exam_competitor_2019_v3

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Yale University *

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Economics

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Jan 9, 2024

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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

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