HW4.pdf - 443 Economics of Law and Regulation Homework...

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443: Economics of Law and Regulation Homework Assignment 4 Chapters 6 and 7 This is homework assignment #4. You need to explain your answers. Each problem has 20 points. The answers are due Thursday March 21 in class. Problem 1: DOJ guidelines. The distance between State College and Pittsburgh is 150 miles. There is 1 gravel company in State College. And there is a gravel company every 30 miles between State College and Pittsburgh, for a total of 6 firms. The situation is pictured below. Distance 0 Firm 1 (in State College) 30 Firm 2 60 Firm 3 90 Firm 4 120 Firm 5 150 Firm 6 (in Pittsburgh) The cost of producing a unit of gravel is 100 dollars, and the cost of shipping a unit of gravel is 10 cents per mile. Recall the DOJ guidelines: “a market is a group of firms such that a hypothetical monopoly would be able able to raise prices by at least 10 per cent (compared to a price of 100 dollars)”. (a) What are the firms in the State College’s market for gravel? (b) What is the HHI of the State College’s market for gravel? (c) If the firms in the State College’s market for gravel merge into two groups, what would the resulting HHI be? (d) Given the DOJ guideline for challenging a merger based on its anticompetitive effects, below, should the merger be challenged? 1
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increase in HHI 0 to 50 50 to 100 more than 100 1800 or more Safe Unsafe Unsafe Postmerger HHI 1000 to 1800 Safe Safe Unsafe 0 to 1000 Safe Safe Safe
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