Short Answer Problems 1.1 Intel responded to publicity over a flew in an early version of its Pentium chip by announcing that the problem was unlikely to affect most users, that Intel would not distinguish chips with and without the flaw in its future sales, and that it would not exchange chips with the flaw unless a customer could demonstrate that the flaw "significantly" affects his or her work cutcomes. What might models of asymmetric information on product quality imply about the effects of this response on the overall demand or speed of diffusion of Intel's next generation chip? Be specific but brief! 1.2 In some industries, manufacturers operate their own distribution networks, marketing their products directly to retail outlets. In others, manufacturers use independently-owned wholesalers or manufacturing representatives to market their products. What factors are likely to influence the choice of distribution method for a particular product? 1.3 "Patents generate monopolies, and monopolies generate dead-weight loss. Society would be better served by eliminatirg patent protection for innovations." True, False, or Uncertain? Briefly explain your answer. 1.4 When Peter Pan replaced American Coach Lines on the New York - Washington, D.C. bus route in June 1992, it offered an introductory fare of $9.95 "to gain publicity and [build] customer loyalty." Greyhound, the remaining incumbent, responded by lowering ite fare to $7 and then to $5. Peter Pan matched each reduction. The $5 fares for both firms were pre-announsed to be valid until mid-August. Operating costs (labor and fuel) per bus-trip are estimated at $475; a bus can carry about 50 Passengers. What arguments would you make to support or refute a charge of predatory pricing against Greyhound? Essay: 1. The Department of Justice has hired you to evaluate the market for rental cars. A survey of customers of the top 5 car rental firms (which account for approximately 85 percent of all rentals) at 20 large airports reveals substantial variation in the rental rates charged to different customers of the same firm. Rates vary considerably across a large number of dimensions: across different airports, across. days of the week (with week-end rentals substantially lower than daily rental Monday - Thursday), over rental periods (one-day v. week-end v. weekly v. monthly), and across car models. In addition, there appear to be a large number of promotional rates used by different customers (AAA discounts, corporate discounts, advertised specials, advance reservation rates, etc.), so that rentals that appear to have identical characteristics (day of eek, location, length of rental, model of car) often entail different prices a) What are possible explanations for non-uniform pricing in a market?a) Mas eeu 8,2 Hen 196! HE34 41 eanelTeR abs05, biowoHoUe 316 shGSL o See Glee on WG wD: O: N MeB Kin WoUaeA < |Dnlecsh ee MORK epeuia pee HA sone gtd tines: ow ee cuaifeg 1 autesu she ag 4 38 eure; 1 56 SAL Ue Spt n sateen Ege CO Eee: UBWIAL Glohysehaes Pe FP SMe ro? the et eye » cute Gere (abn 719 yet) OA prot = = 9 3 Re CBU Cah Spay 2 ie POLE hla Me "0 Sige Obs 18 Osa We ie ma peu 2 UEC ie oe ug font] cnepetet wheen et Ere One Wu 4ue 1 ME AS KOK 2 BN as GREG BUOPSPRIOE O% GK DOs anes 1 WIE, Cie APL Re SBELEFE Cor tastier PNG dst, IAAL (8 GOA Bd ge mse fu Kop. .9 apse + un 2B ULE ae op BA aE-2Irb) Assess the plausibility of each explanation in (a) for the pattern of pricing observed in the rental car market. Include in your assessment any pre- conditions that attach to each explanation and whether they are likely to be satisfied in this market. If you reed additional information, describe what that information is and how it would affect your conclusion. Be specific but brief! Numeric problems: See the odd problems at the end of the Church and Ware chapters assigned on the reading list. Answers in the back of the text.14.20 -Tndustrial Org. & Public $0 \eey See Yous Exel Exow Tul 19, 20%2, Shact answer Rroolems® M1) Hodels of asyrmerrc information gupsest that Rentiums resgonse could lower the gerevived quality o6/Pentium chigs since the consumer may be unable +o detect the Maus from cursory eran ination IS Y Lower quality would chift tre demand carve inward might alco slow if in a Store. Speed of Ai Cust, customers await early “sets of next-gen chips te properly Fach the viability of the chie LL) mie voile down fe yectical integration he decision te inteyrate depends 6x beth the balance of costs which inclacte t yeort savings by cedacing intes Siem transaction costs > cost Amepeares due to Managers Ao lopger being resiclea! claimants HE the upstream Gem is an mena apyaoly ac fe the dowastecan, rem, vertical infegrad en can have e@iaiency grins by charging the vfeckive monopoly erice only once (reducing but created at mu lhip \F downstream Fiems are strategic complements Ahem Soft, then vertical disintegration Cnet could be binelcesal de le layers) and investment maker ioeehtitag retarl/wholesale) oligepelistic/monopoliistic marufacturers 13) Uncertain, Patents ao alloy foe monopoly rents, but they aleo Encourage innovation, Pa¥entable Aechnologces are oCten eure Peblic grods which mada that competin, to rms have an incentive nol tnvect without eafeat Frofechon. “the veneltt fo society ip hefher Ihe cock of monopoly cents + regulatory /iitigation eorts ic lets than the egportunity cost of lost imovation, ~ Average cost for a pascenger (ger burl ig $1.50, however margins) cost could be nearly gerd. routes /fleete are un a GS fare is till ‘pro® Rtieing wun fikely, as ¢ fF bus deivers are unionized aval feqbble m the short-term then even wratimizing. TAs makes eredatery )me promotional length was chert-term C~2% months) which casts doubt thal Grayhound could eltminate buses /routes /olcivers, DA new competitor undecchargin would directly cob Greyhound of customers, and THs eM ces were still above ghavtterm marginal costLong Answer Question The vacied pricing scheme used by cental car compantes is Rely selective of ried disctimmnation te capture greater consumer Surplus, Nonlinear erveing 5 a tool available to oligogolishs comestite(s (Cas is evicenced BY the Bos concentrati'sy of the top S vente Licms), this aled ‘explains the cli€erence in rice Sor the same product, since ai@eront customers have diferent cececvation erices for -the sume eroctuct Corporate discounts could be seen as a Corm of Awo-tiered ectcing with companies Paying Tah soles as well as ‘dividual cates per use. Another gocrible eyplanation is simply that demand varies heavily based on location, day of the week, etc. KF more people gceler 0 Fent om weekdays tran weekende, this would create a atferent privet, even iF firme Could not charge above marginal more limited, thic exelcta d no market power (ancl thereGe Zest) because cupely weulel b« aon deer not, however, account Be the variation wn erice to diferent customers Br the same product. Another explanation could he thet cen tal agencies have ali ®ecemtintes groducte (as in preference for ~the Same car, day, place, ote. is tot ihalPece nt fo di€erent rental agencies pacause of brand, service, efe.) This could res lt in rental ences extoacting revs from castomecs Who eseSer fo cenk Grom them, This requires more whormation about Yre degr2e of geccieved Akecence wy rental agencies. conclucion, the most likely exelanation if demanel variations products themselves and nonlinear price diserimination of Cadtomers. The former ic concistend with (ow erase clacticities of demand in location, model, ray of-theweek and the laffer i= consicteny with a warket stracture rmplythg marke! power ancl -the abihly do sell above mary tnat cost ©