6921 Assignment 4, Alexis Hayslette

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Kent State University *

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Economics

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Feb 20, 2024

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OMBA 6921 – Industrial Economics WB Spring 2024 Assignment 4 – 45 points - Due Friday, February 9, 2024 1. (8) a.) (4) The United States Postal Service (USPS) charged $0.66 per stamp in 2023. They allow stamps.com to sell a sheet of twenty stamps with personalized photos for $1.20 per stamp. Stamps.com keeps the extra beyond the $0.66 it pays the USPS. If stamps.com is acting as a profit maximizing monopolist, what is their Lerner Index and what is the price elasticity of demand for a customized stamp? Lener Index = P-MC/P Lener Index = 1.20-0.66/1.20 = 0.54/1.20 Lener Index = 0.45 Price elasticity of demand = P-MC/P = -1/E = 0.45 = -1/E = -1/0.45 Price elasticity of demand = -2.22 b.) (4) Suppose a movie theater determines that the elasticity of demand for movie tickets is -2.0 for senior citizens and –1.5 for adults under age 65, and the marginal cost is $5 per consumer. Use the Lerner index to determine the price senior citizens should be charged and the price adults under age 65 should be charged in order to maximize profits. Lerner Index = P-MC/P Senior Citizen Price = MC/1-L P = 5/1-2 P = 5/1 Senior Citizen Price = $5.00 Adults under 65 Price = MC/1-L P = 5/1-1.5 P = 5/0.5 Adults Under 65 Price = $10.00 2. (8) Suppose a monopolist faces a market demand curve given by P = 50 - 0.5* Q . Marginal cost is initially equal to zero and constant. a. (4) Calculate the profit maximizing price and quantity. Use the Lerner index to calculate the price elasticity of demand at this point. What is the amount of deadweight loss associated with this monopoly? L = P-MC/P MC=0 Market Demand Curve = P=50-0.5*Q MR=TR/Q MR=MC TR= P*Q TR = 50-.5*Q MR=50-Q Q=50 P=50-.5*50 P=25 L=25-0/25 L=1 Deadweight loss = .5*Q*P =.5*50*25 Deadweight loss = 625

b. (4) Suppose marginal cost increases to MC 10 for all units while demand and marginal revenue remain constant. Calculate the new profit maximizing price, quantity, the price elasticity of demand, and deadweight loss . MR=MC 50-Q=10 Q=40 P=50-.5*Q P=50-.5*40 P=30 L = P-MC/P L=30-10/30 L=0.67 E=1/.67 Price elasticity of demand = 1.49 Deadweight loss = .5*Q*P = .5*40*30 Deadweight loss = 600 3. (10) The publisher Penguin Random House (PHR) recently tried to merge with Simon & Schuster (S&S). The Justice Department blocked the proposed merger on the grounds that it violated antitrust law. The Pre-Trial Briefs be found here: Pre-Trial Briefs a.) (3) The DOJ argued the Herfindahl-Hirshmann Index (HHI) would increase by 891 points to 3113, well above the 2500 threshold of legality; the companies are arguing that the post-merger HHI will be far below this figure. Explain how there can be such a large disparity in the estimates of the HHI. What determines the accuracy of this figure? One reason why there could be such a large disparity in the estimates of the HHI includes the differences in the approaches used by the DOJ and the companies. The DOJ has utilized several different approaches which specifically rely on data, market research, and expert testimony for their calculations. Compared to the DOJ, the companies use other approaches such as assumptions and methodologies which results in a reduced forecasted post-merger household count. To determine the accuracy of this figure the accuracy of the HHI measurement relies on the caliber and applicability of the data utilized, the robustness of the methodology employed, and the thoroughness of the analysis conducted. The HHI is just one metric used to assess market concentration and other factors affecting competition in the relevant market should be considered to determine the accuracy. b.) (4) The DOJ argued that in addition to harming consumers through monopoly power, the merger would have created too much “monopsony” power. Explain difference between monopoly and monopsony power. How might this merger have created too much monopsony power? Note: you can find the full DOJ statement here . Monopoly power is when a group of sellers or a singer seller can act together to control output in markets, as well as prices. Doing so will lead to increased prices and diminished consumer welfare. For monopsony, it can be defined as the dominance held by a lone buyer or purchaser within a market, granting them the authority to dictate prices and conditions to suppliers or sellers. Nicholas Hill, the government's expert witness in the case mentioned how the merger might create excessive monopsony power. Hill noted that the combination of Penguin Random House and Simon & Schuster would result in "a dominant publisher" controlling roughly half of the market for "top selling" books, with a combined 49% share, which is significantly higher than its next largest competitor's share. This concentration of power would likely enable the merged entity to dictate terms and prices to authors, potentially leading to reduced advances and fewer authors being able to earn a living from writing.

c.) (3) Do you think the merger between PHR and S&S should have been approved or not? Briefly explain. Considering the potential implications for authors, particularly in terms of compensation and market competition, I am opposed to the merger. As stated in the DOJ's pre-trial brief, allowing the merger to proceed could result in "authors being paid less for their efforts and fewer authors being able to earn a living from writing." This aligns with concerns about the significant market concentration and control over book rights that would ensue from the merger, potentially diminishing opportunities, and rewards for authors. 4. (10) Norah Jones’ (famous for the songs “Come Away With Me” and “Don’t Know Why”) last national concert tour sold an average of 2/3 of the tickets available, with 1/3 of seats left empty at a typical concert. a. (3) Suppose the local promoter of each concert is a monopolist with a fixed number of seats in each concert hall. The promoter’s cost is independent of the number of people who attend the concert (Norah Jones received a flat payment independent of the number of tickets sold). If the concert charges a single market price, what factors would be considered in determining the profit maximizing price? If the concert charges a single market price, factors that would be considered in determining the profit include:  Demand Curve- The higher prices normally lead to lower demand for concerts, as the lower prices lead to higher demand for the concerts. Knowing the demand for the tickets is prominent to ensure that the promoter understands how the changes in prices vary.  Market Conditions- The promoter would also consider market conditions such as what the turnout should be, the number of tickets sold, and the cost of hosting the concert.  Revenue Maximization- The promoter should have a goal to maximize revenue, while also making sure that a fixed number of seats are available and sold to fill up the portion of seats. b. (3) Does the failure to sell out a concert suggest that the concert venue set too high a price? Does the failure to sell out a concert imply that there is deadweight loss? Explain. Yes, the failure to set out a concert may suggest that a concert venue set the price too high depending on if there is unsatisfied demand at the current price level. This does not necessarily mean that the concert venue set the price too high. Other things can be of influence such as the date and time of concert, the weather, or marketing. A deadweight loss is described as “A deadweight loss is a cost to society created by market inefficiency , which occurs when supply and demand are out of equilibrium. Mainly used in economics, deadweight loss can be applied to any deficiency caused by an inefficient allocation of resources,” (Tuovila, 2022). Given this quote and the information we know about deadweight loss, this does not necessarily mean that deadweight loss is occurring. For the promoter’s situation, because the number of tickets sold are independently the venue is charging a single market price, then there might not be deadweight loss even if the concert doesn't sell out. If the promoter is maximizing revenue and being sure to cover their costs, there may not be deadweight loss. c. (2) How (if at all) does the size of Norah Jones’ flat payment influence the profit maximizing price? Explain. If Norah Jones’ decided to create a flat payment structure this would not directly affect the promoters profit maximizing unless the flat payment is high. If the flat payment is high, the promoter would need to set a higher ticket price to cover the costs and earn profit. d. (2) How would your answers change if the concert hall is able to perfectly* price discriminate (implying they can charge each consumer their maximum willingness to pay.) Would the concert hall be able to sell out each concert? *In reality nothing is actually perfect, except maybe a Taylor Swift concert 😉 .

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If the concert was able to perfectly price discriminate, then the venue would be able to sell out each concert. The reason being, is that by charging customers maximum of what they’re willing to pay, there would be not unsatisfied demand. The promoter would then be able to receive the increased profits and consumer surplus. 5. (9) Use the following roundtable summary on price discrimination from the DOJ and FTC – Roundtable on Price Discrimination - to answer the following questions. a.) (3) What conditions must be met in order for price discrimination to be feasible? What are the factors that determine the competitive implications of price discrimination? The first condition that must be met for price discrimination to be feasible is suppliers must have the ability to offer different prices to targeted customers compared to others. This can be done by offering prices based on customers' locations or purchasing sizes. Alternatively, suppliers could offer multiple products that sort customers based on decisions made at the time of purchasing. The second condition is the prevention of pricing by arbitrage. This is important to prevent customers from exploiting the price difference by reselling the products or services that are intended for the customer. The factors that determine the competitive implications of price discrimination are predatory pricing, loyalty rebates, margin squeezes, entry barriers, and market segregation . b.) (3) Summarize the difference between price discrimination used for “exploitative” purposes vs. “exclusionary” purposes. Explain which – and why – one form is legal but the other is not? Price discrimination used for exploitative purposes is when suppliers charge different prices to different customers based on the consumer's ability to pay more without any economic justification. In this type of discrimination, the firms aim to maximize profits by charging higher prices due to their having huge control over the market. Price discrimination used for exclusionary purposes is when firms set prices that strive to exclude consumers or suppliers in the market. This can involve offering discounts or special offers to some consumers but not offering them to others which has the potential to drive other firms out of the market. Price exclusionary discrimination is illegal due to many antitrust laws as it can lead to firms forming monopolies and having full control over a piece of the market. Whereas exploitative price discrimination is legal as antitrust laws do not prohibit firms from setting a high price on products because firms can set prices freely within an organization. This can also benefit the consumer as it brings more competition in the market to set a lower price. c.) (3) Do you think there should be greater government regulations or oversight of firms’ ability to engage in price discrimination? Explain. I think there should be greater government regulations or oversights of a firm’s ability to engage in price discrimination. Having greater regulations prevents firms from abusing market power or unrealistic price settings for consumers. One example that comes to mind is the price of insulin. Millions of people are required to take insulin and the price is very expensive due to only a few companies controlling the market which drives up the price. Greater regulations should be put in place for price discrimination if it prevents consumers from purchasing essential goods or services that could be life-threatening if the consumer does to receive it.

Work Cited: Tuovila, A. (2022, May 25). What Is Deadweight Loss, How It's Created, and Economic Impact . Investopedia. https://www.investopedia.com/terms/d/deadweightloss.asp

6921 Assignment 4, Alexis Hayslette

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