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Lecture26_AntitrustClosing_Econ121_Fall2010

# Lecture26_AntitrustClosing_Econ121_Fall2010 - Lecture 26...

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Click to edit Master subtitle style  2/2/11 Lecture 26 – Last Lecture!! Antitrust Wrap-up Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban

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2/2/11 Market Definition Example We want to know if Coke and Pepsi constitute by themselves a relevant market. For simplicity assume Coke and Pepsi only sell 1-liter bottles of cola. Each bottle sells for \$1.00 and costs \$0.60 to make. Coke and Pepsi have equal sales of 1.2 million units each. Suppose that for every \$0.01
2/2/11 Market Definition Examples What is the prevailing price elasticity faced by the combined firm? If both Coke and Pepsi increase prices by \$0.01 (or 1%), how many units will they lose to other products? 40K or 1.67% of their combined sales. ε = 0.0167 / 0.01 = 1.67

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2/2/11 Market Definition Examples What is the critical elasticity for a 10% SSNIP? Assume constant elasticity of demand εcrit = (1 + t) / (m + t) What is t? What is m? Here, t = 0.1 and m = 0.4 εcrit = 1.1 / 0.5 = 2.2 > 1.67
2/2/11 Market Definition Examples Now assume linear demand εcrit = 1 / (m + 2t) = 1 / 0.6 = 1.67 This is equal to the prevailing elasticity So, a hypothetical monopolist of Coke and Pepsi would want to increase prices up to a 10% SSNIP (but no more if demand is linear). This is true even though two-thirds of

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2/2/11 Market Definition Examples Note: constant elasticity demand and linear demand provide the upper and lower bounds, respectively, of the critical elasticities. So, if critical elasticity under linear demand is greater than or equal to prevailing elasticity, you can be sure that the hypothetical monopolist will have incentive to increase prices by the SSNIP.
2/2/11 Market Definition Examples Now suppose that 15K of the sales lost by Coke go to Red Bull. This means that Red Bull is a closer substitute to Coke than Pepsi is.

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