Section A
Answer ALL questions in this section.
In this section you are being assessed more on the logic underlying the exercise,
rather than on simply the numerical values of the answers themselves. Hence,
please ensure that when answering questions in this section you do the following: (a)
show all workings, (b) clearly signpost each step and (c) describe how you obtain
quantity, price, profits etc. from the steps you use.
Please answer questions in this section by handwriting and insert a picture of your
handwritten answer with your answers for the remaining sections.
Question 1
A monopoly manufacturer produces a product at a marginal and average cost of 4.
The product is then sold on to a monopoly retailer who sells on to final consumers.
The retailer faces a demand function given by q=24-p, where is the retail price.
Assume the manufacturer charges the retailer just a price per unit and the retailer
faces no additional costs.
a) What price will the manufacturer charge to the retailer?
(6 marks)
b) What price will the retailer charge to consumers?
(1 marks)
c) How much profit does the retailer make?
(1 marks)
d) How much profit does the manufacturer make?
(1 marks)
e) Suppose now the manufacturer and the retailer merge. What price will the
merged firm charge to consumers? What is the profit of the merged firm?
(4 marks)
f) Is the merger profitable? Briefly explain your answer.
(4 marks)
g) How does the merger affect consumer surplus?
(3 marks)
Section B
Answer ALL questions in this section.
In this section you are being assessed on the understanding of relevant economic
theory and explanation of the intuition. For each of the following statements, decide
whether they are TRUE or FALSE and provide clear and concise explanations for
your answers. [Maximum 150 words for each statement]
Question 2
a) A monopolist selling electric cars in Birmingham finds it unprofitable to raise
price by 10% above the current level. Thus, the relevant market is electric cars
in Birmingham.
(4 marks)
b) Horizontal mergers between firms producing close substitutes are more likely
to harm economic welfare.
(4 marks)
c) Resale price maintenance (RPM) is a hard-core restriction in competition
policy because it has no efficiency justification.
(4 marks)
d) Coordinated effects are less likely when there are efficiency gains from the
merger.
(4 marks)
e) If all firms in an industry make positive profits, the industry is better described
by Cournot competition, as firms would earn zero profit under Bertrand
competition.
(4 marks)
Section C
Answer BOTH questions in this section. [Maximum 1000 words for each
question
Question 3
In December 2020, following an investigation by the Competition and
Markets Authority (CMA), 2 UK-based companies who supply groundworks
products to some of the nation’s largest construction firms, have been fined £15m
for colluding illegally to reduce competition and maintain or increase prices for
over 2 years. This involved sharing confidential information on future pricing and
commercial strategy and monitoring each other’s prices.
a) Use economic theory to explain how firms can sustain collusion in the
market when they interact repeatedly.
(12 marks)
b) When does economic theory suggest that collusion is more likely to be
successful?
(12 marks)
c) How does information sharing and monitoring help sustain the collusion in the
above case?
(6 marks)
Question 4
Back in 2011, the world’s largest provider of chipsets for devices (e.g.
smartphones, tablets) running on 4G network signed an agreement with one of the
leading device manufacturers, committing to make significant payments to this
manufacturer on condition that the manufacturer would exclusively use its
chipsets. This was found to be violating competition law.
a) Use economic theory to explain why such an agreement violates competition
law and can hinder competition in the market.
(18 marks)
b) If you are working for the chipsets provider, how can you use economic theory
to defend your company?
(12 marks)
END OF PAPER