EC3023
All Candidates
January Examinations 2016
DO NOT OPEN THE QUESTION PAPER UNTIL INSTRUCTED TO DO SO BY
THE CHIEF INVIGILATOR
Department
Economics
Module Code
EC3023
Module Title
Industrial Economics
Exam Duration (in words)
One and One Half Hours (1 ½ Hours)
CHECK YOU HAVE THE CORRECT QUESTION PAPER
Number of Pages
3
Number of Questions
4
Answer TWO questions from the following four. Each question
carries the same weight to the final mark.
Instructions to Candidates
FOR THIS EXAM YOU ARE ALLOWED TO USE THE FOLLOWING:
Calculators
Permitted calculators are the Casio FX83 and FX85 models
Books/Statutes provided by No
the University
Are students permitted to
bring their own
Books/Statutes/Notes?
Additional Stationery
Version 1
No
No
Page 1 of 3
EC3023
All Candidates
1. Consider a homogeneous product market with inverse demand function p = 62 – 2Q. In all alternative
specifications of the supply side of the market considered below, any firm faces the total cost function
C = 2q, where q denotes the firm’s production.
a) Suppose that the market is served by a monopolist who can only charge uniform liner prices
according to the standard monopoly model. Find the monopoly equilibrium (price, quantity, profit,
consumer surplus and total surplus).
[20%]
b) Assume now that the market is served by two identical firms which compete in prices according to
the Bertrand model. Find the Bertrand-Nash equilibrium (prices, quantities, profits, consumer surplus
and total surplus).
.
[20%]
c) Suppose now that the two firms compete in quantities according to the Cournot model. Find the
Cournot-Nash equilibrium (quantities, price, profits, consumer surplus and total surplus).
[30%]
d) Compare Monopoly, Bertrand and Cournot equilibria in terms of market power, industry profits,
consumer surplus and total surplus. Comment on your results focusing on: i) the relationship between
industry concentration and firms’ market power; ii) the effect of different modes of competition on
consumers’ surplus, industry profit, and social welfare.
[30%]
2. Three firms in an industry are engaged in Bertrand competition. The industry inverse demand
function is p = 18 - 2Q, and the marginal cost is MC = 6 for all firms.
a) Find the Bertrand-Nash equilibrium.
[20%]
b) Assume now that the three firms simultaneously set prices an infinite number of time periods, and
focus on the monopoly price with equal sharing of the monopoly profit as a possible collusive outcome.
Find the collusive outcome and explain how the three firms could achieve it by playing trigger
strategies.
[30%]
c) Suppose that the discount factor of the three firms is δ = 0.55. Can collusion arise in equilibrium if
they play trigger strategies? Comment on your answer.
[20%]
d) Discuss how the following factors affect the stability of tacit collusion: frequency of firms’
interaction, transparency of price cuts, expected future entry of more efficient competitors.
[30%]
PLEASE TURN OVER…….
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Page 2 of 3
EC3023
All Candidates
3. Consider a market with two different groups of consumers on the demand side and a monopolist on
the supply side. The demand function of the first (high-demand) and the second (low-demand) groups
are given respectively by:
q1  40  p1
q 2  20  p 2 ,
where p1 is the linear price the monopolist charges to group 1; p2 the linear price the monopolist charges
to group 1; q1 and q2 are the corresponding quantities demanded by the two groups.
The monopolist faces a linear cost function with no fixed costs and constant marginal cost c = 2.
a) Assume that the monopolist cannot engage in any form of price discrimination, so that it is
constrained to charge the same linear price (p) to the two groups. Find the optimal price charged by the
monopolist, and the corresponding: quantities ( q1 and q2 ) sold to the two groups; consumer surpluses
( cs1 and cs2 ) gained by the two groups; profits (  1 and  2 ) the monopolist makes out of the two
groups; the aggregate industry profit (  ), consumer surplus (CS ) and total surplus (TS).
[30%]
b) Suppose now that the monopolist can engage in 3rd degree price discrimination which will allow it to
perfectly separate the two groups in independent segments of the market. Find the optimal prices ( p1
and p2 ) the monopolist charges in the two segments of the market, and the corresponding segment
quantities ( q1 and q2 ), consumer surpluses ( cs1 and cs2 ), and profits (  1 and  2 ). Find also the
aggregate industry profit (  ), consumer surplus (CS) and total surplus (TS).
[40%]
c) Compare and discuss the results you have obtained at points a) and b), providing a clear economic
interpretation of the monopolist’s optimal pricing strategy under price discrimination, and of its effects
on profits (in each market segment and in the aggregate market), consumer surplus (of each consumer
group and in aggregate), and total surplus.
[30%]
4. Discuss each of the following statements (when appropriate, use a formal model and/or graphical
analysis), and provide the economic intuition of each of them.
a) Product differentiation softens product market competition and increases firms’ market power and
profits.
[50%]
b) Limiting productive capacities can be an effective strategy for firms that compete in prices to avoid
[50%]
profit erosion and maintain positive market power.
END OF PAPER
Version 1
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