exam_competitor_2019_v3

pdf

School

Yale University *

*We aren’t endorsed by this school

Course

410

Subject

Economics

Date

Jan 9, 2024

Type

pdf

Pages

Uploaded by DukeBoulder13147

Competitor Exam 2019 Page 1 The Competitor Perspective: FINAL EXAM Your Name: _______________________________________________________ Your Cohort: _______________________________________________________ Instructions: • Put your name and cohort on this piece of paper. • When you open the exam, FIRST check that your exam is complete. There are EIGHT pages including this cover page. • This is a closed book, closed notes exam. You may not give or receive help. You may not use any electronic devices other than a calculator. The only item permitted on your desk is a paper foreign language to English dictionary. The TAs have been asked to enforce these restrictions. • The exam is in TWO sections. Use 2 blue books, one for each section. • At the start of each section, you are advised how many minutes to spend on each question. If you follow these guidelines, you will spend 2.5 hours on the exam and have roughly 30 minutes at the end to polish up and check over your work. • IN PART II, THERE ARE PAGE LIMITATIONS FOR YOUR ANSWERS. Page limitations are given in “bluebook pages”. Holding a bluebook like a book, a bluebook page is equivalent to a book page. That is, it is either the front or back of a paper. • When you finish or are told to stop, turn in your blue book(s) AND this exam. Sign below: I certify that I have not given or received help with the exam. I have not used notes or other forbidden resources during the exam. Signature: _______________________________________________________

Competitor Exam 2019 Page 2 Part I Use a blue book. Each question in Part I is worth 10 points. You should allow about 1 hour and 40 minutes for this section. Mark your blue book “Part 1”. 1. Angelika and Village Screen are two independent movie theaters located close to each other in Manhattan. They are similar theaters that screen the same films at the same show times. They both sell only movie-popcorn combos. Since the two theaters have essentially identical offerings, customers always prefer to go to the theater with the lower price. (If they charge the same price, then they will split the market equally.) There are 1500 potential moviegoers every day, and each of them is willing to pay up to $16 for a movie-popcorn combo. It is also known that each theater has 1800 seats , and the marginal cost of a movie-popcorn combo for each theater is $9 . Suppose that each theater takes a short-run perspective and only wants to maximize each day’s profits, and that no theaters are going to shut down in the short run. a) What is the appropriate economic model to study price competition in this market? b) If you use Nash equilibrium to make a prediction, what is the price that each theater will charge? c) Give two ways by which the theaters could earn more than predicted in b). d) Angelika signs new contracts with its concessions suppliers, which results in a reduction of its marginal cost to $8. How will your prediction in b) change? 2. Return to the situation in which Angelika and Village Screen have the same marginal cost of $9 . With a new housing development in the neighborhood, the market size has doubled and there are now 3000 potential movie-goers. Any movie-goer is still willing to pay up to $16 for a movie-popcorn combo. Suppose also that each theater’s seating capacity of 1800 remains unchanged. a) Is it an equilibrium for both theaters to charge a price of $16? Justify your answer. b) Is it an equilibrium for both theaters to charge a price of $9? Justify your answer. Film Forum opens a theater close to Angelika and Village Screen with exactly the same offerings. Its seating capacity is 1300 , and its marginal cost is also $9 . Customers prefer to go to the cheaper theater, and if more than one theater charges the same lowest price, they split the market equally. c) What do you predict will be the prices in the three theaters? Justify your answer. 3. A consumer goods manufacturer is negotiating with a retailer to stock its newly launched heated razor. The manufacturer estimates monthly demand for heated razors to be P=200-Q , where P is in USD and Q is in millions of units . For the manufacturer, the total cost function is given by C(Q)=2Q 2 . For the retailer, the marginal cost of retailing is $80 per million units . As the Head of Sales for the consumer goods manufacturer, you propose a quantity-forcing agreement with the retailer: You want the retailer to commit to selling a minimum of 20 million units of the new razor in the first month.

Competitor Exam 2019 Page 3 a) Under such a quantity-forcing agreement, what would be the consumer price of heated razors? b) Imagine now that you are the CEO of the retailer. Your legal department recommends that you reject the quantity-forcing agreement and instead file a complaint to the anti-trust authorities claiming that the large manufacturer is imposing unreasonable restraints on your operations. Your finance department recommends that you consider such a quantity-forcing agreement if you can specify some additional terms in the contract (e.g., terms related to costs, fees, prices, service agreements etc.) Who do you believe is correct? If you believe the legal department is correct, provide a quantitative argument for why such a quantity-forcing agreement cannot be good for your profits. If you believe the finance department is correct, provide a quantitative argument for why this quantity-forcing agreement might be beneficial for you and state what other terms you would suggest in the contract. c) Now, put yourselves in the shoes of anti-trust authorities. If you received a complaint about the above quantity-forcing agreement from the retailer, how would you react? 4. Although they have high fixed costs, coal-fired electricity-generating plants tend to have a much lower marginal cost of production relative to other power providers such as oil and gas-fired plants. Consider a local market for electricity generation in which there are providers with all these different types of plants. A company owns four large coal-fired electricity-generating facilities in this market. The company decides to take one of the four units out of service for routine maintenance on the hottest day of the year, when electricity demand is at its annual peak. Why could it make sense for the company to do this? Explain your answer, preferably using a graph. 5. What is the difference between vertical and horizontal differentiation? Provide definitions and examples to explain your answer. 6. There are two competing energy bars, EnergyPlus and LeanPlus that are available in the vending machine of the Yale Gym. EnergyPlus specializes in high-energy bars, and produces a bar with 65% carbs and 10% protein (the rest being fiber and fat). LeanPlus, on the other hand, specializes in high-protein bars and sells bars with 55% carbs and 20% protein . There are 1000 fitness enthusiasts who visit the gym every day. These 1000 consumers differ in their taste for the proportion of protein in their food. The consumers’ preferred amount of protein is distributed uniformly from 10% to 20%. All 1000 consumers will buy a bar after their workout. (Nobody will buy more than one, and everyone will buy.) These fitness enthusiasts are very particular about the exact proportion of protein in their bars: If you give a consumer an energy bar that has one percentage point more (or less) protein than his ideal, he will buy it only if it is 10 cents cheaper (a disutility of 10 cents for every percentage point deviation). The marginal cost of producing an energy bar is $2 . a) Predict the price of the two bars in the vending machine. b) New medical research claims that low-carb living significantly improves long-term health outcomes. This has an effect on consumer preferences and more people seem to prefer lower proportion of carbs and high proportion of proteins. Explain qualitatively what (if any) effect you think this might have on prices on EnergyPlus and LeanPlus. c) Now, assume that LeanPlus is financially constrained and cannot invest in developing a new bar (but can adjust its price). EnergyPlus already has some tested formulations and wants to try a new

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Competitor Exam 2019 Page 4 formulation with higher protein and lower carbs. It believes that this can be done without increasing costs. EnergyPlus is planning to launch a bar that has 56% carbs and 19% protein. Would this be a good strategy to increase profits? Explain your answer. 7. Potash Corporation is the world’s largest potash supplier. It has roughly six times the annual capacity of its Saskatchewan neighbor, Agrium. Typically, a supplier with larger capacity like Potash Corp has more to gain from reducing output to raise market prices than smaller suppliers like Agrium. Explain precisely why this is the case. 8. You have been hired as a consultant by the Department of Justice to assist them on a project about the ready mix concrete industry. Since wet concrete cannot travel more than an hour before hardening, the ready mix concrete industry in any particular market is very localized and served by local firms. Ready mix concrete is used in construction of roads and buildings and is essentially identical across different producers. Below is a chart depicting the market price and market quantity of ready mix concrete in the small town in upstate NY over the period of 72 weeks. You uncover some important facts about this market: - At the beginning of the period (POINT A), there were only two firms active, Annie’s Concrete and Bill’s Concrete, with identical marginal costs. - At week 25 (POINT C), Bill’s Concrete abruptly shut down due to legal troubles.

Competitor Exam 2019 Page 5 - At week 36, the local government discovered an accounting error, leading to a budget surplus of $100M. It announced and began construction on a 3-year city-wide improvement project, including the construction of new buildings and roads. - After this announcement, in week 38 (POINT D), Bill’s Concrete re-entered the market. - At week 50 (POINT E), Charlie’s Concrete entered the market. Charlie has access to more modern production technology and has a lower marginal cost than Annie and Bill. - At Week 60 (POINT F), Donna’s Concrete entered the market. Donna’s plant has the same marginal cost as Charlie. - At Week 69 (POINT G), a national newspaper article said that that some ready-mix concrete plants recently began substituting in low grade gravel and sand as inputs into their concrete. Buyers could not tell the difference at the time of purchase, but the lower quality inputs would lead to the concrete cracking and crumbling within months. a) Account for the movements in price and quantity in the first 38 weeks. What can explain the trends that you see in the data? Support your answer with evidence and facts where necessary. b) Explain the difference in pricing patterns observed after Charlie’s entry in week 50 (POINT E) and after Donna’s entry in week 60 (POINT F). c) Can you estimate the marginal costs of Charlie’s Concrete and Donna’s Concrete from the data? 9. Steak n Shake is an American casual restaurant chain that sells steak burgers, guacamole burgers, frisco melts, cheese fries, chili, hand-scooped milk shakes, drinks, etc. In late 2008, Steak n Shake introduced a “4 meals under $4” deal. The promotion led to a string of 16 consecutive quarters of same-store sales growth after almost as many quarters of negative growth. But the franchisees were opposed: 50 franchisees united and sued Steak n Shake. Why do you think the franchisees are opposed? 10. You are the CEO of a leading flat glass manufacturer in India. Costs of glass production have been increasing steadily in India, and moreover, small Chinese glass manufacturers are dumping flat glass in the Indian market, making price competition extremely fierce and putting a huge downward pressure on the margins of Indian manufacturers. You happen to meet the CFO of your main competitor at an airport, and you start talking about the financial distress. You discuss your contracts with automakers and recognize that the imported Chinese glass is not attractive to new car manufacturers but is extremely competitive for replacement glass. You and your CFO acquaintance decide that you both could compete very fiercely in the replacement glass market if you were more profitable in the new car market. You agree that, to allow you to be more competitive in the replacement market, your competitor will sell to Ford and Toyota in the new car market while you sell to Honda and GM. Under what circumstances is this allowed legally?

Competitor Exam 2019 Page 6 Part II: Mark your blue book “Part II.” For Part II, there are a few brief readings with questions at the end. This part is worth 50 points and should take 50 minutes. Your answers should be well thought out but very brief. Summarize your key points. Readings are edited and condensed to make them usable for the exam. Readings: Michela Tindera, “Bracing for Competition? Cheaper Challengers Enter Invisalign’s $1.5Billion Market”, Forbes, May 2, 2018. Invisalign has become a household word. Five million patients have gotten clear teeth aligner trays— replacements for unsightly metal braces—over the past 20 years. Just last year, orthodontists prescribed Invisalign trays to 931,000 people, at a cost to the consumer of $3,000 to $8,000 each. That's been a windfall for the manufacturer of these devices, San Jose, Calif. based-Align Technology, the maker of Invisalign. Last year, it generated profits of $231 million on sales of $1.47 billion. Until now, there has been little competition. But in October, about 40 of its patents expired, allowing at least some knockoffs for less complicated orthodontics cases. Already, five startups are making products that will compete at as little as half the price, using e-commerce and telemedicine to cut costs. Patients often don't even see an orthodontist; they may make casts of their own teeth or interact with experts via an app. Clear aligners account for just 15% of the existing orthodontic appliances market in the US, but Align currently holds an estimated 10% of the overall orthodontic appliances market. However, new entrants with cheaper offerings could mean more patients, rather than chipping into Align’s existing customer base, says R.W. Baird analyst Jeffrey Johnson. In addition to the startups, giant conglomerates are also interested in the market. Danaher already makes two clear aligners for simple cases. 3M received clearance from the Food and Drug Administration for a clear aligner last year. Dentsply Sirona and Straumann have each purchased Invisalign competitors. Nathan Bomey, “Goodbye, braces? Invisalign, SmileDirectClub lead teeth-straightening boom”, USA Today, December 21, 2018. The market for clear teeth aligners is booming, allowing millions of Americans who can’t afford braces or dread the metal-wire experience to straighten their teeth for the first time. The number of Invisalign treatments alone has tripled over the last five years, with an expected 1.3 million people worldwide starting the treatment this year. Align, the maker of Invisalign, says that their latest technological advances will allow their aligners to replace braces for 70% of orthodontics cases, up from 60%. The rise of Invisalign and the emergence of competitor SmileDirectClub have spawned a surging industry that’s competing with traditional braces offered by orthodontists. Prices range from about $2,000 for mild-to-moderate teeth straightening from start-ups like SmileDirectClub and Candid, to an average of $5,500 for Invisalign, which can handle more crooked cases. Invisalign also offers a $2,500 option for correcting simple cases. Align has ballooned into a publicly traded company worth nearly $16 billion on the stock market. Invisalign has already treated more than five million patients. The company’s biggest threat is

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

Competitor Exam 2019 Page 7 SmileDirectClub, which has achieved a valuation of more than $3b and has treated more than 300,000 patients since its founding in 2014. While the two companies are competitors, their business approach differs. Align deals directly with orthodontists and dentists who then sell the Invisalign service to their patients. Patients make office visits to their orthodontist for checkups and adjustment every few weeks. SmileDirectClub sells its services directly to patients. Here's how it works: After customers sign up online, the company sends them an at-home impression kit. At-home customers receive detailed instructions and videos on how to take photos of their mouths, sink their teeth into putty that quickly hardens and send the material back to SmileDirectClub. One of SmileDirectClub’s more than 225 contracted orthodontists or dentists reviews each case and approves the treatment plan. Patients receive a series of aligners to use over the course of the following months until their teeth are straight. They can send photos to SmileDirectClub for checkups. Alternatively, instead of using an at-home putty mold, customers can start the process with a single trip to one of SmileDirectClub’s 150 SmileShops. There, a technician takes a 3D digital scan of the customer’s “current smile”, can determine if the customer’s case is treatable with SmileDirectClub’s aligners and can show the customer a rendering of what his or her “new smile” will look like. After the initial visit to the SmileShop, no further visits are required. But not everyone is on board. SmileDirectClub’s model has drawn criticism from the orthodontics industry. The American Association of Orthodontists, or AAO, has filed complaints against SmileDirectClub in at least 36 states, saying that the company’s do-it-yourself model violates dental-practice statutes. The interest group has also issued a “consumer warning” about SmileDirectClub and other mail-order orthodontics businesses. The AAO has not taken action against Align because Invisalign’s on-site supervision is allowable under state laws. At least two states have already taken some form of action against SmileDirectClub. Georgia recently issued a regulation requiring digital scans to be taken with a licensed dentist on site, while Alabama issued a cease-and-desist order after ordering the company not to practice there. SmileDirectClub has countered with an antitrust suit against Alabama’s state dental examiner’s board. From Align Technology, Inc. February 2019 10K filing In order to provide Invisalign treatment to their patients, we require orthodontists and general practitioners to complete an Invisalign training course. The Invisalign System is sold primarily through a direct sales force to dentists and orthodontists in North America, Asia Pacific ("APAC"), Europe, Middle East and Africa (EMEA) and Latin America. To date, over 6.1 million people worldwide have been treated with our Invisalign System…. As of December 31, 2018, we had 449 active US patents, 423 active foreign patents, and 486 pending global patent applications. Our manufacturing facilities are located in Juarez, Mexico, and Ziyang, China, where we conduct our aligner fabrication…. Since the manufacturing process of our products requires substantial and varied technical expertise, we believe that our manufacturing capabilities are important to our success.

Competitor Exam 2019 Page 8 We are highly dependent on manufacturers of specialized scanning equipment, rapid prototyping machines, resin and other advanced materials for our aligners. We maintain single supply relationships for many of these machines and materials technologies. We are also committed to purchasing all of our resin and polymer, the primary raw materials used in our manufacturing process for clear aligners, from a single source. The need to replace one of our single source suppliers could cause a disruption in our ability to timely deliver certain of our products or increase costs. From the Candid Company website But of course we aren’t your only option for teeth straightening at home. What’s the difference between Candid and SmileDirectClub, another at-home teeth aligners company? Candid only works with orthodontists, never general dentists. Candid's clear aligners are made from premium materials. We believe that high-quality aligners deliver the best outcomes. That’s why every set of aligners we make is precision-designed and thermoformed using a durable, stain-resistant thermoplastic. They’re comfortable, removable, and almost completely invisible. SmileDirectClub makes their teeth aligners from a resin called PET-G — according to Orthodent Laboratory, it’s a “commodity” resin and “the same basic resin used to make plastic pop bottles.” Candid provides white-glove customer care. Candid treats you the way you’d expect a doctor to treat a patient. For example, our consent form goes into much more detail about your medical history. And we require eight photos in order to determine whether our aligners are right for you, but SmileDirectClub only asks for five. Candid costs $5 more than Smile Direct Club. Questions: 1. [26 points] Sketch an industry analysis for invisible aligners. There may be some factors for which the information in the reading is not detailed, so state what you understand from the reading materials. Throughout your analysis, note factors that have changed in the last few years or are changing. If your industry analysis differs for different segments of the market, note that. [MAX 4 bluebook pages] 2. [12 points] One industry analyst writes, “We forecast that advancements in 3D printing technology will bolster the profitability of this industry. Very shortly, consumers will be able to come into a store or office, get scanned for aligners that can solve nearly any straightening problem, and leave with a full set of cheaply-produced, high-quality aligners in under an hour.” If the analyst’s forecast about the technological future is correct, how might this impact your industry analysis and current incumbents in the industry? Who stands to benefit the most from this change? [MAX 2 bluebook pages] 3. [12 points] What would be the impact on current incumbents and the future development of the industry if more states follow Georgia’s lead in requiring a dentist to be on site for digital scans (but do not pass other regulations)? Who would benefit from such a regulation? [MAX 2 bluebook pages]

exam_competitor_2019_v3

Related Documents