Section 2. Oligopoly (16 points) I. Will an oligopoly firm initiate a price cut

Question

Section 2. Oligopoly (16 points) I. Will an oligopoly firm initiate a price cut if there is 95% chance that its rivals will match it resulling in potential loss olS75,000 and polential gain olS1.2 million il they don'l malch? What if there is only 80% chance of the rivals matching? Should this firm's competitive strategy in real life be based on price when operating in this type of market structure? If the answer is ncgative, then on whal basis should this lirm compelc? (8 points) 2. Based on the smart phone market share information given in Ihe lable below, will thUS Justice Department approve the merger between I.G and IITC given that its antitrust policy prohibits mergers between lirms, which make Herfindahl-Hirshman Index higher than 2100? What about the merger between Huawei and Nokia? Lay out the calculations within the table below and supplement them with appropriate explanations. (8 points) ProducingShare LG and HTC Merger Value awei and Nokia Merger Firms | (%) | (2500) 30 24 16 15 Samsun Apple Huawei LG Yota HTC Motorola Nokia Others Total: 100 | HHI = HHI =

Explanation / Answer

HHI (Herfindahl-Hirschman Index), sum of squared market shares of all the firms, takes the following form with no mergers:

= 30^2+24^2+16^2+15^2+5^2+4^2+3^2+2^2+1^2 = 2012

After the merger of LG and HTC, HHI becomes

= 30^2+24^2+16^2+19^2+5^2+3^2+2^2+1^2 = 2132

Since HHI is now higher than 2100, merger is prohibited.

For a merger between Huawei and Nokia, HHI becomes

= =30^2+24^2+18^2+15^2+5^2+4^2+3^2+1

= 2076

HHI is under 2100 and so this merger is allowed.

This discontinuity occurs because of the price rigidity that occurs in Sweezy model of kinked demand. Because demand functions has a kink at the point of production, the respective marginal revenue curves show a discontinuity.

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