1. Suppose there are two firms in the market. If they cooperate, they can make $400 each per year in economic profit. If they both compete, they make $200 per year. If one competes and one tries to cooperate, the "competer" makes $800 and the cooperator makes $50. The yearly interest rate is r.

Suppose firm 1 plays a "trigger strategy" of cooperating until it observes the other firm competing, and then competing ever afterwards. In this case, for what values r would firm 2 prefer playing a trigger strategy to competing in every period?

2. There are two firms in a market that produce an identical good, both with marginal cost MC=10. Fixed costs are zero for both firms. Suppose inverse demand for a product is P = 130 - Q.

a) If the firms set the monopoly price and split the monopoly quantity. What quantities do they choose and what profit do they receive?

b) Suppose they set quantities simultaneously. That is, suppose the firms play a Cournot game. What quantities do they choose and what profit do they receive?

c) Suppose firm 1 knows that firm 2 will play the quantity it chooses in (a). What quantity should firm 1 pick? (Hint: use the best response function you derive in (b)). What are profits for each firm?

d) Suppose the firms meet infinitely often. They can save money at interest rate r. Suppose both firms play trigger strategies. That is, suppose firm 2's strategy is to play the collusive quantity every period (the quantity derived in (a)) unless it observes firm 1 cheat, in which case firm 2 switches to playing the competitive quantity (the quantity derived in (b)). If firm 2 plays this way, what interest rate is necessary for a trigger strategy to be preferable for firm 1, as compared to cheating in the first period (playing the quantity in (c)) and playing the competitive quantity (as in (b)) afterwards.

The next 3 problems pertain to the following question:

Which of the following restraints of trade would the Taft court consider to be ancillary and which would be naked restraints of trade? Why? Keep in mind that we can separate the question of whether an activity is ancillary from whether or not it is legal. That is, saying that an activity is legal does not make it ancillary.

3. A group of U.S. firms that sell only abroad agree to market their products jointly.

4. An owner sells a part of his firm to a buyer, and forces the buyer to agree not to compete with the portion of the business that the seller retains.

5. A group of workers bargain for their wages collectively (form a union).

The next 4 problems refer to the following case:

In 1969, the Antitrust Division of the Department of Justice sued 900 California supermarkets for agreeing to adopt a uniform check cashing charge of 10 cents. Prior to 1969, most California supermarkets (including all of the 900 defendants) had no charge for cashing customer checks, so long as a purchase was made.

6. Under what section of what act were the supermarkets charged?

A) Sherman Act, Section 1 B) Sherman Act, Section 2

C) Clayton Act, Section 7 D) Federal Trade Commission Act

7. The grocery companies responded with evidence that check cashing was a service that used up scarce resources -- and those who wanted this service should pay for it, relative to those who paid cash and did not impose check- cashing costs (i.e., "transaction costs") upon the defendants. Would the court view this defense favorably?

A. Yes, economics says that people should pay for costly services.
B. Yes, if costs of check cashing went up, supermarkets might lose money.
C. No, if consumers did not used to pay for check cashing, they should not have pay for it now.
D. No, while check-cashing may be costly for supermarkets, that does not justify supermarkets agreeing on a price.

8. The grocery companies also responded with evidence that in many parts of the country (including states where chain store defendants were operating) grocery stores charged a fee for cashing checks. Would the court view this defense favorably?

A. Yes, the government should not force supermarkets to set up different check cashing systems, which might be costly.
B. Yes, the fact that check-cashing fees occurred in other markets shows that they might be a natural feature of the California market.
C. No, that still does not justify why a group of supermarkets needed to agree to a charge.
D. No, that does not explain why supermarkets used to not charge a fee and now do.

9. The grocery companies also responded with evidence that the ten cent fee did not cover the full cost of cashing checks (relative to cash payment), if one took into account the losses sustained due to bad checks. Would the court view this defense favorably?

A. Yes, it is economically inefficient for firms to be charging a price far below the cost of a service.
B. Yes, it is unfair for the court to force firms to charge a price below the cost of a product.
C. No, that is an argument that the price is reasonable, which never holds up in court.
D. No, the court cannot verify that such calculations are true.

10. In 1979, Robert Pitofsky (a future chairman of the FTC) wrote "There probably has never been a period comparable to the last decade when antitrust economists and lawyers have had such success in persuading the court to adopt an exclusively economic approach to antitrust questions.
... I will urge a different view. It is bad history, bad policy and bad law to exclude certain political values."

For what political reasons might we oppose large firms?

(A short essay is sufficient - a few sentences to a half-page.)