July 21st, 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 26th, 2017.

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Part I: Multiple-choice questions [10 points]
(tick the letter of the most correct answer)

1. According to the Baumol’s model and his view of the managerial theory of the firm, a CEO will
produce the quantity Q that:

a) Maximizes profit.
b) Maximizes revenues, but only in the case in which this quantity assures a satisfactory level
of profit to shareholders.
c) Maximize revenues, but only in the case in which this quantity maximizes also profit.
d) Maximize profit, but only in the case in which this quantity assures a satisfactory level of
revenues.

2. As proposed by Williamson in “Credible Commitments: Using Hostages to Support Exchange”,

the hostage:

a) Is a mechanism to deter opportunistic behaviour.

b) Is a mechanism for one party to add transaction costs to the other party.
c) Is a mechanism to deter information asymmetry.
d) Has a value that is symmetric for the two parties so that the threat is credible.

3. The enlargement of EU in 1986 has brought to the community Spain and Portugal. When these
two countries joined, it was compulsory for them to evaluate what kind of industrial policies are
more effective to catch-up with the rest of EU members. They recognize that the existing
evidence suggests:

a) An investment in current competitive industries should be later followed by reinvestments

in more productive industries.
b) An investment in high-tech industries brings economic growth in short-term.
c) They should continue to support traditional sector development.
d) Literature shows controversial evidence on what policy is more effective than the other.

4. Policymakers have set a homogenous “performance standard” (threshold) on water emissions

for pharmaceuticals. The best available technologies that abate pharma micro-pollutants differ
in terms of cost effectiveness. Compared to environmental taxes the standard

a) Does not guarantee citizens health, minimizes abatement and external costs.
b) Does not guarantee citizens health, does not minimize abatement and external costs.
c) Guarantees citizens health, minimizes abatement and external costs.
d) Guarantees citizens health, does not minimize abatement and external costs.

5. The offer of gym services is a Cournot oligopoly in cities A and B. The Herfindahl – Hirschman
Index (HHI) is larger in A, and demand is more price elastic in B. Industry’s market power

a) is larger in A, provided that costs are homogenous across firms.

b) is larger in B.
c) is larger in A.
d) may be larger in A or B, provided that costs are homogenous across firms..

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6. The minimum efficient scale (or size) of telecommunications operators that offer broadband
connectivity over wireline / fixed networks is 200,000 customers. The demand in a medium-
sized city is 215,000 customers.

a) The market is contestable.

b) The market may be a natural monopoly.
c) The market can’t be a natural monopoly.
d) The market is certainly a natural monopoly.

7. A market outcome is Pareto optimal or efficient if there isn’t any other market outcome where

a) at least one player is better off and other players are not worse off.
b) all players are worse off.
c) the majority of players are better off.
d) at least one player is worse off and other players are not better off.

8. Subsidies from the public budget are used to guarantee the break-even of some utilities. This
form of regulation

a) causes productive inefficiency.

b) ensures equity.
c) causes allocative inefficiency.
d) ensures dynamic efficiency.

9. The Antitrust authority is more likely to suspect predatory pricing if the incumbent is cutting
prices and

a) is a monopolist with a legal monopoly right (concession).

b) is vertically integrated.
c) has cumulated profits over the past year and is not cash constrained (deep pocket).
d) offers monopolized and competitive products tied together.

10. The TV series produced by entertainment and media companies are

a) Club goods because they are non excludable and rival

b) Club goods because they are non rival and excludable
c) Commons because they are non excludable and non rival
d) Commons because they are non excludable and rival

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Part II: Open Question [10 points]
Read the following text and please answer each sub-question in the new lines that follow it.
Writing must be readable.

GoodFood (GF) is the largest online marketplace for agricultural commodities in your country. It
entered the market of Business-to-Business (B2B) platforms in 2009. GF puts the local farmers’
cooperatives in touch with large international food transformers and traders.
The local suppliers (farmers’ cooperatives) have traditionally had difficulties in offering their
products to international customers owing to three main causes.
(i) A gap of commercial capabilities, i.e. insufficient resources and poor skills in areas such as web
communication, foreign languages customer relationship, and international law and regulations;
(ii) A negative quality reputation of some local farmers, mainly owing to a few scandals that had
broken out many years ago about the safety and health of some local products;
(iii) Greater international orientation of other countries, which were more commonly considered by
international customers.
However, 10 years ago, the sensitiveness of international customers toward the costs of agricultural
supplies started increasing, due to competitive pressures. In their search for lower cost supplies,
they have increasingly targeted the farming cooperatives of your country, which are well known for
operational efficiency and mild costs.

GF offers the following services to local suppliers.

- Basic service - Online cataloguing. The listed domestic suppliers can feature their products on
GF’s online catalogues for a low fee (US$100 per year, up to 10 products). GF presents
information on the local suppliers and their products (characteristics and price) in different
languages and through pictures and videos.
- Premium services. Over time, GF started to offer customer relationship services and advertising
banners (at fees ranging US$300 – 2,000 per year).
- Verification. GF also offers a verification service. Many local suppliers claim to have safety,
health and environmental certifications of own products. However, only a few local farmers
appoint independent international agencies for conducting a rigorous certification (US$120 per
year per product). GF verifies if the local cooperative or consortium has really obtained a high-
quality certification, and grants truthful operators a TS label (“trustworthy supplier”; extra fee
for the labelling service, US$1,000 per product).
At the same time foreign customers from different countries can register and access the GF’s B2B
platform for free.
- They use GF’s online catalogues for building a short list of possible local suppliers.
- The GF platform offers them a rating service. Customers post their reviews of local suppliers,
and the GF summarizes their evaluations into a rating / grade assigned to each supplier.
- Two factors have been found to influence foreign customers in the final choice of the local
supplier: the rating received, the “trustworthy supplier” label.

GF achieved and exceeded its 5-years targets in advance, i.e. 20,000 subscribers among the local
farmers’ cooperatives, 5,000 subscribers among the international buyers / customers, 80% share in
the revenues of the country’s B2B agricultural platforms. Today growth is smaller yet still amazing.

Your company (a strategy consulting firm) is analyzing the industry of online marketplaces, and the
analysis of GF case is your task. Please address the following questions.

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 A. Can GF be described as a two-sided platform? Why? Can you list and explain the network
effects that are at work in the case? (max 12 lines overall)

B. Are there information asymmetries at work in the case? Which ones? Is GF offering
remedies? (max 12 lines overall)

C. Is GF’s pricing appropriate? Why? (max 12 lines overall)

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Part III: Structured Question [10 points]
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.

Company LidLighters produces lids for kettles.

Recently, LidLighters negotiated an agreement with a well-known electric kettle producer Mosh
about the supply of specifically designed energy-efficient lids with customized features for Mosh’s
patented kettles, in the annual volume of 10 million units. As part of the agreement, LidLighters
should train a batch of their engineers capable of designing and producing the customized lids.

Building a plant with the capacity of 10 million lids per year would cost LidLighters 5.000.000 euro,
and can only be financed with a loan from a bank that requires an annual payment of 1.000.000
euro for the following 6 years. The loan re-payment of 1 million euro per year thus represents
LidLighters’ (annualized) cost of investment in this plant. It is an unavoidable cost, meaning that
LidLighters has to make the payments no matter how many lids it actually sells. Training the
specialized engineers costs another 500.000 euro annually.

The average variable cost for producing a single lid is 0.5 euro. The negotiated price for a single lid
with Mosh is 0.9 euro, while the market price that LidLighters could sell these new lids is only 0.6
euro per unit, as the high-tech features and design of the produced lids are fully valuable only to
the Mosh’s patent-protected kettles.

a) Explain what are the relationship-specific investments (RSIs) and which types of RSIs exist in
general. Specify which of these RSIs are in place for LidLighters based on the text above.

b) Based on the RSIs, should LidLighters accept the deal and build the factory? Justify the
decision.

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c) Explain what is Quasi-rent and calculate it in the case of the relationship between LidLighters
and Mosh.

Assume that LidLighters has accepted the deal. After one year of successful relationship, Mosh is
trying to renegotiate the deal. They are offering to purchase again 10 million lids, however this
time at the price of 0.75 euro per unit.

d) Should LidLighters accept the new deal? Justify the decision.

e) How do you name this phenomenon (i.e. the new offer of Mosh, its conduct towards
LidLighters)? Based on what is Mosh trying to renegotiate the initial agreement?