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Unformatted text preview: 1 Fall 2009 Economics 121B: Industrial Organization MIDTERM 2 Answer Keys Part I Short Answer Questions (Total 40 points) (Please write your answers in 2-4 sentences.) 1 . (10 points) The U.S. DOJ and FTC issued the current Merger Guidelines in 1992. According to the guidelines, the relevant antitrust market is defined using the so-called SSNIP test (SSNIP = Small, but Significant and Nontransitory Increase in Price). Operationally, the test is taken to be “5% increase in price lasting for one year.” If DOJ instead decides to use “5% increase in price lasting for six months” for the test, what will be its consequences on market definitions and merger approvals? Explain. Answer : If the DOJ were to use “5% increase in price lasting for six months” rather than “5% increase in price lasting for one year,” the relevant market boundary would be narrowed. With the market boundary narrowed, we may expect a fewer number of mergers would be approved, as the premerger and postmerger market shares of the firms within the market would be higher (a narrower boundary means less firms, which means each firm has a higher market share). 2 . (10 points) Suppose the pizza restaurant chain industry has eight firms with market shares of the following percentages: 20, 18, 15, 12, 12, 10, 8, 5. In November 2009, the seventh (8% m/s) and the eighth (5% m/s) largest firms proposed a merger. Explain whether this merger would be safe or unsafe under the 1992 Merger Guidelines. Answer : The proposed merger belongs to the safe region. See the figure. The premerger HHI is 20 2 + 18 2 +15 2 +12 2 +12 2 +10 2 +8 2 +5 2 = 1426. The increase in HHI resulting from the merger will be 2*8*5 = 80. Therefore, the postmerger HHI will be 1506. 50 100 Postmerger HHI Increase in HHI 1800 1000 80 Safe Safe Safe Safe Safe Safe Unsafe Unsafe Unsafe 1506 2 3 . (10 points) What is double marginalization? How can reducing double marginalization be a potential benefit of vertical integration? Answer : Double marginalization refers to a situation when the price of the input is marked up twice: first, by an upstream firm and, then by a downstream firm when both the upstream firm and the downstream firm have market power. A vertical merger can reduce the incentives for double marginalization and, generally it will result in increase in quantity produced and decrease in price, which will increase total surplus consequently. 4 . (10 points) Conglomerate mergers involve firms that are not sellers in the same market nor do they stand in a buyer-seller relationship. Conglomerate mergers may be categorized into three types. What are these three categories? (For each type, also provide at least one representative merger example.) Answer : They are 1) Product Extension (Pepsico and Pizza Hut), 2) Market Extension (Walmart and Woolco Canada), and 3) “Pure” Conglomerate Mergers (R.J. Reynolds and Burmah Oil and Gas) [other examples are also acceptable if they are associated with the right category.] Gas) [other examples are also acceptable if they are associated with the right category....
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This note was uploaded on 05/15/2010 for the course ECN 60112 taught by Professor Janinewilson during the Fall '10 term at UC Davis.
- Fall '10