16072 Industry Economics
1.1 Select an industry and explain the relationship between economies of scale and scope, market structure and long-run equilibrium in that industry. Industries you may be familiar with include airlines, automobiles, entertainment, food delivery, AREITs, supermarkets, property developers, textbook publishers, professional software and social media.
1.2 There are three basic strategies. Using a well-known company as a current example, discuss the strategy that company is following in the context of the relevant industry and market.
2.1 A decision on market entry with a new product has to be made.
Sales Level Market A Market B Market C
Probability Units Probability Units Probability Units
Good 0.3 1,200,000 0.3 1,000,000 0.7 700,000
Poor 0.3 600,000 0.5 320,000 0.2 400,000
Fail 0.4 0 0.2 0 0.1 0
The entrant can only enter one of these three markets. Show how to determine which one to enter based on expected unit sales.
The cost of entering is $250,000. If the product sells for $10 and has unit costs of $5, what is the expected profit?
The entrant is uncertain about the price after entry, because profitability will depend on the reaction of the incumbent firm. If there is a 40% probability of the incumbent pricing low and a 60% chance of earning $5, what are the expected earnings from entry?
Draw the matrix form of this game and use the Prisoners’ Dilemma to show why the incumbent will decide to price low and earn $0 rather than price high and earn $5.
2.2 An auction has two bidders, each with a value of either $30 or $80, with both values equally probable. What reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price? Clearly show how this outcome is reached.
If each bidder has a value of either $60 or $80, what reserve price should the auctioneer set, and what is the expected revenue from auctioning the item with and without a reserve price?
Compare the outcome of an auction with 2 bidders with the same auction with three bidders. Each bidder has a value of either $16 or $20 for the item, and you attach probabilities to each value of 50%. What is the expected price? If two of the three bidders collude, what is the price?
3.1 Explain how the difference in outcomes between simultaneous and sequential games comes about. What effect does moving first have in a sequential game? Why?
3.2 What are hidden actions and hidden information? Why are they important and what might be some solutions? Give examples.
4.1 Incentive conflicts are found in many situations. Give two examples and explain how the conflicts can be managed.
4.2 Explain how cost and extent decisions affect the allocation of assets to higher value uses.