EC231
EC2310
1 (Question 1 continued overleaf)
UNIVERSITY OF WARWICK
Summer Examinations 2019/20
Industrial Economics 1: Strategic Behaviour
Time Allowed: 2 hours.
Answer TWO questions from Section A (60 marks total) and ONE question from Section B
(40 marks). Answer Section A questions in one booklet and Section B questions in a
separate booklet.
Approved pocket calculators are allowed.
Read carefully the instructions on the answer book provided and make sure that the
particulars required are entered on each answer book. If you answer more questions than
are required and do not indicate which answers should be ignored, we will mark the
equisite number of answers in the order in which they appear in the answer book(s);
answers beyond that number will not be considered.
Section A: Answer TWO questions
1. A firm has designed a new product which is significantly different from existing
products in the marketplace. Its market research people have estimated demand for
the product as 0.5( , XXXXXXXXXX4q p A p A where q is quantity sold, p is price and A is the
amount of advertising done. The production team assess the marginal cost will be 20
and the fixed costs of producing the product will be 1000.
(a) So far, the firm has had a policy of not advertising. Assuming they continue this
policy, what is the profit-maximising price? Will they go ahead to introduce the
product? (6 marks)
(b) The marketing team are keen to introduce the product with an advertising
campaign, to take advantage of the product’s predicted demand response to
advertising. The unit cost of advertising is 10. Calculate the new price and profit
and comment. (8 marks)
(c) Another team within the firm want to try an alternative strategy. They want to give
away a number of units of the product to “opinion formers”, who they anticipate
will promote the product through the opinion formers’ social media outlets. The
cost of this will be 700. The predicted effect on demand will be the same as if the
firm had spent 1000 on advertising. Assess this strategy in comparison with the
previous two approaches from the firm’s point of view. (10 marks)
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2 (Continued overleaf)
(d) Assess the effect on consumers of the firm’s approach you recommend, compared
with the alternatives. (6 marks)
2. A greengrocer is planning to offer customers a daily fruit and veg box service. It knows
that consumers’ willingness to pay for a daily fruit box (��
�) is uniformly distributed
etween £0 and £1.60; that consumers’ willingness to pay for a daily veg box (��
�) is
uniformly distributed between £0 and £1; and that consumers’ WTP for fruit and for
veg are independent. The products can be supplied at £0 marginal cost per customer
per day for either fruit or veg. There is a mass of consumers equal to 1.
(a) If the greengrocer sells separate fruit boxes and veg boxes, what are the profit-
maximising prices, the amounts that would be sold and the resulting profit? Show
your work. (7 marks)
(b) If the greengrocer were to sell a single box containing both fruit and veg, what
would the optimal price, amount sold and resulting profit be? How does this price
elate to the optimal separate prices found in part (a)? (8 marks)
(c) What other bundling strategies might the firm consider (explain them)? Is one of
them likely to be better than the strategies found in part (a) and part (b)? (8 marks)
(d) How would your answers change if customers resold produce to each other?
(7 marks)
3. Describe what you understand by four of the following concepts or pairs of concepts,
explaining the importance for the subject area of industrial economics and, where
appropriate, illustrating your understanding by giving practical examples and explaining
the differences. (7.5 marks each)
(a) Exogenous versus endogenous switching costs
(b) Consumer
and preferences
(c) Drip pricing
(d) Second versus third-degree price discrimination
(e) Lemons markets
(f) Retail price maintenance
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3 (End)
Section B: Answer ONE question.
Please use a separate booklet.
4. What key phenomena are models of search trying to explain? How far are the models
of Salop and Stiglitz and/ or Varian/ Stahl able to explain these phenomena empirically?
To what extent can these models explain behaviour and outcomes when consumers
use search engines (price comparison platforms)? (40 marks)
5. Many online firms track consumer data to improve their offers to consumers. Recent
Open Banking rules allow banking customers to give other firms access to machine
eadable records of their banking history. How would you expect this to affect:
competition among banks; price discrimination among different types of banking
customer; and the evolution of ‘fintech’ alternatives to conventional banking services?
(40 marks)
6. Increasingly, online ‘platforms’ have changed the patterns of integration with those
who provide content and services (e.g. Netflix and Amazon Prime original content, BBC
use of contracted production companies and streaming subscriptions like BritBox). One
specific example is the ‘marketplaces’ offered by Amazon and eBay, where merchants
sell in their own virtual ‘stores’ alongside – and often competing with – Amazon direct
sales and eBay auctions of individual items. Can this be understood as a case of vertical
integration? What might have motivated the platforms to offer and the merchants to
accept these a
angements? Can the economics of vertical restraints and franchising
shed light on why eBay is fading while Amazon Marketplace continues to grow rapidly?
(40 marks)
Industrial Economics 1: Strategic Behaviou
Section A: Answer TWO questions
Section B: Answer ONE question.
Please use a separate booklet.
Microsoft Word - EC231 Summer XXXXXXXXXXV1.0
EC2310
1 (Question 1 continued overleaf)
UNIVERSITY OF WARWICK
Summer Examinations 2018/19
Industrial Economics 1: Strategic Behaviour
Time Allowed: 2 hours.
Answer TWO questions from Section A (60 marks total) and ONE question from Section B
(40 marks). Answer Section A questions in one booklet and Section B questions in a
separate booklet.
Approved pocket calculators are allowed.
Read carefully the instructions on the answer book provided and make sure that the
particulars required are entered on each answer book. If you answer more questions than
are required and do not indicate which answers should be ignored, we will mark the
equisite number of answers in the order in which they appear in the answer book(s):
answers beyond that number will not be considered.
Section A: Answer TWO questions
1. Consider two firms (� = 0, 1) located at �� along the unit interval [0,1] and a unit mass
of consumers uniformly distributed between them. The preferences of a consumer
located at point � ∈ [0,1] are determined by their underlying preferences for the two
goods (��, assumed not to depend on �), the prices charged to consumer x for each of
the two goods (��
�), the distance from the consumer (�) to the firms and a quadratic
‘transport cost’ from � to each of the firms (���� − ��
�
): in other words, a consumer at
x will buy from firm 0 if:
��
� − ��
� − �(�� − �)
� > ��
� − ��
� − �(�� − �)
�
Assume first that all consumers regard both goods as identical (�� = �� = �� for all �),
that firms do not discriminate on the basis of location (i.e. ��
� = �� for all �) and that
firms choose locations �� in the first stage and prices �� in the second stage.
(a) Find an expression giving the location of the consumer who is just indifferent
etween the two stores, and use this to derive the sales by each firm as a function
of their locations and prices. (5 marks)
(b) If the firms have identical and constant marginal costs � (so the cost of producing a
quantity � is ��) solve for the equili
ium prices for given locations (��). (5 marks)
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1 (Question 1 continued overleaf)
(c) Under the further assumption that the firms choose locations equally spaced
around the midpoint of the interval (� = �� = 1 − ��), show that the firms will
choose the same prices and find the equili
ium locations and profits. Will firms try
to minimise or maximise product differentiation (the distance between �� and ��)?
(5 marks)
Still assuming that � = �� = 1 − ��, and also that � = 1 and � = 0, suppose the firms
are allowed to charge different prices to ‘low’ and to ‘high’ consumers located on
different sides of the midpoint (but resale is prohibited):
��
� = �
��
��� if � ≤ 1 2�
��
����
if � > 1 2�
for � = 0,1
(d) As before, find expressions for the division of consumers between the two firms as
a function of the prices ��
� and the location parameter �, and the total sales of and
evenues of each firm in the ‘high’ and ‘low’ markets. [Note that for fixed prices
there may be indifference points (dividing consumers purchasing from firm 0 or
firm 1) i) within the low segment, ii) at the midpoint and/or iii) in the high segment]
(5 marks)
(e) Find the equili
ium prices ��
���,��
���,��
����
,��
����
as in part (b). (5 marks)
(f) Assuming the firms are located as in part c, is price differentiation socially efficient?
(5 marks)
2. Chris wants to buy a suit for an important interview next week. The outside limit of
what Chris wants to pay is £200, but a friend, Hilary, says such a suit should be available
from one of the shops in a large shopping centre at around £125 to £150. Hilary
eckons that around 1 in 4 shops have the suit at £125, with the rest at £150, but
doesn’t remember which. Chris doesn’t much like trying on clothes and evaluates the
cost at £5 per shop visited.
(a) Assuming Chris follows a sequential search rule, what will Chris’s reservation price
e and how many shops will Chris expect to visit? (4 marks)
(b) Pat,