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Unformatted text preview: Click to edit Master subtitle style • 4/28/11 • Lecture 26 – Last Lecture!! Antitrust Wrapup • Econ 121: Industrial Organization • UC Berkeley • Fall 2010 • Prof. Cristian Santesteban • 4/28/11 • 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 1liter 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 • 4/28/11 • 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 • 4/28/11 • 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 • 4/28/11 • 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 twothirds o • 4/28/11 • 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 • 4/28/11 • Market Definition Examples • Now suppose that 15K of the sales lost by Coke go to Red Bull....
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 Supply And Demand, Toys R Us, Market Definition Examples

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