September 12, 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 September 19th, 2017.
Part I: Multiple-choice questions [10 points]
(tick the letter of the most correct answer)

1. Which of the following is a fundamental characteristic of price discrimination practices?

Different versions of the same product
a) Have the same costs.
b) Have a different price for different customers.
c) Have price differences greater than cost differences.
d) Have price differences equal to cost differences.

2. A water distribution utility is a single – product enterprise. It supplies water with standardized
quality to very similar users located in a city district. Current market is made up by 100,000
users.
a) The utility exhibits economies of scale till 150,000 users (minimum efficient scale). Water
distribution in the city district is certainly a natural monopoly.
b) The utility exhibits economies of scale till 150,000 users (minimum efficient scale). Water
distribution in the city district is not a natural monopoly.
c) The utility exhibits economies of scale till 90,000 users (minimum efficient scale). Water
distribution in the city district is not a natural monopoly.
d) The utility exhibits economies of scale till 90,000 users (minimum efficient scale). Water
distribution in the city district is certainly a natural monopoly.

3. A market is very concentrated, with the current ratio C1 = 70%.

a) The dominant firm has market power, and is abusing it.
b) Before concluding about abuse of dominant position, we have to understand if there are
dominant firms.
c) There is for sure a dominant firm, Antitrust should investigate if it is abusing its position.
d) There is for sure a dominant firm, Antitrust should investigate if there are collusive
agreements.

4. Over time the adopters of Filter, an end-of-pipe technology for abating air emissions, have
cumulated a significant experience in operating and maintaining it. In other words they have
benefitted from learning economies, reducing the O&M costs related to Filter. Other thing
being equal,
a) They will abate a larger amount of emissions than the first year when they adopted Filter.
b) They will pay smaller compensation to victims of emissions than the first year when they
adopted Filter.
c) They will abate a smaller quantity of emissions than the first year when they adopted Filter.
d) They will for sure place themselves at the first-best equilibrium.

5. Performance standards are an environmental policy. In the case of mildly noxious pollution,
they are generally
a) more efficient than technology standards
b) less efficient than technology standards
c) more profitable than technology standards
d) less profitable than technology standards
6. Consider a market with six firms, two having a market share of 30% and four having a market
share of 10%. Two of the four firms with a 10% market share want to merge. What is the value
of the concentration ratio (CK) before and after the merge?
a) If K=3, C is equal to 0.7 before the merge and 0.8 after the merge.
b) If K=4, C does not change before and after the merge.
c) If K=5, C does not change before and after the merge.
d) If K=6, C is equal to 1 before the merge and 1.1 after the merge.

7. A market is monopolized by the incumbent I, who gets monopoly profit 𝜋𝜋𝐼𝐼 = 50. The time
horizon extends to 2 periods. At time 1 a potential entrant E decides whether to enter or not.
If E enters, at time 2 I can react aggressively by reducing the price at an unprofitable level;
both firms get a profit 𝜋𝜋𝐸𝐸 = 𝜋𝜋𝐼𝐼 = −1. Alternatively I can decide to accommodate E (i.e. not to
retaliate); in this case, both firms get a profit 𝜋𝜋𝐸𝐸 = 𝜋𝜋𝐼𝐼 = 20.
a) E enters because it knows that I will exit.
b) E is aware of the possible aggressive reaction of I, and it uses a Hit-and-Run strategy.
c) E enters because it knows that I will find the aggressive reaction unprofitable.
d) E is aware of the possible aggressive reaction of I, and it does not enter the market.

8. With regard to industrial policy, the period 1940s-1960s is characterized by:

a) The decision of the state to chose the “Laissez-faire” approach.
b) The recognition of industrialization as necessity for development and that the market
failures would prevent this from happening automatically.
c) The imense need to protect established industries.
d) Focusin on the flexibility of industrial policy, i.e. innovation and technological upgrading.

9. Bang&Sound is a producer of high-end audio equipment. The company had previously been
specialized in professional equipment, but has decided to enter in the commercial speakers
market. In order to produce the speakers, the company needs to integrate a special type of
sound membrane, an asset that has a very high degree of specificity. What would be the best
strategy for the company:
a) Bang&Sound should integrate the production of the asset, as superiority of markets in terms
of technical efficiency becomes weaker for a high degree of asset specificity, while agency
efficiency becomes greater for vertical integration.
b) Bang&Sound should buy the asset from the market, as both technical and agency efficiencies
of markets are superior to vertical integration for a high degree of asset specificity.
c) Bang&Sound should integrate the production of the asset, as vertical integration becomes
superior to markets in terms of technical efficiency for a high degree of asset specificity.
d) Bang&Sound should buy the asset from the market, as markets are superior to vertical
integration in terms of technical efficiency for any degree of market specificity.

10. The horizontal boundaries of the firm:

a) Refer to the choice regarding which activities are performed inside the firm and which are
out-sourced and left to the market.
b) Refer to a make-or-buy decision.
c) Refer to the quantity and the varieties of products a firm produces.
d) Refer to a make-or-buy decision for contingent reasons (e.g. a demand’s peak).
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.

Triangle is a successful French high-tech start-up that offers innovative solutions for catering
equipment industry. It has locally developed advanced, energy-efficient and user-friendly systems
for preparing and preserving the food, mainly relying on the knowledge of the founders, who are
experienced professional cooks and engineers. Triangle has managed to obtain the necessary
resources locally, and assembles, manufactures and sells products using their own retail points of
sale in France, to the extent that it has become the leader in the national catering equipment
market. Following the success on the national scale, internationalization is considered as a natural
step forward for Triangle.

One of the Triangle’s founders Didier Deschamps, who is in charge of business development,
attended a course in Business and Industrial Economics at the university, where he studied about
firm internationalisation models. In fact, he was so intrigued by them that he eventually conducted
his master thesis project on the topic of the Scandinavian School of Firm Internationalisation (The
Uppsala Internationalisation Model). With all the knowledge he has gained, he proposed to his co-
founders to use this strategy to expend the business of Triangle across the borders.

If Didier was to create an internalisation roadmap for Triangle following the Scandinavian School
approach, how would he set up:

a) Short-term internationalization strategy.

b) Long-term internationalization strategy.

c) What would be advantages and disadvantages of this approach?
Part III: Exercise [10 points]
Please answer each sub-question in the new lines that follow it. Where appropriate addition of figures,
tables, graphs or formulas is possible. Writing must be readable.

Wonderful, a luxury apparel company has recently launched a very sophisticated line of
sunglasses. It has designed M-Misterious, woman sunglasses with super lenses and super design.
The Sales department is deciding how to price M. After analyzing the potential demand for M,
they understand that there are 2 major market segments.
- Normal people (N), 2 million customers, are willing to pay up to 300 Euro for M.
- Fashion victims (V), 1 million customers, are willing to pay up to 1200 Euro for M.
Wonderful knows how many N and V users are in the market, but it can’t tell N customers from V
customers, i.e. if a customer claims to be N type, Wonderful has to accept it. Aside from the initial
fixed development costs (F), variable production costs of QT are zero, so MC=0.

(1) If Wonderful decides to set an uniform price, i.e. just one price for M for all users, what will it
be? What are its variable profits?

(2) Is Wonderful affected by the “Law of one price”?

(3) The Production department has implemented a scaled-down version of the sunglasses, D-
Down-to-earth which is as costly to produce and sell as the M version. D still has super lenses
and a very good design but it is definitely less sophisticated than M.
- Normal customers (N) are willing to pay up to 150 Euro for D.
 - D is worthless for Fashion Victim customers (V) because it does not really set them apart
from common people.
Can you represent in a table the willingness to pay of N and V customers for M and D?

(4) There are two optimal different prices, i.e. one price for each version of sunglasses, that make
customers of the two segments “come out” and choose own “right version”. Please determine
them and show how you find them.

(5) Which kind of price discrimination is this? Is it more profitable than offering only M and setting
an uniform price?