BUSINESS AND INDUSTRIAL ECONOMICS

A.Y. 2021/2022
BIE classroom exam – February 03rd, 2023

NAME _____________________________________ SURNAME ____________________________________

STUDENT ID_(matricula)___________________________________________________________________

MULTIPLE-CHOICE QUESTIONS [10 points]

You do not need to provide explanations for your answers. However, if you want to add a note to a response
(e.g., an assumption, a clarification, an illustration), please write it in the paper sheets you will upload as a
.pdf file.

1. Which of the following statements on the theory of public goods is FALSE?

a. Once a public good is produced, any additional consumer must pay an extra cost to use it
b. Public goods are generally under-supplied by firms because their provision generates positive
externalities that benefit everybody else
c. A firm or an individual who releases open-source software without requiring any payment is releasing
a public good
d. Examples of public goods encompass the national healthcare system and street lightening

2. Which of the following statements on vertical integration is FALSE?

a. The likelihood of vertical integration decreases in the presence of high market uncertainty
b. The likelihood of vertical integration increases as the scale of production increases
c. The likelihood of vertical integration decreases as asset specificity decreases
d. Technical efficiency is high when market specialists benefit from high economies of scale

3. Which of the following statements on firms’ market power is FALSE?

a. A higher market power translates into a higher firm’s profit to reward shareholders and make
additional investments
b. Firms’ market power depends on the intensity of competition and market structure
c. Innovation plays an instrumental role in acquiring and maintaining market power
d. The role of public policy revolves around setting the conditions to concentrate market power among
a few firms because this increases social welfare

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4. Which of the following statements on competition is FALSE?
a. Incumbents can temporarily deter new firms’ entry into an industry because of the ownership of a
patent, which is essential for developing the product. Incumbents use this strategic entry barrier to set
prices higher than their marginal costs
b. If firms undertake a predatory pricing strategy, they set the price below their marginal costs in the
short run to deter the entry of new firms and earn extra profits in the long run
c. Two firms in the market produce homogenous goods using the same technology. If the firms compete
à la Cournot, they choose the quantities they produce. The choice of each firm is simultaneous and
independent. In equilibrium, firms’ profits are usually higher than profits in a Bertrand competition
d. Compared to perfect competition, a strategic interdependence among firms exists in oligopolistic
competition

5. Which of the following statements on the firm’s boundaries is FALSE?

a. There is evidence that, on average, related diversification produces superior performance
compared to unrelated diversification
b. Franchising contracts are alternative organizational structures between vertical integration
and market transactions
c. Wall’s company produces both ice cream and meat products. The firm’s integration in these
two markets with different seasonal peaks allows it to smooth out seasonal fluctuations
d. According to the Vernon model, internationalization is more likely in the mature phase of a
product life cycle than in the introduction phase because, in the mature phase, new firms
imitate the innovative products

6. A merger between firms that are active in the same “relevant market” can significantly impede effective
competition because of “unilateral effects” when
a. The merged entity enjoys larger economies of scale than its rivals and can drive its competitors out of
the market by charging lower prices
b. The merged entity combines different products/services that are very weak demand-substitutes
c. The merged entity has the incentive to increase prices above the pre-merger level because of the loss
of anticompetitive constraints
d. None of the other statements is correct

7. Which of the following statements on platform businesses is FALSE?

a. The “winner-takes-it- most/all” phenomenon makes platform industries modern monopolies
b. The “winner-takes-it- most/all” phenomenon does not occur if firms differentiate their
products/services so that they can survive and prosper in market niches
c. All the else being equal, a potential user likely prefers platform A to platform B if A allows multi-
homing, while B does not
d. Platform-based firms tend to solve the “chicken-egg problem” by subsidizing the group of users who
is less price-sensitive

8. Which of the following statements on industries and markets is TRUE?

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 a. A five-firm concentration ratio assesses firms' sizes based on the number of employees. Since five
firms operate in the industry, the discount factor for future profits that makes firms indifferent to
collude or not amounts to 0.8
b. The firms in an industry with a high concentration ratio always operate in a highly competitive
environment
c. Economic profits in a contestable market do not attract new entrants
d. None of the other statements is correct

9. Which of the following statements is TRUE? In a highly competitive market, potential entrants enter the
industry when incumbents gain economic profit. This happens when the price is
a. Lower than the minimum average cost in the short run. In this case, new entrants can scale up the
market quickly and attract customers
b. Lower than marginal costs in the short run. In this case, new entrants can scale up the market quickly
and attract customers
c. Higher than the minimum average cost in the long run. However, the entry of new firms causes an
increase in the price in the industry and the exit of firms which make losses
d. None of the other statements is correct

10. Firms 1-6 are active in industries A-F. The table reports firms’ shares of sales in each industry (a blank cell
means that a firm does not operate in an industry; e.g., firm 1 does not operate in industry F). Industries A,
B, and C are related industries; the same holds for industries D, E, and F. Which of the following statements
is TRUE?

Firm Industry A Industry B Industry C Industry D Industry E Industry F

1 0.2 0.2 0.2 0.2 0.2
2 0.6 0.4
3 0.5 0.25 0.25
4 0.1 0.1 0.1 0.1 0.1 0.5
5 0.3 0.25 0.2 0.25
6 0.2 0.1 0.15 0.2 0.1 0.25

a. Basing on the Herfindahl index, the industries D and F are more concentrated than industries A and C
b. Basing on the Herfindahl index, the industries C and D are less concentrated than industries A and F
c. Basing on the Gort index (D2), firms 2 and 4 are more diversified than firms 1 and 5
d. Based on the Specialization index, firm 2 is the most diversified firm

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 STRUCTURED QUESTION
MINI-CASE [5.5 points]
Please, read the section reported below from the article “Nostrums for rostrums: Online platforms,” which appeared in
The Economist on May 28th, 2016.

The growing power of online platforms is worrisome. But regulators should tread carefully.
Platforms benefit from the power of networks: the more potential matches there are on one side of a platform, the
greater the number that flock to the other side. The consequence may be a monopoly. That is normally a red flag
for regulators, who are scrambling to keep pace with the rise of platforms.
The nature of platforms means established rules of regulation often do not apply. Think different. In a conventional,
"one-sided" market, prices are related to the cost of supplying goods and services. If a business can charge a big
mark-up over its marginal cost of production, a wise regulator would strive to ensure there are enough firms vying
for business or, where that is not possible, to set prices in line with the monopolist's costs.
Such precepts are of little use in regulating platforms. Their prices are set with an eye to the widest participation.
Often consumers pay nothing for platform services-or are even charged a negative price (think of the rewards
systems run by some payment cards). Pushing down prices on one side of the platform may cause charges on the
other side to rise, a bit like a waterbed. That in turn may drive some consumers away from the platform, leaving
everyone worse off. Such uncertainties mean that regulators must not act precipitously.
Tech giants like to claim there is no need for special regulation. The winner-takes-all aspect of networks may
mean there is less competition inside the market, but there is still fierce rivalry for the market, because countless
startups are vying to be the next Google or Facebook. Unfortunately, incumbents may be able to subvert this
rivalry. One of their strategies is to use mergers. "Shoot-out" acquisitions is the name given to purchases of
startups with the aim of eliminating a potential rival. Many claim that Facebook's acquisition of WhatsApp was
in this category. A recent parliamentary report in Britain noted that Google had made 187 purchases of other tech
firms. Regulators tend to ignore mergers of businesses in unrelated markets and big firms hoovering up small fry.
Buyers of firms with an EU-wide turnover of less than EUR 100m do not have to notify the European Commission.

I. Provide a real-world example of platform business, and explain your reasonings [1 point]
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II. Provide an example of same-side network externalities, and explain your reasonings [0.5 points]
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III. Provide an example of cross-side network externalities, and explain your reasonings [0.5 points]
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IV. Name three possible pricing strategies that may solve the chicken-egg problem and provide a brief explanation
[1 point]

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 1)________________________________________________________________________________________
2)________________________________________________________________________________________
3)________________________________________________________________________________________

V. Name 3 possible non-pricing strategies that may solve the chicken-egg problem and provide a brief explanation
[1 point]
1)________________________________________________________________________________________
2)________________________________________________________________________________________
3)________________________________________________________________________________________

VI. Briefly explain the sentence from the text “The winner-takes-all aspect of networks may mean there is less
competition inside the market, but there is still fierce rivalry for the market, because countless startups are
vying to be the next Google or Facebook.” [1.5 points]
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EXERCISE [4.5 points]

EXERCISE 1
Consider a duopoly situation with two firms (1 and 2) facing the demand curve P = 35 - Q, where Q = q1 + q2.
Both firms have the following cost function Ci(qi) = 5qi, i=1,2
a. Suppose that products are homogeneous and that the two firms (1 and 2) set their quantity level
simultaneously. Find the resulting Nash equilibrium (quantities, prices, profits). [1.5 points]
b. Suppose that products are homogeneous and that firm 1 sets its quantity before firm 2. Find the resulting
Nash equilibrium (quantities, prices, profits). [1.5 points]
c. Suppose that the two firms collude. Find the resulting Nash equilibrium (quantities, prices, profits). [0.5
points]

EXERCISE 2
Assume a market for car tires where tires are homogeneous. Two firms (1 and 2) have a combined demand of
Q=100-0.4P. Their marginal and average costs amount to $100. Initially, the market price is $100. Firm 1 and 2
have decided to merge. They can lower their production costs from $100 to $85 because of economies of scale in
combined operations, and now the monopolist charges a price of $120. Use the above demand curve to evaluate
the merger.
a. Calculate the consumer surplus, producer surplus, and social (total) surplus pre-merger and post-merger.
Should the merger be approved? Why? [1 point]

Do you want your submitted exam to be corrected?

a. Yes, I want
b. No, I withdraw

SOLUTIONS
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