MAE 214 Economic Strategy for Business
Assignment TWO
Due by 11:59 PM on Sunday, September 16 2018
F This is an INDIVIDUAL assignment.
F Late assignments will not be accepted without a valid excuse.
1. (10 Marks) The Concentration Ratio and Her
ndahl Index.
The
gure below shows the Australian mortgage lending market share in 2007 and 2014:
(a) (2 marks) Compute the N-
rm Concentration Ratio, CR(N), for N=1, 2, 3, and 4 for the
Australian residential mortgage market in 2007.
(b) (2 marks) Compute the N-
rm Concentration Ratio, CR(N), for N=1, 2, 3, and 4 for the
Australian residential mortgage market in 2014.
(c) (2 marks) Show that the Her
ndahl Index for the Australian residential mortgage market in
2007 is between 7.7% and 13.1%.
(d) (2 marks) Show that the Her
ndahl Index for the Australian residential mortgage market in
2014 is between 14.8% and 18.3%.
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(e) (2 marks) The article below provides the sales of new vehicles for major brands in Australia
in 2017:
https://www.caradvice.com.au/612213/vfacts-industry-claims-annual-record-for-2017/
First calculate the 4-
rm Concentration Ratio, CR(4), for the Australian motor industry in
2017. Based on CR(4), determine whether the Australian mortgage market or the Australian
motor industry is more concentrated.
2. (30 marks) Product Di¤erentiation and Price Competition: Apple and Samsung.
In many oligopolistic markets,
rms o¤er similar but not exactly the same products (called di¤er-
entiated products). Examples include products o¤ered by Coles and Woolworths, Coke and Pepsi,
Pizza Hut and Dominos, Apple and Samsung, Qantas and Virgin, just to name a few. In this
exercise, we study product di¤erentiation and price competition between Apple and Samsung in
the market for smartphones. Assume that the demand for iPhones is determined by the following
equation:
QA(PA; PS) = 2800 ? 2PA + PS;
where PA is Apples price for an iPhone, and PS is Samsungs price for a Galaxy.
The demand for Samsung Galaxy phones is
QS(PA; PS) = 2800 ? 2PS + PA:
Each
rm has a constant marginal cost of $400.
(a) (2 marks) Determine the optimal pricing strategy for each
rm.
(b) (2 marks) Calculate the equilibrium pro
ts for each
rm.
Consider the following two scenarios independently.
Scenario I. Trump Tari¤
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Recently the U.S. imposes a 10% tari¤ on imports of Chinese goods. Suppose the tari¤ applies
to the iPhone. This raise the cost to Apple for the China-assembled smartphones into the
United States. Accordingly, the tari¤ increases the marginal cost of the iPhone by $40. On
the other hand, we assume that the tari¤ has no impacts on Samsung Galaxy, as Samsung
makes over half its phones in South Korea and Vietnam.
(c) (8 marks) Redo (a) and (b).
(d) (4 marks) Based on your answers in (a)-(c), discuss how the Trump tari¤ a¤ects (i) the prices
of smartphones, (ii) the market share of each
rm, and (iii) the pro
tability of each
rm.
Scenario II. Research and Development
Suppose now each
rm can make an investment in R&D to enhance its product features and
di¤erentiate the product from its rival. Denote by IA the amount of money Apple spends on
R&D, and IS the amount of money Samsung spends on R&D. For simplicity, assume IA and
IS admit the following two values: $0 and $100,000. Given (IA; IS); the demand for iPhones
is determined by the following equation:
QA(PA; PS; IA; IS) = 2800 +
IA ? IS
500 ? 2PA + PS;
and the demand for Samsung Galaxy phones is
QS(PA; PS; IA; IS) = 2800 +
IS ? IA
500 ? 2PS + PA:
Consider the following two-stage game. In the
rst stage, Apple and Samsung simultaneously
choose R&D spending IA and IS; respectively. In the second stage, after observing each others
investment in R&D in the
rst stage, Apple and Samsung simultaneously choose prices PA
and PS; respectively.
(e) (10 marks) Find the subgame perfect Nash equilibrium of this two-stage game.
(f) (4 marks) Based on your answers in (a), (b) and (e), discuss how R&D on product di¤eren-
tiation a¤ects (i) the prices of smartphones, (ii) the market share of each
rm, and (iii) the
pro
tability of each
rm.
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