Problem 1: DOJ guidelines. The distance between State College and Pittsburgh is 150 miles. There is...

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Problem 1: DOJ guidelines. The distance between State College and Pittsburgh is 150 miles. There is 1 gravel company in State College. And there is a gravel company every 30 miles between State College and Pittsburgh, for a total of 6 firms. The situation is pictured below. Firm 1 (in State College) Firm 2 Firm 3 Firm 4 Firm 5 Firm 6 (in Pittsburgh) 0 30 60 90 120 150 Distance The cost of producing a unit of gravel is 97 dollars, and the cost of shipping a unit of gravel is 10 cents per mile. Suppose that firms compete by choosing prices (they play a Bertrand game). Recall the DOJ guidelines: "a market is a group of firms such that a hypothetical monopoly (or a hypothetical cartel) would be able able to raise prices significantly". Suppose here that "significantly" means by at least 10 percent. (a) What are the firms in the State College's market for gravel? You will use this answer for the next three parts. (b) Suppose that all firms in State College's market for gravel have equal market shares. What is the HHI? (c) Suppose that the firms in State College's market for gravel merge propose to merge into two firms with equal market shares. If this merger is approved, what would the HHI be? (d) Given the DOJ guideline for challenging a merger below, should the merger be consid- ered safe, be scurtinized, or be presumed to be anti-competitive? less than 1500 less than 100 Safe Change in 100 to 200 Safe Scrutinize Post merger HHI 1500 to 2500 Safe more than 2500 Safe Scrutinize more than 200 Safe Scrutinize PAC* Table 1: PAC: Presume to be anticompetitive Problem 1: DOJ guidelines. The distance between State College and Pittsburgh is 150 miles. There is 1 gravel company in State College. And there is a gravel company every 30 miles between State College and Pittsburgh, for a total of 6 firms. The situation is pictured below. Firm 1 (in State College) Firm 2 Firm 3 Firm 4 Firm 5 Firm 6 (in Pittsburgh) 0 30 60 90 120 150 Distance The cost of producing a unit of gravel is 97 dollars, and the cost of shipping a unit of gravel is 10 cents per mile. Suppose that firms compete by choosing prices (they play a Bertrand game). Recall the DOJ guidelines: "a market is a group of firms such that a hypothetical monopoly (or a hypothetical cartel) would be able able to raise prices significantly". Suppose here that "significantly" means by at least 10 percent. (a) What are the firms in the State College's market for gravel? You will use this answer for the next three parts. (b) Suppose that all firms in State College's market for gravel have equal market shares. What is the HHI? (c) Suppose that the firms in State College's market for gravel merge propose to merge into two firms with equal market shares. If this merger is approved, what would the HHI be? (d) Given the DOJ guideline for challenging a merger below, should the merger be consid- ered safe, be scurtinized, or be presumed to be anti-competitive? less than 1500 less than 100 Safe Change in 100 to 200 Safe Scrutinize Post merger HHI 1500 to 2500 Safe more than 2500 Safe Scrutinize more than 200 Safe Scrutinize PAC* Table 1: PAC: Presume to be anticompetitive