eco204_summer_2009_practice_problem_12

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Unformatted text preview: University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain ECO 204 Summer 2009 S. Ajaz Hussain Practice Problems 12 Please help improve the course by sending me an email about typos or suggestions for improvements Note: Please don't memorize these solutions in the expectation that similar questions will appear on tests and exams. Instead, try to understand how to derive the answer as you'll be tested on techniques and applications, not on memorization. Moreover, tests and exams will cover topics and techniques that may not be in these practice problems. You are urged to go over all lectures, class notes and HWs thoroughly. Question 1 (2008 2009 Final Exam Question) The Table below reproduces Table B from the DHL case: International Air Express Market Shares by $ Revenues (1988) Company Market Share DHL 44% Fedex 7% TNT 18% UPS 4% Others 27% Source: Table B in DHL case. (a) Calculate the CR4 in the international air express market. State any assumptions. (b) Estimate the HHI from the data in the Table above. Brief explain whether the estimate overstates or understates the true HHI. (c) If Fedex and UPS merge what is the change in the global HHI? Show your reasoning. Question 2 (20072008 Test Question) The following page has Exhibit 11 from the Matching Dell case. Suppose Dell and Compaq announced a merger in 1998. Should this proposed merger be blocked by antitrust authorities? Show all steps carefully and keep any explanation brief. 1 University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain All figures for 1998 Corporate Revenue ($bn) Value of PC Sales ($bn) Value of PC sales / corporate revenue Worldwide PC market share ($) Worldwide PC market share (units) Worldwide average selling price ($) U.S. PC Market share ($) U.S. PC Market share (units) U.S. Average Selling Price ($) U.S. / worldwide PC sales CAGR of Worldwide PC business, 1994 1998 Value Units Corporate Financials Return on Sales Salestoassets Ratio Assetstoequity Ratio Return on equity Return on Invested capital (1997) Days of Inventory Cost Structure Advertising / Sales R&D / Sales SG&A / Sales PC sales by channel (units; worldwide) Direct Catalog, phone, online sales representatives Distributor / reseller Retail Other PC Sales by customer category (units; worldwide) Home & small office Small & midsize business Large Business Government Education Stock Appreciation, 12/30/94 12/31/98 Dell 18.2 17.7 96.80% 10.40% 8.60% 2,271 15.10% 13.20% 2,343 63.7% Compaq 31.2 27.9 89.4% 16.4% 14.7% 2,100 16.6% 16.7% 2,047 44.4% IBM 81.7 16.9 20.7% 9.9% 8.8% 2,127 9.1% 8.2% 2,278 40.2% HP 47.1 11.8 25.0% 6.9% 6.3% 2,054 7.9% 7.8% 2,088 50.0% Gateway 7.6 7.1 92.8% 4.2% 4.0% 1,961 8.1% 8.4% 1,982 84.9% 51.9% 56.2% 24.3% 28.7% 12.9% 18.0% 40.1% 44.8% 27.3% 36.5% 8% 2.65x 2.96x 62.9% 186% 7.0 8.8% 1.35x 2.03x 24.2% 35% 34.2 7.7% 0.95x 4.43x 32.6% 13% 49.4 6.3% 1.40x 1.99x 17.4% 16% 70.4 4.5% 2.65x 2.15x 25.7% 45% 10.0 1.1% 1.5% 9.8% 1.1% 4.3% 16.0% 2.1% 6.2% 20.4% 2.6% 7.1% 16.6% N/A N/A 13.8% 86.6% 37.4% 49.2% 6.9% 0.0% 6.5% 4.4% 3.3% 1.1% 66.6% 24.6% 4.4% 7.5% 2.4% 5.1% 69.6% 18.4% 4.6% 0.6% 0.0% 0.6% 75.1% 23.2% 1.2% 90.3% 88.4% 1.9% 4.7% 1.0% 4.0% 18.3% 37.0% 33.6% 6.4% 4.6% 5617% 28.5% 32.6% 27.5% 6.0% 5.3% 432% 30.6% 32.7% 26.0% 6.2% 4.6% 402% 33.3% 30.8% 27.2% 5.9% 2.8% 174% 58.2% 19.1% 9.3% 5.1% 8.2% 374% 2 University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain Question 3 Gamsi, Laffont, and Vuong in "Econometric Analysis of Collusive Behavior in a SoftDrink Market," Journal of Economics and Management Strategy (Summer 1992) estimated the following demand equations for Coke and Pepsi "syrup" 1 . Qc = 26.17 3.98Pc + 2.25Pp + 2.60A c 0.62A p + 9.58S + 0.99 I Qp = 17.48 + 1.40Pc 5.48Pp 4.81A c + 2.83A p + 11.64S + 1.92 I All data was quarterly from 19681986. Here: Q = quarterly quantity of syrup sold P = price of syrup (1986 dollars) A = square root of quarterly advertising expenses (1986 dollars) S = equals 1 if spring or summer, equals 0 if winter or fall I = real income (1986 dollars) Average values from data: QC = 30.22, QP = 22.72, PC = 12.96, PP = 8.16, AC = 5.89, AP = 5.28, I = 20.63 In this question, you will practice analyzing actual demand equations as these contain a plethora of information. (a) Examine the demand equation for Coke syrup: do the coefficients make economic/intuitive sense? (b) Examine the demand equation for Pepsi syrup: do the coefficients make economic/intuitive sense? (c) Calculate the elasticity of Coke sales with respect to Coke price, Pepsi price, Coke advertising, Pepsi advertising and income. (d) Calculate the elasticity of Pepsi sales with respect to Coke price, Pespi price, Coke advertising, Pepsi advertising and income. (e) Use your answers in parts (c) and (d) to compare and contrast Coke and Pepsi sales. For example, which product reacts more to own advertising? What about rival advertising? 1 Coke and Pepsi, the corporations, produce syrup or concentrate which is sold to (typically) independent bottlers. The bottlers carbonate the concentrate, bottle and distribute the soft drinks. These demand equations are for the concentrate, i.e. bottlers' demand. 3 University of Toronto, Department of Economics, ECO 204. Summer 2009. S. Ajaz Hussain (f) Derive a simple demand equation for Coke and Pepsi (i.e. sales as a function of price) and graph the demand curve (i.e. price versus sales). Question 4 Give some cost drivers for airline (horizontal) mergers. In particular, discuss the role of fleet composition. 4 ...
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