Economic European Commission Questions

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1. (30 marks) Read the following press release of the European Commission
(Brussels, 28, March 2012). We model the European air cargo market as
follows. First, only the 14 firms associated in the cartel were active on the
market. Second, these firms are symmetric and had the same constant
marginal cost, c, for supplying airfreight services. Third, these firms competed
as in the Cournot model by choosing the quantity of airfreight services.
Finally, the inverse demand for airfreight services (per month) was given by
?? = ?? ? 2??, where q denotes the total quantity of airfreight services supplied
by the 14 firms.
The Commission fined the cartel members a total of 169 million euros.
Given the cartel lasted for 72 months, this is roughly equivalent to 2.35
million euros per month. This fine is meant to compensate the European
consumers for the reduction in the consumer surplus because of the existence
of the cartel.
a. (10 marks) Show that (?? ? ??) had to be equal to 3.89 million per month
to justify the fine 2.35 million per month imposed by the Commission.
b. (10 marks) Set (?? ? ??) to 3.89 million. Assuming that the cartel profits
were equally shared among the cartel members, show that any of these
firms would have been better off by leaving cartel (then the defecting firm
and the cartel will compete like a two-firm Cournot model). Discuss the
stability of the cartel.
c. (10 marks) Now suppose that the 14 firms were following a grim trigger
strategy and were expecting to continue to continue to compete
indefinitely on that market. Under the grim trigger strategy, all 14 firms
compete independently in the Cournot model. Compute the minimum
discount factor that allowed the 14 firms to sustain full collusion.

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European Commission

European air cargo market

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