July 7th, 2017

BUSINESS AND INDUSTRIAL ECONOMICS

[Paola Garrone, Gresa Latifi, Boris Mrkajic]

Academic Year 2016/2017

NAME AND SURNAME __________________________________________________________________

STUDENT ID___________________________________________________________________________

During the BIE exams, students

• Have to arrive on time
• Have to bring and show their ID card
• Must leave their personal belongings (bags, backpacks, etc.) near to the lecturers’ desk
• Must switch off their PC, mobile phones, smartphones and tablets, and cannot use or touch them
• Cannot cheat or copy their classmates’ work
• Cannot refer to their books, slides or notes
• Can bring a pocket calculator
• Must hand in the text and all the copies of their essay before leaving the exam room
Please note: lecturers will ask students who break the aforementioned rules to leave the exam room.

Further information
• Students have to fill the name, surname and student ID
• Students are expected to write in a readable way
• Multiple-choice questions: one and only one answer is correct, and brings positive points; other
answers give rise to neither negative nor positive points, exactly like unanswered questions; correct
answers for at least 6 questions out of 10 are a pre-condition to pass the exam, otherwise the exam
grade will be “fail”, irrespectively of other parts.
• You have 2 hours to complete the exam.
• Evaluations will be published by July 13th, 2017.
Part I: Multiple-choice questions
Please tick the letter of the most correct answer

1. Government wants to promote productive innovative activities. If it was to follow Baumol’s (1990)
reasoning, which of the following strategies would be the most appropriate:

a) Government should mainly focus on increasing the total number of entrepreneurs, as an increased
rate of entrepreneurship have historically shown to be the main driver of productive innovation and
technological change
b) Government should mainly focus on creating an environment that would financially reward
productive type of innovation, but also improve social recognition and approval of these individuals
c) Government should mainly focus on increasing the total number of entrepreneurs, while also
creating an environment that would financially reward productive type of innovation
d) Government should focus on creating an environment that would maximize financial rewards of
productive type of innovation

2. Which of the following constitutes a Foreign Direct Investment (FDI)?

a) A U.S.-based company investing in a UK-based company’s shares listed on the London Stock Exchange
b) An Italian family firm producing car parts investing in residential real estate in the Southern France
c) A French-based company selling Euro (EUR) for Swiss Francs (CHF), expecting CHF to strengthen with
respect to EUR in the short-term
d) A Swedish company building five shops in Barcelona and Madrid to sell its products in the Spanish
market

3. Vaccination against a communicable disease (for example, polio) (i) ensures immunity against the disease
to the vaccinated person, and (ii) reduces the risk of epidemics for the population. The reduced risk of
epidemics for the population is
a) An excludable good
b) A non-excludable good, that is, a positive health externality
c) A common, that is, a common-pool resource
d) A knowledge spillover

4. Starting from the year 2000 the European Union has decided to return its attention to industrial policy.
Which of the following is one of the reasons for initiating the Industrial Policy rejuvenation within this
community of countries?

a) The developed economies gained momentum in the traditional sectors

b) There was recognition that the gap between Europe and US in labour productivity growth was
increasing
c) There was an urgent need to promote Intellectual Property Rights (IPR) regulation
d) There was a significant decrease in the labour productivity growth gap between Europe and other
emerging economies

5. Governments that partially privatize a State-Owned Enterprise (SOE)

a) offer the SOE stocks to the public

b) regulate the SOE in order to retain the control over it
c) sell the majority of SOE stocks to industry players and institutional investors
d) sell a part of the SOE stocks and retain the control over SOE

6. FM is a music streaming platform. FM’s potential customers are young people who are very sensitive to
the music quality, even if their income is not very high. Only few music artists can supply high quality

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 music. In order to exploit network effects and have the two-sided platform take off, FS management
should

a) charge the music artists a high fee and set a high price for customers
b) charge the music artists a low fee and set a high price for customers
c) charge the music artists a high fee and subsidize customers
d) charge the music artists a low fee and subsidize customers

7. The monopolistic train company of your country is offering special ticket prices to elderly people (E), 𝑝𝑝𝐸𝐸 .
The marginal cost of service for E is the same as the marginal costs for others (O). After conducting a long
analysis, the train company discovered that on average E’s demand for the service is more elastic than
O’s demand, 𝜖𝜖 𝐸𝐸 > 𝜖𝜖 𝑂𝑂 . Now the train company wants to set the most profitable ticket prices for E and O.

a) This is a case of price discrimination by self-selection

(𝑝𝑝𝐸𝐸 −𝑐𝑐) 1 (𝑝𝑝𝑂𝑂 −𝑐𝑐) 1
b) The price for E is lower than the price for O, i.e. 𝐸𝐸 = 𝐸𝐸 and =
𝑝𝑝 𝜖𝜖 𝑝𝑝𝑂𝑂 𝜖𝜖 𝑂𝑂
𝑝𝑝𝐸𝐸 1 𝑝𝑝𝑂𝑂 1
c) The price for E is higher than the price for O, i.e. 𝑐𝑐 = 𝐸𝐸 and 𝑐𝑐 = 𝑂𝑂
𝜖𝜖 𝜖𝜖
d) This is a case of perfect price discrimination
8. Power producers exhibit the concentration vectors 𝑆𝑆𝐴𝐴 in country A and 𝑆𝑆𝐵𝐵 in country B
𝑆𝑆𝐴𝐴 = [0.40, 0.20, 0.10, 0.10, 0.10, 0.10]
𝑆𝑆𝐵𝐵 = [0.30, 0.30, 0.10, 0.10, 0.10, 0.10]
The Herfindahl – Hirschman Indexes (HHI) are

a) 𝐻𝐻𝐻𝐻𝐻𝐻𝐴𝐴 = 2,400 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 2,200

b) 𝐻𝐻𝐻𝐻𝐻𝐻𝐴𝐴 = 2,300 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 2,500
c) HHIA = 2,200 and HHIB = 2,400
d) 𝐻𝐻𝐻𝐻𝐻𝐻𝐴𝐴 = 2,500 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 2,300

9. The national environmental authority regulates the air quality. It sets a threshold for the concentration
of nitrogen oxides in the gases and fumes that industrial facilities release in the atmosphere. It punishes
the rule breakers with a very high fine. The policy is

a) an emission tax that creates costs for rule breakers

b) a technology standard that obliges firms to adopt given cleaner technologies
c) a performance standard that limits pollution
d) an obligation that bans (prohibits the adoption of) more harmful technologies

10. The “Efficiency Hypothesis” argues that a greater industry concentration may be related to

a) a greater allocative efficiency, for example because of new entries

b) a greater productive efficiency, for example because of scale economies
c) Antitrust’s measures, for example against collusive agreements
d) a smaller dynamic efficiency, for example less R&D investment

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Part II: Open Question
Read the following text and please answer each sub-question in the new lines that follow it. Writing must
be readable.

Audit firms review and certify the financial reports of other companies, providing investors with an
assessment of the accuracy of reports. Companies that are listed on the stock exchange are legally required
to undergo financial audits. Reviews of listed companies have to follow the standards set by the regulatory
authority of financial markets. In addition, practically all non-listed companies and public organizations have
their reports audited as well, even though regulations are less stringent. Currently the market for audit
services in your country is dominated by 4 large audit firms.
You are working in a medium-sized firm, RevAcc. RevAcc provides audit services mainly to non-listed
enterprises, and wants to expand in the market of listed companies. RevAcc top management is considering
to ask the Antitrust to start an investigation over the presence of possible anticompetitive agreements
between the 4 market leaders in the market of listed companies. Your CEO appointed you with the task of
preparing a brief for internal diffusion about the opportunity of presenting a complaint to the Antitrust. To
this aim, you have studied a report recently published by a well-reputed industrial economist, and have had
several meetings with RevAcc legal department.
− The 4 market leaders are organized by service lines and offer broadly similar services. Customers are
acquired through negotiations or participation into tenders.
− They serve 96% of the listed companies in your country, and account for 74% of revenues in the whole
audit market, even if they appear to be specialized in different industries. The individual market shares for
the 4 market leaders have changed over years only slightly, i.e. their market shares have steadily been in
the 15-20% range over the last 10 years.
− Every year customers publish on their reports information on their audit provider and the audit fees they
have paid. At the same time the demand of listed companies for audit services is relatively insensitive to
price.
− The majority of customers consider the past experience of audit firms and their existing relationships with
large customers more important in deciding which audit firm to appoint. The 4 firms have all a very good
reputation in this domain.
− The 4 leaders invest huge sums in the organization of industry-specific conferences with influential
speakers for their current and prospect customers in the country and the publication of country-specific
market reports.
− Another key element of audit firms’ reputation is the ability to attract talented and highly productive
people. Most financial executives in listed companies had job experiences with the 4 leaders.
− Your legal department explained that in your country both explicit cartels and tacit collusion between
competitors are prohibited. In another country an Antitrust investigation did not find any direct
communication or explicit information shared or exchanged between the 4 leaders with the purpose of
coordinating their commercial strategies.
The brief should highlight reasons why the Antitrust could (or could not) find evidence of anticompetitive
agreements between the 4 market leaders. To this purpose, you have decided to address the following
questions in the first part of the brief.

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A. What are the main barriers to entry in the market of audit services for listed companies in your
country? (max 12 lines overall)

B. Are the 4 leaders likely to support a tacit collusion agreement? Why? (max 12 lines overall)

C. Can reduced price rivalry be a way to collude (explicitly or tacitly) in the audit market for listed
companies? Which other actions could be implemented to collude? (max 12 lines overall)

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Part III: Structured Question
Please answer each sub-question in the new lines that follow it. Where appropriate addition of figures,
graphs or formulas is possible. Writing must be readable.

a) Explain why sunk costs may act as an entry barrier. (max 8 lines overall)

b) Assume that entry costs are only partially sunk. The Incumbent (I) is a monopolist that has born entry
costs in the past. At time t=1, an Entrant (E) is considering whether to enter or not. E has the same
marginal costs as I, and knows that I will react to possible entrants with a tough price competition
(Bertrand). At time t=2 I decides whether to stay or not. If I gets out, it recovers a part of the entry
costs. Please represent the sequential game with a game tree, after defining actions and payoff
formula and coefficients, and making if necessary additional assumptions. (max 8 lines overall + the
tree)

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c) Find the sequential game equilibrium. Explain its conceptual meaning / conclusions (max 8 lines
overall)