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. 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.

𝑝𝑝𝐸𝐸 1 𝑝𝑝𝑂𝑂 1
a) The price for E is higher than the price for O, i.e. 𝑐𝑐 = 𝐸𝐸 and =
𝜖𝜖 𝑐𝑐 𝜖𝜖 𝑂𝑂
b) This is a case of perfect price discrimination
c) This is a case of price discrimination by self-selection
(𝑝𝑝𝐸𝐸 −𝑐𝑐) 1 (𝑝𝑝𝑂𝑂 −𝑐𝑐) 1
d) The price for E is lower than the price for O, i.e. = and =
𝑝𝑝𝐸𝐸 𝜖𝜖 𝐸𝐸 𝑝𝑝𝑂𝑂 𝜖𝜖 𝑂𝑂

2. 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 = 2,300 and 𝐻𝐻𝐻𝐻𝐻𝐻𝐵𝐵 = 2,500

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

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

a) a greater productive efficiency, for example because of scale economies

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

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

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

a) offer the SOE stocks to the public

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

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

7. 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 obligation that bans (prohibits the adoption of) more harmful technologies
b) an emission tax that creates costs for rule breakers
c) a technology standard that obliges firms to adopt given cleaner technologies
d) a performance standard that limits pollution

8. 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 increasing the total number of entrepreneurs, while also
creating an environment that would financially reward productive type of innovation
c) 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
d) Government should focus on creating an environment that would maximize financial rewards of
productive type of innovation

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

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

10. 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) A non-excludable good, that is, a positive health externality
b) A common, that is, a common-pool resource
c) An excludable good
d) A knowledge spillover

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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.

In your country, large energy-intensive companies have to undergo an “energy audit” every 2 years. Energy
audits are a central part of energy efficiency policies. Energy auditors carry out a thorough analysis of energy
consumption within the customer. They measure current energy uses, estimate consumption trends and
energy expenditures, identify causes of energy wastage, and make proposals for energy saving.
Energy audits have to follow the standards set by the energy policymakers. In addition, many small-medium
enterprises have their energy consumption audited as well, even though regulations are less stringent.
Currently the market for energy audits in your country is dominated by 4 large audit firms.
You are working in a medium-sized energy auditor, EnManager. EnManager provides audit services mainly
to small-medium enterprises, and wants to expand in the market of large energy-intensive companies.
EnManager 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 larger 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 EnManager 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 82% of the largest companies in your country, and account for 65% of revenues in the whole
market for energy audits, even if they appear to be specialized in customers belonging to 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 are obliged by the policymakers to publish on their websites the outcome of energy
audits, information on their auditor, and the audit fees they have paid. At the same time the demand of
larger companies for audit services is relatively insensitive to the audit fees.
− The majority of customers consider the past experience of audit firms and their existing relationships with
large energy-intensive customers more important in deciding which auditor 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 in the publication of reports on
country-specific energy markets.
− Another key element of auditors’ reputation is the ability to attract talented and highly productive energy
and management engineers. Most energy and environmental managers in large energy intensive
companies had job experiences with the 4 leaders.
− 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 energy audit services for larger 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 air quality is a public good. (max 8 lines overall)

b) The two main industrial players in a metropolitan area, Fumes (F) and Steam (S), either reduce
emissions in the atmosphere or go on as usual (not reduce). Each of them would have benefits from
air pollution reduction (greater productivity). There are also costs for reducing emissions
(abatement). Please represent the situation with a game in normal form, after defining actions and
payoff formula and coefficients, and making if necessary additional assumptions. (max 8 lines overall
+ the table)

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c) Describe the conditions necessary to have a Prisoner’s Dilemma. Report the formal conditions
(inequations for coefficients) and their conceptual meaning / the conclusions. (max 8 lines overall)