Econ 571 Homework 1
Spring 2025
Due Date: February 11, 2025 12:00pm (before class time)
1. Short Answer Question
a. Explain the six important economic features associated with digital platforms and explain how they shape the market competition landscape in the digital spaces.
b. Explain the current state of antitrust regulation concerning digital platforms, with a focus on recent developments in the EU, UK, US and China.
c. (Preparation for the Final Project) Identify one recent antitrust case that involves platforms’ self-preferencing behavior. Apply the economic analysis we learned in class to investigate the antitrust matter and explain your thoughts. Hint: Lecture Notes on Blackboard provide few candidate cases. You may use academic literature, news article and court documents to support your argument.
d. (Preparation for the Final Project) Identify one recent antitrust case that involves platforms’ envelopment strategy. Apply the economic analysis we learned in class to investigate the antitrust matter and explain your thoughts. Hint: Lecture Notes on Blackboard provide few candidate cases. You may use academic literature, news article and court documents to support your argument.
2. Platform. Self Preferencing Strategy
The market consists of two upstream firms A and B, and one downstream firm R. Both firms produce products A and B at the marginal cost of 20 (i.e., MCA=20, MCB=20) and sell products at a wholesale price of 30 (i.e., WPA=30, WPB=30) to downstream firm R. The downstream firm R purchases both products from upstream firms at wholesale prices and sells them to end consumers at prices of PA and PB respectively. The market demand for both products A and B are given by QA=90-2PA+PB and QB=90+PA-2PB
a. When Firm A and B are both independent from Firm R, solve Firm R’s profit maximization decision to get the market equilibrium. In particular, calculate PA, PB, QA, QB, πA, πB and πR .
b. When Firm A and B are independent, does Firm R have any incentive to decrease PA (i.e., elimination of double marginalization incentive) or increase PB (i.e., raising rival’s cost incentive). Show how both incentives change after Firm A and R become vertically integrated.
c. When Firm A and R are vertically integrated, solve Firm R’s profit maximization decision to get the new market equilibrium. In particular, calculate P’A, P’B, Q’A, Q’B, π’B and π’R.
d. Compare the market equilibrium from a) and c) above. In particular, compare PB, QA, QB, πB and πR when Firm A and R are independent versus when Firm A and R are vertically integrated. Based on your comparison, can you explain Firm R’s self-preferencing behavior?
3. Platform Envelopment Strategy
Platform. A and T are monopolists in two different markets. Consumers’ utilities of consuming platform. A and platform. T are uniformity distributed between zero and VA and VT respectively.
a. Before the platform. envelopment strategy, each platform. chooses the optimal price of platform. A and platform. T at VA/2 and VT/2 respectively. Use graph to show how consumers make their purchase decisions among 1) consuming A only, 2) consuming both A and T, 3) consuming T only, 4) consuming non-A and non-T.
b. Now platform. A (i.e., the attacker) want to enter platform. T’s market by inventing a similar platform. T’ and bundle A and T’ together. The attacker offers the bundle AT’ to consumers at the sum of two optimal monopolists’ prices, i.e. (VT′ +VA )/2. Use graph to show how such platform envelopment strategy can diminish the incumbent platform. T’s market share in the attacking market.
c. Assuming the attacker now offers the AT’ bundle with a discount, i.e. (VT′ +VA )/2 – d. Use graph to show how offering a discounted bundle price can diminish the incumbent platform. T’s market share even more in the attacking market.
4. Horizontal Merger - Duopoly Model
The market consists of two firms before the merger. Each firm’s marginal cost of production is mc1 = 10 and mc2 = 10. The market demand is P = 80 − 5Q. Two of the firm decides to merge together. After merger, the market has only one merged firm, with the marginal cost of production unchanged atmcm = 10.
a. Characterize the market equilibrium before the merger. In particular, characterize the equilibrium price and quantity, each firm’s supply and profit.
b. Characterize the market equilibrium after the merger. In particular, characterize the equilibrium price, quantity, and profit of the merged firm.
c. Compare the pre- and post-merger market outcomes. Explain how such merger can impact the market outcomes and whether it is considered as a pro- or anti- competitive merger.
After merger, the merged firm generates cost efficiency gains. Its marginal cost of production decreases tomcm = 5.
d. Recharacterize the market equilibrium after the merger. In particular, characterize the equilibrium price, quantity, and profit of the merged firm.
e. Compare the pre- and post-merger market outcomes. Explain how such cost efficiency gains can impact the market outcomes and whether it is considered as a pro- or anti-competitive merger.