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BS3572 Industrial Economics Tutorial 3 Exercise 1 Finish Exercises 1.3 and 3 from Problem Set 2. Exercise 2 1.

Read the paper by S. Borenstein (1994), Rapid Price Communication and Coordination: The Airline Tari Publishing Case , and consider the following questions: According to the US Department of Justice (DOJ) allegations, how the pre-announcement of price increases and the use of fare basis codes and footnote designators were facilitating collusion in the airline industry? What arguments did the airlines use to reject the allegations of collusion and what was the response of the DOJ to each of these arguments? What agreement was reached between the DOJ and the airlines? 2. As alleged by the DOJ, the distribution of fare change information by the Airline Tari Publishing Company allowed the airline companies to engage in communication in order to coordinate on higher prices. However, the distribution of fare change information also allows the airlines to detect and respond to price changes of the competitors almost immediately. To see why the detection lag matters in maintaining collusion, answer again Exercise 1.3 from Problem Set 2 but now assume that it takes 2 periods to detect a deviation. Exercise 3 In Balzac there are only two TV stations. At a certain time, each has the choice of broadcasting a Dinosaur s hockey game or the Royal Canadian Ballet: 70% of the viewers want to watch the hockey game; 30% want to see the ballet. Each would rather have their ngernails removed than watch the alternative program. If both stations show the same program, they split the audience evenly between them. If maximizing prots means maximizing viewing audience, what programs will the two stations broadcast? Is the market equilibrium e cient? How will your answers change if 60% of the viewers want to watch the hockey game and the rest - the ballet? Exercise 4 Consider Hotelling s location model with n rms. The product characteristic space is the unit interval, consumer tastes are uniformly distributed on this interval, and prices are xed. 1. Suppose that n = 3. Argue that there does not exist a Nash equilibrium (in pure strategies): 1

(a) Argue that a rm has a protable deviation if all three rms choose the same location. (b) If all rms do not choose the same location, there necessarily exists a peripheral rm (meaning that there are no rms located either on its left or on its right) and whose location is dierent from the locations of the other two rms. Argue that this rm has a protable deviation. 2. Suppose that n = 4. Determine which of the following location (strategy) proles form the Nash equilibria: (a) (b) (c) , that is, two rms are located at point 1 , while the other 4 3 two rms are located at point 4 on the unit interval.
1 ; 3 1 ; 4 1 ; 3 2 ; 4 2 ; 3 2 ; 4 2 3 3 4 1 1 3 3 ; ; ; 4 4 4 4

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