microeconomics book solution 15

Philip mo rr is r j reynolds advertise advertise do

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Philip Mo rr is R . J . Reynolds Advertise Advertise Do not advertise Do not advertise $ 1.5 million profit $ 1 million profit $ 1.5 million profit $ 2. 8 million profit $ 1 million profit $ 2. 8 million profit $ 2 million profit $ 2 million profit S-218 C H A P T E R 1 5 O L I G O P O LY S209-S220_Krugman2e_PS_Ch15.qxp 9/16/08 9:23 PM Page S-218
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Solution c. The development of a hydrogen-powered car would make it more difficult to form or maintain an agreement. Remember that a cartel essentially acts like a monop- oly. A cartel’s (or a monopoly’s) market power is eroded if there is entry of new firms or the development of substitute products. 11. Suppose you are an economist working for the Antitrust Division of the Department of Justice. In each of the following cases you are given the task of determining whether the behavior warrants an antitrust investigation for possible illegal acts or is just an example of undesirable, but not illegal, tacit collusion. Explain your reasoning. a. Two companies dominate the industry for industrial lasers. Several people sit on the boards of directors of both companies. b. Three banks dominate the market for banking in a given state. Their profits have been going up recently as they add new fees for customer transactions. Advertising among the banks is fierce, and new branches are springing up in many locations. c. The two oil companies that produce most of the petroleum for the western half of the United States have decided to forgo building their own pipelines and to share a common pipeline, the only means of transporting petroleum products to that market. d. The two major companies that dominate the market for herbal supplements have each created a subsidiary that sells the same product as the parent company in large quantities but with a generic name. e. The two largest credit card companies, Passport and OmniCard, have required all banks and retailers who accept their cards to agree to limit their use of rival credit cards. 11. a. This warrants an antitrust investigation because it is likely that having the same set of people sit on the two boards will facilitate cartel-like behavior. b. This does not warrant an antitrust investigation. The intensity of advertising and competition by location indicates that the banks are engaged in nonprice competition. c. This warrants an antitrust investigation. By using the same pipeline, each compa- ny can monitor how much output the other is producing. This facilitates cartel- like behavior. d. This does not warrant an antitrust investigation. These two companies are actively competing, albeit by using their subsidiaries. e. This warrants an antitrust investigation. These two companies are acting together to shut out a rival. 12. The industry for small, single-engine airplanes is oligopolistic, and it has achieved tacit collusion. Each firm currently sells 10 airplanes at a price of $200,000 each.
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