Rail services in Belland

Read the extracts and answer the questions that follow.

Text A — The national rail network

1. Belland Rail is the only operator of passenger trains on Belland’s national rail network. Constructing parallel tracks would involve extremely high fixed costs, while the cost of carrying an additional passenger is low. Economists therefore describe the network as a natural monopoly.

2. Belland Rail is privately owned and protected by a 20-year operating licence. Passenger groups claim that fares are high, services are overcrowded and the firm restricts output to increase profit. The firm argues that its abnormal profit finances safer trains and research into lower-energy technology.

Text B — Proposed regulation

1. The government is considering a maximum fare and minimum service-quality standards. It may also require Belland Rail to give other operators access to its tracks. Regulation could protect passengers, although the regulator does not have complete information about the firm’s costs.

2. Alternatively, the government could purchase Belland Rail. Supporters of government ownership expect greater access for rural passengers, while opponents fear political interference and weak cost control.

Table 1 — Belland Rail revenue and cost data

Belland Rail annual revenue and cost data

Table 2 — Passenger rail market data

Annual passenger rail journeys under current monopoly output and estimated allocatively efficient output.

Mobile telecommunications in Caruba

Read the extracts and answer the questions that follow.

Text A — A concentrated market

1. Three firms supply almost all mobile services in Caruba. Entry requires a government spectrum licence and a nationwide network. The firms are interdependent because each pricing decision affects the sales of its rivals.

2. Following several years of stable prices, the competition authority found messages suggesting that the firms had agreed not to offer monthly contracts below 30 carubs. The firms deny collusion, claiming that similar costs explain similar prices.

Text B — Competition and enforcement

1. A new virtual-network operator entered by renting access to an existing network and charging lower prices. The three established firms responded with temporary discounts, raising the possibility of a price war.

2. The authority may impose fines and require network access on fair terms. Consumer groups support intervention, but the firms argue that high profits finance fifth-generation network investment in remote regions.

Table 1 — Mobile market shares

Mobile market shares in Caruba

Table 2 — Contract prices and subscribers

Uncompleted two-firm payoff matrix for price strategies.

A patented medicine in Norland

Read the extracts and answer the questions that follow.

Text A — Medica’s treatment

1. Medica developed a treatment for a rare disease. A patent prevents other firms from producing the medicine for 12 years, creating a significant barrier to entry. Patients have no close substitute, and the national health service purchases nearly all doses.

2. Medica states that its abnormal profit rewards risky research and finances trials for new treatments. Patient groups argue that the high price limits access and transfers public funds to Medica’s shareholders.

Text B — Policy options

1. The government is considering a maximum price, compulsory licensing to generic producers, or a fine if Medica is found to have charged an excessive price. Medica warns that compulsory licensing would weaken future innovation incentives.

2. The health ministry could instead negotiate a price linked to treatment outcomes. However, the ministry has less information than Medica about development costs and clinical effectiveness.

Table 1 — Medica’s output data

Medica's annual output, price and average economic cost.

Table 2 — Research expenditure

Medica’s annual research expenditure before and after patent approval.

Grocery retailing in Estara

Read the extracts and answer the questions that follow.

Text A — Supermarket expansion

1. Four supermarket chains account for most grocery sales in Estara. Their large distribution centres permit bulk purchasing and specialized logistics. Independent shops claim that the chains use below-cost introductory prices to discourage entry.

2. The chains compete through loyalty schemes, home delivery and own-brand products. This non-price competition has increased convenience, but consumer groups argue that apparent variety hides similar products supplied by the same large firms.

Text B — A proposed merger

1. FreshWay wants to acquire DailyBasket. The merger would increase concentration and might reduce competition in smaller towns. FreshWay claims that greater economies of scale would lower average costs and food prices.

2. The competition authority may block the merger, require the sale of some stores or impose conditions protecting suppliers. It must decide whether expected efficiencies are likely to reach consumers.

Table 1 — Grocery market shares

Grocery market shares before the proposed merger; independent retailers are shown as an aggregate.

Table 2 — FreshWay cost and price projections

FreshWay projected cost and price per basket before and after the proposed merger.

Cafés in the city of Lydora

Read the extracts and answer the questions that follow.

Text A — A differentiated market

1. Lydora has hundreds of independently owned cafés. Entry requires limited capital, but cafés differentiate themselves through location, menus, décor and service. The market therefore resembles monopolistic competition.

2. BeanHouse introduced a distinctive menu and earned high profit during its first year. Several similar cafés then entered nearby. BeanHouse’s demand fell and became more price elastic as consumers gained additional substitutes.

Text B — Long-run outcomes

1. BeanHouse now earns normal profit. Its owner nevertheless receives an income because the opportunity cost of the owner’s time and capital is included in economic cost.

2. Some economists criticize duplicated advertising and unused seating capacity. Others argue that product variety allows consumers to choose cafés that better match their preferences.

Table 1 — BeanHouse short-run data

BeanHouse short-run daily data

Table 2 — Market entry data

Market entry and BeanHouse daily sales

Electricity distribution in Meridia

Read the extracts and answer the questions that follow.

Text A — Meridian Grid

1. Meridian Grid owns the transmission lines linking generators to households. The network’s large fixed costs and falling long-run average cost make duplicate grids inefficient. The government therefore permits one supplier but controls its prices.

2. The regulator allows Meridian Grid to earn a specified return on capital and requires universal service. Critics argue that this form of price regulation gives the firm an incentive to exaggerate costs and invest in unnecessary capital.

Text B — Reliability and ownership

1. Storm damage caused lengthy power cuts. Consumer groups claim that Meridian Grid reduced maintenance to increase economic profit. The firm says the regulated price was too low to finance resilient infrastructure.

2. The government is considering public ownership. This could prioritize reliability and access, but taxpayers would bear losses and political objectives might replace efficient management.

Table 1 — Meridian Grid finances

Meridian Grid annual finances

Table 2 — Reliability data

Meridian Grid reliability indicators for two periods.

Cement production in Darsana

Read the extracts and answer the questions that follow.

Text A — Industry concentration

1. Cement production requires expensive plants, access to limestone and extensive distribution networks. Four producers supply nearly the entire market. The government suspects that firms have divided customers geographically.

2. A high concentration ratio may indicate market power, but the producers argue that imported cement and potential entrants constrain their pricing. They also claim that large plants achieve technical economies of scale.

Text B — A price-fixing investigation

1. Construction companies report simultaneous cement-price increases despite falling energy costs. The competition authority is considering fines and individual penalties for managers if price fixing is proven.

2. Housing groups support strict enforcement because cement is an important input into construction. The firms warn that large fines could reduce investment and employment.

Table 1 — Cement producers’ sales

Annual cement sales by producer

Table 2 — Price and cost data

Cement price and average energy cost per tonne.

Water supply in Pelago

Read the extracts and answer the questions that follow.

Text A — AquaPel

1. AquaPel owns the reservoirs and pipe network supplying Pelago’s capital. No household has a close alternative to piped water. The firm’s licence and ownership of the network create high barriers to entry.

2. AquaPel has been accused of restricting output through underinvestment in leakage control. Water tariffs have risen while service interruptions have become more frequent.

Text B — A price cap

1. The regulator proposes a five-year price cap that allows tariff increases only when economy-wide inflation exceeds expected productivity growth. AquaPel argues that the regulator has underestimated future maintenance costs.

2. Consumer groups support the cap but demand minimum quality standards as well. Economists warn that price regulation without quality monitoring may encourage further cost cutting.

Table 1 — AquaPel cost and revenue data

AquaPel annual water sales, tariff and economic cost.

Table 2 — Water service indicators

Water service indicators for AquaPel's network.

A patented medicine in Norland

NorlPharm is the only supplier of Cardiox, an essential medicine protected by a patent. No close substitutes are available. The government is concerned that the patent allows NorlPharm to restrict output and charge a price above marginal cost.

Assume that there are no externalities and that all monetary values are measured in Norland dollars. Table 1 gives the market demand and cost information.

Table 1

Market demand and cost information for Cardiox in Norland.

The government is considering a maximum price or a compulsory licence that would allow other qualified producers to manufacture Cardiox.

Water distribution in Bellara

AquaBell is the privately owned sole supplier of piped water in the city of Bellara. Constructing a second pipe network would require substantial duplication of fixed infrastructure. AquaBell’s annual total cost is given by $TC=400+20Q$, where output is measured in millions of cubic metres per year and total cost is measured in millions of bellars per year.

Table 1 shows three possible price and output outcomes considered by the water regulator. Values in Table 1 are rounded to two decimal places where applicable.

Table 1

Possible regulated and unregulated outcomes for AquaBell.

The regulator must balance affordable water, allocative efficiency, AquaBell’s financial sustainability and continued maintenance of the network.

A proposed digital-platform merger in Tazbek

Several firms operate online marketplaces in Tazbek. MarketHub proposes to acquire ShopLink. The competition authority is concerned that network effects, control of transaction data and high switching costs already protect the largest platforms.

Table 1 shows market shares before the proposed acquisition.

Table 1

Online-marketplace market shares before and after the proposed acquisition.

Table 2 gives price, revenue and total economic cost information for MarketHub’s premium seller service. Quantities are measured in millions of subscriptions per year and monetary values are in millions of taz.

Table 2

MarketHub premium seller service: revenue and cost data

Semiconductor production in Carinth

The semiconductor industry in Carinth is dominated by a small number of firms. NanoCore, the largest producer, proposes acquiring a smaller competitor. NanoCore argues that its scale and abnormal profit allow it to finance risky research and development.

Table 1 shows firms’ current market shares.

Table 1

Semiconductor firms’ market shares before the proposed acquisition.

Table 2 gives information about a process innovation recently developed by NanoCore. Output is measured in millions of chips and monetary amounts in millions of carins unless otherwise stated.

Table 2

NanoCore process innovation data

The competition authority must decide whether to prohibit the acquisition, approve it, or approve it subject to conditions.

The ShopLink digital marketplace

Read the extracts and answer the questions that follow.

Text A — Growth of ShopLink

1. ShopLink connects consumers with independent online retailers. As more buyers join, more sellers find the platform attractive, which attracts still more buyers. ShopLink also controls extensive purchasing data and makes transferring reviews to rival platforms difficult.

2. ShopLink is a price maker in the market for marketplace services. It increased the commission paid by retailers and began placing its own products above rival products in search results. Small retailers claim that they cannot reach enough customers without using ShopLink.

Text B — Competition policy

1. The competition authority states that ShopLink may be abusing its market power. It proposes requiring equal search treatment, allowing users to transfer data and preventing ShopLink from buying a new rival.

2. ShopLink argues that integration reduces costs, improves delivery and finances research into fraud detection. It warns that strict rules could reduce innovation and free services for consumers.

Table 1 — ShopLink commission and transactions

ShopLink commission and annual transaction data before and after the change.

Table 2 — Online marketplace shares

Online marketplace shares

Domestic airlines in Torvia

Read the extracts and answer the questions that follow.

Text A — Two leading airlines

1. AeroTor and SkyPath dominate domestic air travel. Airport slots, safety certification and aircraft costs create high entry barriers. Each airline anticipates the other’s response when changing fares, indicating an oligopoly.

2. Both firms previously maintained high fares. SkyPath then cut fares to gain market share, and AeroTor responded. The resulting price war increased passenger numbers but sharply reduced profit.

Text B — Cooperation or competition

1. The airlines now share some airport lounges and coordinate schedules. The competition authority is investigating whether this cooperation has extended to illegal fare fixing.

2. The firms argue that cooperation reduces duplicated costs and supports routes to remote regions. Consumer groups fear that tacit coordination will raise fares once the price war ends.

Table 1 — Passenger fares and quantities

Average domestic air fare and annual passenger journeys during the price war.

Table 2 — Airline strategy payoffs

Airline strategy payoffs, in millions of torins.

Commercial seeds in Arandia

Read the extracts and answer the questions that follow.

Text A — GeneGrow

1. GeneGrow supplies patented drought-resistant seeds. Farmers must purchase new seeds each year and may not reproduce them. Patents, specialist research and control of distribution protect GeneGrow from entry.

2. GeneGrow’s seeds raise yields during droughts, but their prices have increased. Farmers argue that the absence of a close substitute gives GeneGrow excessive control over price.

Text B — Innovation and access

1. GeneGrow spends part of its profit on research and development (R&D). It claims that large, uncertain research projects would not occur without patent protection and the possibility of abnormal profit.

2. The government is considering compulsory licensing, a maximum seed price and publicly funded agricultural research. It must balance farmer access against future innovation.

Table 1 — GeneGrow production data

GeneGrow production data

Table 2 — Research and yield data

Research expenditure and drought-year crop yield data for GeneGrow.

Video streaming in Vestalia

Read the extracts and answer the questions that follow.

Text A — Competing platforms

1. Four major platforms dominate Vestalia’s video-streaming market. They differentiate their services through exclusive programmes, recommendation systems and subscription bundles. Consumers often subscribe to more than one platform.

2. ViewNow has acquired several independent studios and made their programmes exclusive. Rival platforms claim that vertical integration reduces their access to content and strengthens ViewNow’s market dominance.

Text B — Consumer choice and intervention

1. ViewNow argues that its scale finances expensive original programmes and gives viewers greater product variety. Consumer groups respond that repeated subscription-price increases and incompatible user profiles make switching costly.

2. The competition authority is considering preventing further studio acquisitions and requiring platforms to make user profiles portable. It could also require some programmes to be licensed to rivals.

Table 1 — Streaming market shares

Streaming market shares in Vestalia.

Table 2 — ViewNow subscription data

ViewNow monthly subscription data before and after a price increase.