In a small town, the managers of the three janitorial service firms have tacitly agreed to charge $150 per week for cleaning a standard-sized office. Each firm services 200 offices. The marginal cost and average total cost of cleaning an office are both $130.
1. What is each firm’s economic profit?
2. Suppose that a new office opens. Its owners tell the managers of one of the janitorial service firms that they will hire the janitorial service—but only if the price is $140 per week. Is this new contract profitable for this firm? If the janitorial service managers sign the contract, how would it affect the tacit collusion among the firms?
3. Suppose that the janitorial service’s contracts with its 200 existing customers all have most-favored-customer clauses. Now if the owners of the new office offer to sign a contract only if the price is $140 per week, is it profitable for the janitorial service firm to sign the contract? Why or why not? How does this clause affect the tacit agreement? If the company agrees to the new contract, what will be the effect on the tacit agreement?
1.9-) Intel and Applied Micro Devices are the two major producers of CPU chips used in personal computers. They can each research and enhance their chips’ computational speed, reduce their power consumption, or enhance their graphics ability. The economic profit depends on each company’s choice of which attribute to research. The payoff matrix shows each firm’s hypothetical economic profit for all possible choices. What is the Nash equilibrium of this game? Explain your answer.
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5.1-) How does the antitrust treatment of price discrimination, tying contracts, and exclusive dealing contracts in the European Union compare with their treatment in the United States?
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