Prof. Dr.

Ulrich Schwalbe Winter Term 2010/11

Economic Foundations of
Competition Law and Regulation
Review questions 1

Efficiency Concepts and Market Forms

Exercise 1 Describe the concepts of consumer surplus (or consumer welfare) and
total surplus (or total welfare). What are the arguments in favour and against
using consumer surplus rather than total surplus as the objective of competi-
tion policy?

Exercise 2 To what extend might trade policy and competition policy be in con-
flict with each other?

Exercise 3 Explain why there is a possible tension between allocative and effi-
ciency on the one hand and productive and dynamic efficiency on the other?

Exercise 4 Find all Nash—equilibria in pure strategies in the following two–

person game:

L C R
U 1, 2 2, 1 1, 0
L 0, 5 1, 2 7, 4
D −1, 1 3, 0 5, 2

Why is an equilibrium defined in terms of strategies rather than in terms of

payoffs? Explain your answer by using the game above.

Exercise 5 In the fall of 1999, the price of a long–distance telephone call in the
United States dropped to as low as 5 to 7 cents per Minute, down from 50
cents a generation ago and 25 cents in 1992, as the major U.S. telephone com-
panies engaged in a brutal price war. It all started in August 1999 when MCI
Worldcom and Sprint (respectively the American number 2 and the number
3 long–distance telephone company before the merged in October 1999) lowe-
red the price of a long–distance telephone call to 5 cents per minute for night
and weekend calls and 10 cents for daytime calls with a monthly fee of $ 4.95
and $ 5.95, respectively. Soon after, AT&T responded by offering a flat price
of 7 cents per minute for day or night calls and a monthly fee of $ 5.95. A
full–fledged price war had erupted, which might conceivably see the price of
 long–distance telephone calls fall to zero and telephone companies receiving
revenues from monthly fees, cell phone charges, and Internet access.
How can this type of situation bee described? How do you think such a price
war can be avoided? Are cartels stable?

Exercise 6 Why should one expect an inverted U relationship between competi-

tion and innovation?