Homework 4
Instructions
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Task (6 points, maximum 800 words)
Read the paper by Shapiro (1995) (see the study materials). Answer the following questions.
Please, use your own formulations. Do not copy sentences or formulations from the paper:
1. What are unilateral and coordinated effects of a merger?
2. How does the approach of the competition agency differ for markets with
homogeneous and differentiated products?
3. What are incremental costs (you can find the definition also in other sources)?
4. Define the diversion ratios from brand A to brand B. What are the premerger gross
margins?
5. How do these two variables affect the profit-maximizing price increase? If the
diversion ratio (premerger gross margin) is high, the price increase will be higher or
lower? Explain the intuition behind it.
6. What is product repositioning? What is its likely effect on post-merger prices if the
diversion ratio is high?