increase next month, but if competition doesn't follow announcement, it sticks to current price in the end)
The time series of price data of a given industry reveals that prices are not stable over time.
During the last ten years, one can observe periods in which prices are high, and periods where prices are low (about 40% less than the high price level). Can one infer from the existence of low prices that there was no collusion in these time periods?
Collusion may have occurred during this period, but because of high volatility in demand, it is difficult to indicate whether the price fluctuations are a consequence of changes in demand
OR deviation from collusive prices.
If you discover that two or more firms change prices by the same proportion within a few days of each other, is this evidence that the firms have a collusive agreement?
If one producer adapts its price because by doing this he can supply more demand, rivals will follow (if they can) because otherwise they won't have any costumers left.

10.
Suppose there are 9 firms active in a relevant market. This is the market share distribution:
Firm A 15%
B 15%
C 6 %
D 5 %
E 5 %
F 9 % o o o o
G 10%
H 15%
I 20%
Now firms E and F want to merge. In this industry, it cannot be expected that the merger leads to large efficiency gains. Furthermore, the market characteristics are such that the entry barriers are relatively high, and buyers in that market are fragmented the products sold in that market are relatively homogenous, and the demand is relatively stable.
Should the merger be allowed by the competition authority?
No YES
High entry barriers give scope to price increases
Fragmented buyers won't have any power
Number of firms is reduced so collusive agreements are made easier
Homogeneous products boost collusive decisions
Stable demand gives rise to possible collusion
There are no efficiency gains

11.
a. 320
12.
a. 200
13.
c. 0.48
14.
Consider the Cournot model. There are 3 identical firms in the market that produce a homogenous good. Entry into to the market is not possible. They optimize their profits by quantity setting. Suppose the market demand is Q = 1000 - 1000p (and thus: p = 1 – 0.001Q)
The marginal cost for all firms is MC = 0.28 currency units. In equilibrium, each firm would produce 180 units of output resulting in a profit of 32.40 currency units. Consequently the industry output would be 540 units, and total industry profits would be 97.20 currency units.
The equilibrium price in the market would be p = 0.46 currency units.
This results in a consumer surplus of CS = [1 – 0.46] * 540/2 = 145.8.
Note: How to calculate consumer surplus? CS is the difference between the consumers reservation price and actual price times quantity divided by 2 (triangle = half a rectangle).
You can check the document on Toledo!
Now suppose that two firms want to merge, but they credibly communicate that they will r ealize efficiency games so that the marginal cost of production for the merged entity will reduce to MC_M = 0.16. (where _M refers to “merged company”).
So, after the merger, there would be two firms in the market, one with MC = 0.28, and the merged entity with MC_M = 0.16.
How much output will the merged company produce in equilibrium?
Calculate the Cournot-equilibrium assuming that firm 1 is the merged firm with c1 = 0.16 and firm 2 is the stand-alone firm with c2 = 0.28.
How much output will the other company produce in equilibrium?
What will be the new market price?
= 1 - 0.001 x (320+200)
= 0.48
How large will the producer surplus be?
15.
. 142.2
Easy, just calculate the profit for the merged firm and the stand alone firm and add them up
How large will the consumer surplus be?
. 135.2
See document on Toledo or earlier courses of economics (basic calculation)

16.
17.
No
Yes
Should this merger be allowed from a welfare point of view?
Welfare is increased by (135.2 + 142.2) - (145.8 + 97.2) = 34.6
Should this merger be allowed from consumer surplus point of view?
Consumer surplus decreases by 145.8 - 135.2 = 10.6