Federal antitrust agencies would be concerned to see a Herfindahl increase of the magnitude you computed in (a), and might challenge the merger. Pepsi could respond by offering a different market definition. What market definitions might they propose? Why would this change the Herfindahl?

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The following are the approximate market shares of different brands of soft drinks during the 1980s:

Coke-40%

Pepsi-30%

7-Up-10%

Dr. Pepper-10%

All other brands-10%

a. Compute the Herfindahl for the soft drink market. Suppose Pepsi acquired 7-Up. Compute the post-merger Herfindahl. What assumptions did you make?

b. Federal antitrust agencies would be concerned to see a Herfindahl increase of the magnitude you computed in (a), and might challenge the merger. Pepsi could respond by offering a different market definition. What market definitions might they propose? Why would this change the Herfindahl?

 
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so that the entrant engages in predatory practices? If so then what are the practical differences between incumbents and entrants?

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In most models of entry deterrence, the incumbent engages in predatory practices that harm a potential entrant. Can these models be reversed, so that the entrant engages in predatory practices? If so then what are the practical differences between incumbents and entrants?

 
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What price for heart surgery must the hospital charge to insure that its competitor cannot profitably compete in the cataract market?

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Suppose that a hospital monopolizes the local market for heart surgery, charging $10,000 per procedure. The hospital does 1000 heart surgeries annually and the cost of heart surgery is $5000 per procedure. The hospital is a duopolistic in the market for cataract surgery. The hospital and its competitor both perform 2000 cataract procedures annually, charge $2000 per procedure and have costs of $1000 per procedure. The hospital plans to go to insurers and offer a bundled price. It will discount the price of heart surgery below $10,000 and hold the price of cataracts at $2000, provided that it is given exclusivity in the cataract market. What price for heart surgery must the hospital charge to insure that its competitor cannot profitably compete in the cataract market? (Assume that the hospital would match its rival’s price in the cataract market if the rival were to respond to this bundling arrangement by cutting its cataract price).

 
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Recall the discussion of monopolistic competition in Chapter 8.

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Recall the discussion of monopolistic competition in Chapter 8. Suppose that an entrepreneur considered opening a video store along Straight Street in Linesville. Where should the entrepreneur position the store? Does your answer depend on whether additional entry is expected?

 
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Suppose that an entrant introduces a product that is identical to product A.

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Consider a firm selling two products, A and B, that substitute for each other. Suppose that an entrant introduces a product that is identical to product A. What factors do you think will affect (1) whether a price war is initiated and (2) who wins the price war?

 
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Dunne, Roberts, and Samuelson examined manufacturing industries in the 1960s to 1980s. Do you think that entry and exit rates have changed in the past two decades?

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Dunne, Roberts, and Samuelson examined manufacturing industries in the 1960s to 1980s. Do you think that entry and exit rates have changed in the past two decades? Do you think that entry and exit rates are systematically different for service and retail industries?

 
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Assuming that each choice results in the same production costs once installed, under which choice is the incumbent likely to encounter a greater likelihood of entry and why?

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An incumbent is considering expanding its capacity. It can do so in one of two ways. It can purchase fungible, general purpose equipment and machinery that can be resold at close to its original value. Or it can invest in highly specialized machinery that, once it is put in place, has virtually no salvage value. Assuming that each choice results in the same production costs once installed, under which choice is the incumbent likely to encounter a greater likelihood of entry and why?

 
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That the (tit-for-tat) strategy is fraught with risk cannot be overemphasized.

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An article on price wars by two McKinsey consultants makes the following argument.

That the (tit-for-tat) strategy is fraught with risk cannot be overemphasized. Your competitor may take an inordinately long time to realize that its actions can do it nothing but harm; rivalry across the entire industry may escalate precipitously; and as the “tit-for-tat” game plays itself out, all of a price war’s detrimental effects on customers will make themselves felt.

How would you reconcile the views expressed in this quote with the advantages of tit-for-tat claimed in this chapter?

 
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Compose an e-mail to send to your friend explaining personal financial management techniques he can employ.

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A friend tells you that he has a job that pays US $1,500 per month (after tax); however, he is spending US $1,900 per month and taking on more credit card debt to meet his monthly bills. In conversation he says, “I love to fix up my car, and I love purchasing new clothes. I need money for the things I want to do.” He ends the conversation by saying, “My father always says that I need a budget, but I tell him that I am doing just fine without one.”

Compose an e-mail to send to your friend explaining personal financial management techniques he can employ.

 
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How can you distinguish tit-for-tat pricing designed to sustain “collusive” pricing from competitive pricing?

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Suppose that you were trying to determine whether the leading firms in the automobile manufacturing industry are playing a tit-for-tat pricing game. What real world data would you want to examine? What would you consider to be evidence of tit-for-tat pricing? How can you distinguish tit-for-tat pricing designed to sustain “collusive” pricing from competitive pricing?

 
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