Owners of firms typically have less information than the managers and cannot
perfectly monitor the behavior of the latter. Describe various mechanisms,
including but not limited to direct monetary incentives that may limit the ability of managers to pursue their own objectives rather than those of the owners.
(a) Define third-degree price discrimination and describe at least two examples of this practice. Then explain why profit maximization under third-degree price discrimination requires that marginal revenue for each group of consumers equals marginal cost. Finally, use this condition to explain how a price discriminating monopolist facing linear demands and increasing marginal cost should change its prices and total output if the demand curve for one group of consumers shifts outwards. (b) Consider an industry where an incumbent firm and a potential entrant with
identical cost functions play a three-stage game as follows. In period 1, the
incumbent firm can invest in R&D that will lower its unit production cost. In
period 2, the potential entrant may or may not enter; if it enters, it must incur a
fixed cost of entry equal to f. However, the potential entrant cannot invest in
R&D and therefore cannot affect its unit production cost. In period 3, the firm
or firms in the market set quantities. Discuss the incentives that the incumbent has to invest in R&D. How does your answer change if firms compete in prices in period 3? Explain.
Describe one econometric study of collusive behavior, including a discussion of the link between theory and econometric modeling. Explain the uses and
limitations of this type of empirical work.
Discuss the advantages and disadvantages of the “rule of reason” approach in
the conduct of competition policy. Refer to particular business practices to justify your answer and describe briefly any relevant empirical evidence.