- [
**Reading**] Read the following article:

Couture, T. (2013). Without Favour: The Concentration of New Brunswick’s Print Media Industry. *Canadian Journal of Communication, 38*(1), 57-81. Retrieved from https://doi.org/10.22230/cjc.2013v38n1a2578

## Can’t find the full text of the article? On the page above, look below the abstract, and below the Keywords. There’s a line that starts with the bold words ‘Full Text’, followed by TINY links labeled PDF and HTML. Click on one of those to access the full version of the article.

**Complete a 3-2-1 report for the above article using the form found on Brightspace.**

**Question 1**: ** In your own words**, what are the

**3 most important concepts**, ideas or issues in the reading? Briefly explain why you chose them. Note

*: the concept the reading’s author(s) thought was the most important should be included.*

Concept 1 (In your own words)

Concept 2 (In your own words)

Concept 3 (In your own words)

**Question 2**: What are **2 concepts, ideas or issues in the article that you had difficulty understanding, or that are missing but should have been included**? ** In your own words**, briefly explain

**what you did to correct the situation**(e.g. looked up an unfamiliar word or a missing fact), and the result. Cite any sites or sources used

**in APA format**.

Issue 1 (In your own words) and what you found out

Citation 1 (in APA format)

Issue 2 (In your own words) and what you found out

Citation 2 (in APA format)

**Question 3**: What is the main **competition policy story or idea **of the reading? (Competition policy studies the efficiency of the allocation of society’s scarce resources by firms.)

Story (In your own words)

## 2. [Dead Weight Loss (DWL) of Monopoly]

**REGULAR QUESTION****Basic Math of DWL**) This is one of the rare occasions in this course where it’s ALL about the math (and geometry). I want to make sure we’re all on the same page about the very basics of the calculations involved.

Consider a market described by the following questions: P = Price and Q = Quantity

The inverse demand curve is P = 100 – Q

The industry’s marginal cost curve is MC = 5 + 2Q

## i. Draw a diagram (like the ones we saw in Lecture 7) that shows the demand curve, the

**the ones in the lecture****.**

It does *not *have to be exact – you can freehand sketch it, if you like – but lines should slope in the right direction, and I’d like you to label the intercepts on the Price and Quantity Axes. Please make sure your diagram is in PDF, JPG, GIF or PNG format, otherwise we may run into display issues while marking. It’s fine to copy-paste the diagram into this file, or to upload it separately. You can draw it by hand and take a picture with your phone, use Excel or Powerpoint and save the graphs/drawings as a picture, use a drawing program and take a screenshot, etc.

An example of what I’m looking for:

# Price 650

P_{M}=316

# 75

Q_{M}=125

150

# Quantity

250

(The above image is actually in PDF form. I created the picture in Powerpoint, drag-selected it, copied it to the clipboard, then switched to Word and selected Edit Paste Special Paste as PDF.)

## Well-Labeled Diagram:

[Take as much space as you need, or submit a separate image file.]

## ii. Calculate the area of the Dead Weight Loss triangle. Show your work.

I don’t need to see every step of your work. It’s fine to set up your equations, and then use a math program (or math web site) to do the rest of the work – as long as you let me know what you used for the calculations. For example (this is NOT the right calculation, by the way):

In the perfectly competitive outcome, Price = Marginal Cost, so 300 – 5Q^{2} = 28Q. Solving this equation for Q using Wolfram Alpha^{1}, we get that Q = -11.037 or 5.4365 (approximately). Since Q can’t be negative, the correct solution is that under perfect competition Q = 5.4365. Plugging this into P = MC = 28Q, we find that P = 28 x 5.4365 = … [etc.]

I teach a course to engineering students, and they’re quite fond of Wolfram Alpha as a convenient source of free calculations – it can even solve things that are entirely symbolic (e.g. solve a*x^2=b+ln(x) for x). If you type what you’re looking for in the most obvious way in the search bar, it’ll probably understand what you’re asking for: https://www.wolframalpha.com/

If you DO use math programs, though, remember that I need to see *enough *of your math so that I can understand your reasoning and figure out how you came up with the answer you gave. I want to know what thought process and logic you went through to get the number you eventually write down. If all I get is a (correct) number with no explanation, you’ll get very few, if any, marks for that. The number makes your answer easier to grade, but I’m not interested in the number for its own sake – I want to know *how you think and reason *about economic issues.

## Area of the DWL triangle:

**Work**:

[Write down your work here. Cite and/or link to any sources you used for your calculations.]

1 See https://www.wolframalpha.com/input/?i=solve+300-5*Q%5E2%3D28*Q+for+Q

## b. 88 CHALLENGE QUESTION (DWL and price elasticity of demand).

**If you take this challenge, you are to do it on top of the regular question. It can boost your mark on Question 1 by a maximum of 10 marks (making the maximum mark 88 instead of 78).**

A 1989 article^{2} points out that Nintendo could have sold 45,000,000 game cartridges in 1989, but chose to produce only 33,000,000. This suggests that Nintendo acted like a monopolist, and that the base^{3} of its deadweight loss triangle was equal to about 27% of the competitive output. Put another way, if Q_{M} is the monopoly output and Q_{PC} is the perfectly competitive output, in Nintendo’s case we saw Q_{M}/Q_{PC} = 33/45 = 73% (approx), or equivalently, (Q_{M}/Q_{PC})/Q_{PC} = 27%.

*Superior Propane *is a famous Canadian Competition Policy case that hinged on a deadweight loss calculation. We’ll cover it later in the course. In that case, it was found by one analyst^{4} that the base of the deadweight loss triangle was equal to about 13% of the competitive output. Put another way, it was found that in the market Superior Propane was operating in, Q_{M}/Q_{PC} = 87%, or equivalently, (Q_{M}/Q_{PC})/Q_{PC} = 13%.

## Superior Propane, faced a steeper demand curve? Explain your reasoning. You may use

**diagrams and/or math as part of your explanation.**

## You may assume that the demand and marginal costs curves are linear, just like in Lecture 7.

**Did Nintendo or Superior Propane face a steeper demand curve**?

## Explain your reasoning. You may include math and diagrams if you wish to.

2 Ramirez, D. (1989, December 21). The Sales Game Played by Nintendo’s Wizard. *The New York Times*, D1. Retrieved from https://www.nytimes.com/1989/12/21/business/the-games-played-for-nintendo-s-sales.html

3 The base of the deadweight loss triangle is equal to the difference between the quantities produced under perfect competition, and under monopoly.

4 See the values for Q1 and Q2 given in Footnote 14 on the last page of Mathewson, F. & Winter, R. (2000). *The analysis of efficiencies in Superior Propane: correct criterion incorrectly applied*. Retrieved from https://www.researchgate.net/publication/242536722_The_analysis_of_efficiencies_in_superior_propane_Correc t_criterion_incorrectly_applied

Hint: Which would lead to a wider DWL triangle, as a % of the competitive output? A steep demand curve, which is close to being vertical, or a flat demand curve, which is close to being horizontal?

If you’d like to develop your intuition using math, I recommend the following:

- Let inverse demand be given by P(Q) = a – bQ (the general form of a line)
- Let the Marginal Cost curve be given by MC(Q) = d + cQ.

- Revenue is then P(Q) x Q = (a – bQ) x Q

- Marginal revenue is MR = d(P(Q)xQ)/dQ = a – 2bQ. (I did the calculus for you).

- With this setup, you have everything you need to calculate expressions for Q
_{M}, the monopoly output, and Q_{PC}, the perfectly competitive output.

- You can then calculate an expression for Q
_{M}/Q_{PC}, and see what happens to that ratio as you change b. (Why b? Because that’s the magnitude of the slope of the demand curve. The higher b, the steeper the demand curve.)

- One easy way to do this: have a math program plot your function for you over a wide range of possible values for b. If your expression for Q
_{M}/Q_{PC}has parameters in it other than b (it could include a, b and c), you can substitute sensible trial values for them, and see what happens when you plot the expression for, say, b=0 to 100^{5}.

- If you’re comfortable with calculus, you could also answer the question that way – take the derivative of your expression for Q
_{M}/Q_{PC}with respect to b, and see whether a higher b (steeper curve) makes the monopoly output a higher or lower % of the perfectly competitive output.

5 For example, suppose your expression is (a + b^2)/(bc + d/b). You need to make sure a > d so that the demand and marginal cost curves cross, but other than that your choices of positive constants are pretty open. You could set a = 10, d = 2, c = 3, and tell Wolfram Alpha to plot the result for you for values of b from 0 to 100: ‘plot (10 + b^2)/(3*b + 2/b) for b=0 to 100’: https://www.wolframalpha.com/input/?i=plot+%2810+%2B+b%5E2%29%2F%283*b+%2B+2%2Fb%29+for+b%3D0

## 3. (Fortnite vs Apple)

Epic Games, the owners of the popular Fortnite video game, and Apple are in a bit of a fight^{6}. Epic sells virtual currency within Fortnite. For the Mac version of Fortnite, Apple has been taking 30% of all revenue earned by Epic from these sales.

Epic recently decided to leave what it called the Apple ‘monopoly’ and sell virtual currency directly to Fortnite players, bypassing Apple’s fee. At the same time, it has permanently lowered the price of its virtual currency by 20%^{7}.

Epic claims this is good for its players, and good for society. In this question, you will evaluate this claim in a simple model that keeps much of the flavour of the real-world spat.

## a. REGULAR (Comparing surpluses)

Let’s start with a very standard, very simple setup. (Inverse) demand for virtual currency is given by P(Q) = 100 – Q. At least one game critic has suggested that the marginal cost virtual currency is zero, so let’s go with that.

I’m going to ask you to study and compare two situations: BEFORE Epic’s split with Apple, and AFTER Epic’s split with Apple.

**BEFORE Epic’s split with Apple**: We know Apple charges a fee of 30% of Epic’s revenue. Epic’s revenue^{8} is (1 – 30%) x P(Q) x Q = 70% x (100 – Q) x Q. Epic’s marginal cost is zero. Assume that Epic chooses its price like a monopolist (in this case, a monopolist facing a ‘tax’ by apple.) Assume that Apple faces no costs whatsoever, and this ‘tax’ it charges Epic is essentially free money for Apple^{9}.

**AFTER Epic’s split with Apple**: Epic no longer has to pay Apple’s ‘tax’. Epic’s revenue is P(Q) x Q

= (100 – Q) x Q. ** Assume **that Epic sets a price equal to 80% of the price it set before the split with Apple. This is the price that Epic has announced to the world. However, in our simple model, it is

*impossible*for this to be a profit-maximizing price for Epic, as long as Epic’s marginal costs are zero

^{10}.

6 Morrison, S. (2020, September 8). Apple’s Fortnite ban, explained [Web Page]. Retrieved from

7 “1,000 V-Bucks cost $7.99 directly from Epic, compared with $9.99 if bought through Apple”. Spangler, T. (2020, August 13). ‘Fortnite’ Looks to Sidestep Apple, Google App Store Fees With 20% Discount for Direct Payment [Web Page]. Retrieved from https://variety.com/2020/digital/news/fortnite-discount-epic-games-apple-google-app- store-fees-1234734274/

8 If revenue is 70% x (100 – Q) x Q, then marginal revenue is just 70% x (Marginal Revenue when Revenue is (100 –

Q) x Q). As mentioned above, for inverse demand of the form P = a – bQ, leading to revenue equal to (a – bQ) x Q, marginal revenue is (a – 2bQ).

9 This is, of course, a very strong assumption.

10 Think about it: a monopolist sets marginal revenue = marginal cost. If that marginal cost is ZERO, and marginal

revenue in the two cases is only off by a positive factor (70%)…

## i. Draw diagrams, similar to the ones you did in Question 1, for both situations: BEFORE the split with Apple, and AFTER the split with Apple.

**Diagram showing the situation BEFORE the split with Apple**:

[Insert diagram in PDF,JPG,GIF or PNG form here, or upload separate image file]

## Diagram showing the situation AFTER the split with Apple:

[Insert diagram in PDF,JPG,GIF or PNG form here, or upload separate image file]

## ii. For each of the two situations (BEFORE and AFTER), calculate consumer surplus, Epic’s p roducer surplus, Apple’s producer surplus, and total surplus. Show your work^{11}. Did the change benefit society? Briefly explain your reasoning.

** BEFORE **the split with Apple:

## Consumer Surplus:

**Epic’s Producer Surplus**:

## Apple’s Producer Surplus:

**Total Surplus**:

## Show your work:

[Take as much room as you need]

** AFTER **the split with Apple:

## Consumer Surplus:

**Epic’s Producer Surplus**:

## Apple’s Producer Surplus: $0 (Epic’s not paying their tax anymore.)

**Total Surplus**:

## Show your work:

[Take as much room as you need]

## Is society better off before or after the split with Apple?

**Why? **(This can be VERY brief.)

11 As mentioned earlier, it’s fine to use a math program to perform the in-between steps after you set up a system of equations to be solved.

## b. 88 CHALLENGE (Calibrating models and comparing equilibria)

**If you take this challenge, you are to do it on top of the regular question. It can boost your mark on Question 1 by a maximum of 10 marks (making the maximum mark 88 instead of 78).**

Some of you may not have found the regular question very satisfying, because we assumed that Epic set a non-optimal price after splitting with Apple. This assumption was needed because of another assumption we made – that Epic’s marginal costs were equal to zero. Let’s fix that.

As before, assume inverse demand is P = 100 – Q, and that in the BEFORE scenario, Apple takes away 30% of the money Epic earns, so that Epic’s revenue is 0.7 x (100 – Q) x Q. AFTER Epic leaves, there’s no more tax, so Epic’s revenue is (100 – Q) x Q.

This time, though, do NOT assume that Epic’s marginal costs are zero. Instead, assume Epic’s marginal costs are of the form MC = d + c x Q, where d and c are constants. This is a straight line with slope c and intercept d.

In part a., you calculated the monopoly price (and quantity) for Epic in the ‘BEFORE’ scenario. You have available to you the optimal quantity, which we’ll call Q_{before}.

From Epic’s comments, you know that their price AFTER the split is 20% lower than their price under Apple. So P_{after} = 0.8P_{before}. In part a., you calculated this price, and the corresponding quantity demanded. Call that quantity demanded Q_{after}.

A profit-maximizing monopolist sets Marginal Revenue = Marginal Cost. The BEFORE and AFTER scenarios have different marginal revenue curves associated with them. Call these MR_{before} and MR_{after}. In the BEFORE scenario, Q = Q_{before}, and MR = MR_{before}(Q_{before}). In the AFTER scenario, Q = Qafter, and MR = MR_{after}(Q_{after}). You can represent the first one as a point on the (x,y) = (Q,P) plane equal to (Q_{before},MR_{before}(Q_{before})), and the second one as (Q_{after},MR_{after}(Q_{after})). If Marginal Cost, MC, is a straight line, and if MR = MC in *both *cases, so that the monopolist (Epic) is maximizing surplus, then MC must be the line * connecting those two points*. If you have two points, you can use high school math to derive the equation of a line connecting them

^{12}.

12 If you need a refresher, this YouTube video may help: McLogan, B. (2011, January 27). How to find the equation of a line given two points [Video file]. Retrieved from https://youtu.be/4vXqMsvPSv4

**Find an equation for marginal cost, of the form MC = d + c x Q, which is consistent with Epic****setting MR = MC in both scenarios (BEFORE and AFTER).**You will need to find numerical values for ‘d’ and ‘c’ using the ‘line through two points’ method described above.**Show your work:**

**Equation**: **MC(Q) **=

## Work:

[Take as much space as you need]

**Repeat Part ii of the regular question (3.a), but this time taking into account your non-zero marginal cost function.**You may find re-drawing your diagrams extremely useful, and you may include diagrams as part of your answer, if you wish, but it is not required.

## ii. For each of the two situations (BEFORE and AFTER), calculate consumer surplus, Epic’s p roducer surplus, Apple’s producer surplus, and total surplus. Show your work^{13}. Did the change benefit society? Briefly explain your reasoning.

** BEFORE **the split with Apple (MC(Q) = d + cQ):

## Consumer Surplus:

**Epic’s Producer Surplus**:

## Apple’s Producer Surplus:

**Total Surplus**:

## Show your work:

[Take as much room as you need; include a diagram, if you wish]

13 As mentioned earlier, it’s fine to use a math program to perform the in-between steps after you set up a system of equations to be solved.

** AFTER **the split with Apple (MC(Q) = d + cQ):

## Consumer Surplus:

**Epic’s Producer Surplus**:

## Apple’s Producer Surplus: $0 (Epic’s not paying their tax anymore.)

**Total Surplus**:

## Show your work:

[Take as much room as you need; include a diagram, if you wish]

## Is society better off before or after the split with Apple?

**Why?**