TRP 506: Review Questions

1. Write short notes on the following terms

i) Mergers remedies
ii) Intra-brand competition
iii) Price and non-price monopolization
iv) Nash equilibrium in game theory
v) /Predatory pricing
vi) Non-price monopolization practices
vii) Dominant strategy in game theory
viii) Backward and forward integration
ix) Price discrimination
Price anti-competitive (price monopolization) practices- mergers, collusion, market sharing
agreements, joint ventures, mergers and acquisition
Non-price practices (how do they lead to anti-competitive behaviours) - strategic investments,
exclusive deals, refusal to supply, market flooding, bundling, foreclosing rivals to inputs

2. Suppose you were working with your country’s Anti-trust Authority on the case of a
merger that is about to be formed. The AA’s management is concerned about the
prospective merger and wants to stop it. If you were a technical officer of the AA you
should be able to write for the management a proposal to deal with the merger in an
appropriate way.
i) What concern(s) do you think the management wants to address?
The first is the elimination of competition between the merging firms, which, depending on
their size, could be significant. The second is that the unification of the merging firms'
operations might create substantial market power and might enable the merged entity to raise
prices by reducing output unilaterally. The third problem is that, by increasing concentration
in the relevant market, the transaction might strengthen the ability of the market's remaining
participants to coordinate their pricing and output decisions.

The fear is not that the entities will engage in secret collaboration but that the reduction in the
number of industry members will enhance tacit coordination of behaviour.

Also, may convert a large firm into a dominant one with a decisive competitive advantage, or
otherwise make it difficult for other companies to enter the market. This type of merger also
may reduce the number of smaller firms and may increase the merged firm's political power,
thereby impairing the social and political goals of retaining independent decision-making
centres, guaranteeing small business opportunities, and preserving democratic processes.

ii) How would you assess the viability of the merger and whether it should be stopped
or otherwise be allowed?
Look at market share, if they are small companies merging, it is an advantage to competition.
Assess whether if the firms have a remedial proposal for them to merge, there are two types
of remedial measures, asses on the two (remedial measures)
The type of monopoly that is coming, is it coming from R&D and has invested in technology
or not.
Rescuing of a failed firm. Does the merger internalize all transactions between a
manufacturer and its supplier or dealer, thus converting a potentially adversarial relationship
into something more like a partnership? Second, internalization can give management more
effective ways to monitor and improve performance.

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3. Explain the structural factors that can facilitate collusion as one of anti-competitive
behaviours in the economy. Lecture 4, slide 4-12
 Concentration
 Entry
 Cross ownership and other links among competitors
 Regularity and frequency of the orders
 Buyer power
 Product homogeneity
 Symmetry
 Multi-market contacts
4. Suppose you computed prices correlation coefficients of three goods for a period of 6
years and the results were as presented in the table below.

Good 1 Good 2 Good 3

1 12 5 19
2 16 6 16
3 18 7 17

i) Which goods are substitutes to each other? Explain

-1<r<1 Good 1 and Good 2 are perfect substitutes because they have +ve correlation
coefficient therefore as the price of good 1 goes up that of good2 will go up.

ii) Assuming that production of these goods take place in a few firms and that there is
some difficulty for new entrants to engage in production, describe the possibilities
of a merger to be organized between any two of these goods.
Good 1 and good 2 are substitutes, hence, stand a possibility to merge because there is a
difficulty for new entrants to make a monopoly.
iii) If the economy has the Anti-trust Agency (AA), do you think it would be okay for
the AA to stop a merger from being created? Whether YES or NO, explain clearly
the reason(s) for your answer.
Yes, because these goods are in the same market, the unification may create a monopoly and
would reduce a consumer’s welfare.

5. Define productive and dynamic efficiencies, and explain how anti-competitive behaviour
leads to inefficient outcomes for both cases.
Productive efficiency is when a firm cannot possibly produce another unit of output without
increasing proportionately more the quantity of inputs needed to produce that unit of output.
To be productively efficient means the firm must be producing on its PPF it is impossible to
produce more of one good without producing less of another
Dynamic efficiency, refers to the extent to which a firm introduces new products or process of
production
6. Discuss the relevance of global value chains to Africa’s industrialization

GVC entails product design, production, marketing, distribution.

Africa should strive to enhance backwards integration

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7. To be specific about the relevant market of the commodity, a test that is widely used by
courts and Anti-trust Authorities is SSNIP (Small but Significant Non-transitory Increase
in Prices).
i) Explain the concept of the single market based on SSNIP.
SSNIP is used to measure if the two products are in the same market. For the commodities to
be in the same market they have to be substitutes. Example, if banana and kiwi are in the
same market, if the price of bananas increase and the price of kiwi will also increase because
they are in the same market and the two are substitutable. Then if two banana firms merge
they will not have complete market dominance because kiwi is also a product in the market
and it’s a substitute product and consumers can easily go for it.

ii) Describe the tools used to implement SSNIP test.

 Own price elasticity
 Price correlation tests
 Cross-price elasticities
 Price differences

8. The following diagram represents a monopolistic market structure.

i) Based on this market structure, explain the reasons the country’s Anti-trust
Authority might want to intervene the market.

Monopolistic market structure follows a monopoly behaviour hence it is characterized by

monopoly practices. At P, AR is greater than AC meaning this firm is making maximum
profits thus appropriated more welfare to producers at the expense of consumers welfare. In a
perfect competition firm MR=D however here this is not the case. this firm rationally
produces until point MR=MC yet it still charges very high price. Ideally prices would be
where MC=AC=D but here quantity produced is way below what consumers demand but still
at a price greater than MC resulting in dead weight loss which is just but a loss to economic
welfare.

Therefore, the AA might intervene due to this prohibitive pricing resulting in welfare loss for
both the consumers and the economy. In this a market, monopolistic firms will engage in rent
seeking activities (corruption) in order to keep or increase their monopoly power which
would further result in welfare loss.

ii) Discuss the reason(s) why some cases of this structure might not be intervened by
the Authority.
In case where Market power might act as an incentive for innovation there might be no
intervention as that also pushes other firms to innovate and invest more in R&D.

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 A firm which enjoys a monopoly after having successfully invested, innovated and
introduced new products or used better inputs will become more efficient thus help drive
prices down and enhance compitiveness.
Thus, if AAs tried to eliminate or reduce Market Power, this would eliminate firms’
incentives to innovate.

9. Explain the objectives and dilemmas of competition policy.

a) Objectives of competition policy
 Welfare (total surplus)
 Consumer welfare (consumer surplus)
 Defence of smaller firms
 Promoting market integration
 Economic freedom
 Fighting inflation
 Fairness and equity
b) Dilemmas of competition policy
 The issues and conflict between industrial policy and competition policy
 Common objectives
 Potential conflicts
 Public finds
 Dilemma of small countries.

10. Based on the first-degree price discrimination hypothesis, illustrate and explain why it
should not to be taken for granted that price discrimination hurts welfare.

First degree price discrimination means the producer will charge differently depending on the
consumers’ maximum willingness to pay. There is no welfare loss since there is possibility for
welfare gains but its only skewed and appropriated towards producers therefore hurting the
consumers. Welfare appropriation has to be fair and equal but in this case, consumers are
suffering.

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11. The pathways to economic and social upgrading are specific to each value chain, and so
due to the balance of power, Africa has a better opportunity in its RECs value chains than
in the global value chains. Discuss
Africa has a competitive advantage amongst African countries and therefore, it would
enhance trade among African countries through the RECs than trading with the rest of the
world. Within RECs its more advantageous since our CA lies in our ability to intra trade as
opposed to international markets where companies employ significant technology
12. Suppose in a duopoly market structure the two telecom companies, A and B are operating
competitively in a country. Company A wants to undertake “advertisement strategy” to
enhance its profit and it understands that by doing so, Company B is likely to react to its
action.
i) Do you think Company A will implement such a strategy? Explain
Yes, company A will implement such a strategy because that is its dominant strategy
regardless of the actions of the other company.
ii) Assume Company A believes that by advertising its profit will increase whereas
operating without advertisement profit will remain low; and also, that Company A
does not know in advance whether Company B would advertise as a reaction if A
advertises. Using the concept of the Prisoners’ Dilemma in the game theory,
illustrate the likely payoffs of companies A and B (in terms of HIGH profit versus
LOW profit) from the strategies that could be pursued by these companies,
respectively.

Company B
Company A. Advert No advert
Advert High, high High, low
No advert Low, high Low, low

iii) From (ii), explain the Nash equilibrium of advertisement decisions of the
companies A and B.
Nash equilibrium is high, high because both companies will benefit from the advertising.

13. Using the diagram below, clearly explain the welfare effect of price discrimination.

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 In perfect competiotion
Consumer surplus will include area represented by
Price =Pc
Consumer surplus = Po, Pc, S
Producer surplus will be zero since the firm is operating at its optimum efficiency and there
are too many firms in the market hence high competition and no producer surplus.

In a monopoly
Price = Pm
Consumer surplus = Pm, R, O
Producer surplus = Pm, R, T, PC
Dead weight loss is RTS

In Monopolistic under first degree

Price= Pc and O
Consumer surplus = No consumer surplus
Producer surplus= O, Pc, S
No consumer surplus because, firm knows the maximum price which each consumer is
willing to pay and is discriminating on that. The difference between willingness of the
consumer and market price is zero.

14. Distinguish monopolistic competition from oligopoly.

Monopolistic Competition
 Many buyers and sellers
 Sellers offer differentiated products
 Sellers can easily enter and exit
 Individual sellers decide what price to charge
Oligopoly
 Few large firms
 Differentiated and homogeneous products

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  Barriers to entry
 Actions of one have impact on another

15. There has been some view that “Africa’s transformation opportunity is in the regional
value chain”. Discuss
Answered above! Question 11

16. Why African governments that enthusiastically sign trade liberalization agreements at one
point, so dramatically fail to implement subsequent liberalization provisions; an important
step towards mutually desirable free trade gains? Explain sing the Prisoners’ dilemma
context of the game theory.
It is more of agreements and how countries will find an advantage in deviating. If they all
don’t deviate they will come at a point of Nash equilibrium, but suppose one of the countries
deviate, it will probably gain more than the others. Countries act like in the game theories
where players act in their own interests and forget about the regional agreements. They are not
putting strong emphasis on the regional interests but rather in their own countries’ interest.

17. Suppose you are provided with the following profit per unit outcomes from the strategic
price competition between two firms; A-Z Co. ltd. and Highlands Investment ltd. The
gains depend on the set price (either high or low as perceived).

A-Z Co. Ltd.

Highland High price Low price
Investment Ltd. High price $60, $60 $80, $10
Low price $10, $80 $40, $40

i) What are the price setting strategies of the game?

High price and low price.
ii) Write the dominant strategy for each of them, respectively.
The dominant strategy for highland investment ltd is high price $80 and for A-Z ltd is high
price $80.

iii) What is the Nash equilibrium of the price competition game?

The Nash equilibrium is high-high, because the objective is to maximize profit, $60-$60.
iv) What is the payoff to the player A-Z Co. Ltd. at the Nash equilibrium and how does it
differ from its payoff from its dominant strategy?
Payoff is at the Nash equilibrium is $60 and that of dominant strategy is $80. Payoff in the
dominant strategy is higher than in Nash equilibrium, and the difference is $20.

18. Suppose you computed cross price elasticity of demand between apple and banana, and
the result was 2.
i) What does this result mean?
A 1% increase in the price of apple would demand a 2% increase in the quantity demand of
banana.
ii) Is there possibility that these two products are selling in the same market?
Yes, because they are substitutable.
iii) Do you think the two products could be substitutes of complements? Explain
The products are substitutes.

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 iv) If you were an Anti-trust Authority’s expert, and there was a proposal for the two
respective firms selling these products to merger, would you consider the mergers
effect on welfare? Explain
Yes, an AA will not allow the two firms to merge, if they merge, they gain market power and
the price of one product rises there will be no opportunity for consumers to substitute to the
other product, thus affecting the consumer welfare.