Economic Analysis I
Revision Session 1

1. “If firms are competing in quantities, then it pays to be the first to the market. If firms are competing in price, it is worthwhile to wait for your opponent to make his move. ’ Explain
2. In an attempt to increase tax revenues, legislators in several states have introduced legislation that would increase state excise taxes. Examine the impact of such an increase on the equilibrium prices paid and quantities consumed by consumers in a market characterised by (1) Sweezy oligopoly, (b) Cournot oligopoly, and (c) Bertrand oligopoly, and determine which of these market settings is likely to generate the greatest increase in tax revenues. Your answer should include relevant graphs.
3. Explain under what condition price war can be an effective business strategy.
4. According to Bertrand's theory, price competition drives firms' profits down to zero even if there are only two competitors in the market. Why don't we observe this in practice very often?
5. E-commerce represents  an  increasing  fraction  of economic  transactions  in  many different industries. Does e-commerce create a Bertrand trap? What is special about e-commerce (and, more generally, the new economy) that makes the Bertrand trap a dangerous trap? How can e-commerce firms avoid the trap?
6. The refinery market in the U.S. is highly profitable and operates close to its full capacity. Observers fear that in the time of shocks such as Hurricane Katrina, which forced the closure of a number of refineries, the U.S. refinery market will not be able to meet the demand of the customers. Despite this, there has not been much investment to expand capacity over the last two decades or so. Moreover, the industry has gone through a wave of mergers that has reduced the number of producers. Use insights from the oligopoly theory to explain why there has been little investment to extend capacity. Make sure you explain the underlying theory in detail.
7. Why is a pharmaceutical company more likely to spend $1 billion to research a new drug: when it knows it will be able to charge different prices in different countries or when it knows that it will be required to charge the same price in different countries? Why? Use relevant theoretical concepts to support the analysis.
8. With peak load pricing, consumers can choose to adjust their consumption or to leave it unchanged. How do you think the price elasticity of demand of those who adjust their behaviour differs from those who do not?
9. As a manager of a chain of movie theatres that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that has revealed two different demand curves at your movie theatres. On weekends, the inverse demand function is P = 15 – 0.001 Q; on weekdays, it is P = 10 – 0.001Q. You acquire legal rights from movie producers to show their films at a fixed cost of £20,000 per movie, plus a £2 “royalty” for each movie-goer entering your theatres. Devise a pricing strategy to maximize your firm’s profits.
10. Apple’s iTunes music service sells music by the song. Other services, such as Spotify and Pandora, sell subscriptions to a library of music. Using the concepts covered in course, which type of service do you think is most likely to succeed in the marketplace and why?
11. John Lewis frequently announces that the company sets very competitive prices for all its department stores: “Each John Lewis shop checks the prices of likely rivals in the local area. If a competitor within the area sells the same product that is part of our standard offer at a low price, John Lewis will reduce the price to match the rival's price. We are never undersold.” How will agame theorist interpret John Lewis'pricing strategy? Use a numerical example to illustrate your analysis.
12. Major companies such as Coke and Pepsi are known to pursue simultaneously two business strategies. They engage in brand proliferation, i.e., market a high number of similar drinks. And they spend a high percentage of their sale on advertising. Use the concept of product space, basic insights from the Hotelling model and your understanding of the impact of a high advertising ratio to explain how the strategies affect the market for soft drink.