A market has 5 firms. One firm has a market share of 50%, a second 35%, and the other three 5%
each. What is the Herfindahl index for this market? Based on your result, determine the intensity of
Explain how incumbents can erect strategic ba
iers (i.e. what should an incumbent
firm do to deter entry or hasten exit by competitors).
Suppose two firms (Firm 1 and Firm 2) are producing a product. The total demand is: Q = 100 – P,
where Q = Q1 + Q2. Each of the two firms has the cost function TC = 20Q. Based on the information
given, calculate the equili
ium P, Q, Q1, Q2, Profit1 and Profit2 under monopoly (collusion), Cournot,
and Stackelberg. For the Stackelberg model, assume that Firm 1 is the leader and Firm 2 is the
follower. Show all your workings to gain full marks.
The Cournot and Bertrand models make dramatically different predictions about the quantities, prices
and profits that will arise under oligopolistic competition. Explain the two ways of reconciling the two
Suppose the demand curve for product x is given by Qx = XXXXXXXXXXPx)² -
0.02(Py)³. What is the cross-price elasticity of demand x with respect to y when Px =
$30 and Py = $20? Interpret your answer.
The use of the SSNIP (Small but Significant Nontransitory Increase in Price) test presents some
difficulties when it is to be used in non-merger investigations. One of the difficulties is refe
ed to as
the “cellophane fallacy”. Explain the main argument under the cellophane fallacy.
Building a competitive advantage based on a superior cost position is likely to be attractive when
three conditions are met. Explain the three conditions.
Suppose a firm has $300 million to invest in a new market. Given market uncertainty, the firm
forecasts a high-scenario where the present value of the investment is $600 million, and a low-
scenario where the present value of the investment is $200 million. Assume the firm believes each
scenario is equally likely. Suppose that by waiting, the firm can learn with certainty which scenario will
arise. If the firm waits one year and learns that high scenario will happen, its expected net present
value of investment is $141.5 million. Using the above information, calculate: (a) the annual discount
ate; and (b) the difference in the expected net present value of investment between waiting a year
and then invest and investing today.