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Regulation & Antitrust Policy (Econ 180 ) Signature: Drake University, Spring 2009 William M. Boal Printed name:
HOMEWORK EXERCISE
"Franchise Bidding and Government Enterprise"
Due April 22, 2009
INSTRUCTIONS: Please enter your answers in the boxes provided. Point values are noted in brackets.
(1) [Franchise bidding: 10 pts] Suppose three firms are bidding for a franchise in a descending English auction. Bids consist simply of proposed prices for a particular service for a city. Firm A's average cost is $10. Firm B's average cost is $8. Firm C's average cost is $5. Each firm chooses its bidding strategy to maximize profit.
a. Which firm will win the auction?
b. What price will be the winning bid? $
Drake University, Spring 2009
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(2) [Franchise bidding with multipart tariffs: 32 pts] A city has received the following two bids for a particular service (such as cable TV, telephone service, internet access, water, etc.). Each bid consists of a two-part tariff, including a monthly charge (or "entry fee") that each customer must pay no matter how much they use, and a usage price per unit demanded. Proposed tariffs Best Services' bid Superior Services' bid Usage charge (per unit) $1.00 $0. Monthly charge $5.00 $40.
Suppose demand for the service by a typical resident is as follows.
Best Services Superior Services
a. How much usage would a typical resident demand under each proposed tariff?
units units
b. How much money would a typical resident spend under each proposed tariff? Include both the monthly charge and the usage charge.
c. How much consumer surplus would a typical resident enjoy under each proposed tariff?
d. Assume the city wants to get the best possible deal for its residents. Which firm should get the franchise? e. Why?
Drake University, Spring 2009
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(4) [Competition versus natural monopoly: 28 pts] The following graph shows market demand for cable TV service in a particular city. Assume cable TV service is a natural monopoly. With production by one firm, marginal cost and average cost are about $8. Production by two firms instead of one (called "overbuild") raises marginal and average cost to $12. However, assume that production by two firms also drives price down from the monopoly level to the competitive level.
Number of subscribers (thousands)
Monthly fee (per subscriber)
a. Using a straightedge , draw and label the marginal revenue curve if this market is served by a monopoly.
b. Compute the monopoly price. $
c. Compute the monopoly quantity. thousand
d. Compute the deadweight loss from monopoly pricing, as compared with competitive marginal-cost pricing.
$ thousand
e. Compute the cost saving from monopoly production. $ thousand
f. Is society better off with a monopoly, or with "overbuild" and competition?
g. Why?
[end of exercise]
