Category: Exam Questions

In William Baumol’s papers in Duke University’s Economists’ Papers Archive I came upon a cache of six Ph.D. exams for the field of industrial organization at Princeton from the late 1970s. This is definitely a collection worth the effort of transcribing and presenting in a single post.

_______________________________

PRINCETON UNIVERSITY
Department of Economics

General Examination
for the Degree of Doctor of Philosophy
Industrial Organization

Time: 3 Hours

October 1975

Start a new paper or book for each question.

You are required to answer the question in Part A and then must choose two questions from Part B (except that you cannot choose both questions 1 and 2 in Part B). The questions could easily be the subjects of long books. Instead, please try to summarize the arguments as concisely and yet as thoroughly as time allows.

PART A. One hour

The Justice Department, in relation to its investigation of merger activity, has hired you as a special consultant to determine the nature and extent of economies of scale in industry X. The industry is composed of 60 firms of various sizes. Write a summary of your report which includes:

1. a discussion of the sources of economies (and diseconomies) of scale generally;
2. a discussion of the various methods of measuring scale economies, including their strengths and weaknesses;
3. which method you would choose, and why.

PART B. Two hours

Answer two of the following (except that if you choose either question 1 or 2, you must choose your other question from 3 or 4; you cannot choose both 1 and 2).

1. The Federal Trade Commission has recently filed an antitrust suit against the four major American breakfast cereal manufacturers. A major part of the case argues that the high advertising rates in this industry are responsible for the high concentration in this industry and for the high profits in this industry. This has been viewed as a landmark case.
   1. Sketch briefly the economic and legal arguments that each side will make.
   2. Indicate how you think the courts will rule on this and what precedents they will use.
2. The testing of the market structure-profitability hypothesis has generated a great deal of controversy in the journal literature. Write an essay describing that controversy and sorting out the arguments and the points that are at contention.
3. Schumpeter has argued that high concentration in industries is beneficial because it makes more rapid the page of technological progress in those industries. This would argue for a lax antitrust policy. On the other hand, others have argued that innovation is best encouraged by direct government subsidy (or production) and that a strict antitrust policy is necessary to ensure static efficiencies.
   Write an essay discussing the arguments that each side would offer, and indicate which set of arguments you find more convincing and why.
4. Economists are nearly unanimous in their contention that the railroad Industry has been strangled by federal regulation. Yet there appears to be no end in sight.
   1. What are the characteristics of rail transportation that appear inevitably both to draw government into the arena and yet commit it to failure?
   2. Do you think public policy should lead in the direction of nationalization, of more enlightened regulation, or of less government control? Why?

_______________________________

PRINCETON UNIVERSITY
Department of Economics

General Examination
for the Degree of Doctor of Philosophy
Industrial Organization

Time: 3 Hours

May 1976

Do not write your name on any of your examination papers, but identify them with a Code Number which you will have obtained from Mrs. Coleman.

Start a new paper or book for each question so that the examinations can be assembled by question rather than by candidate. Be sure that your Code Number appears on each sheet or book.

Part A. (One hour) Answer all eight (8) questions. Comment on the validity of each statement.

1. U. S. v. American Tobacco (1946) represented a new and significant direction for antitrust policy that has had long-lasting effects.
2. Since advertising constitutes an important barrier to entry, a tax on advertising would improve the competitive functioning of markets.
3. The Robinson-Patman Act constitutes an important antitrust safeguard to competitive markets.
4. Hypotheses concerning invention and innovation can be satisfactorily tested by using data on research and development expenses.
5. Competition is more vigorous if there are four firms of equal size than if there are four firms of unequal size.
6. Reciprocity always indicates the exercise of monopoly power.
7. Queues of customers outside doctors’ offices indicate a lack of competition.
8. Capital markets tend to require a lower rate of interest from larger firms. This is only a pecuniary economy and can not be used as evidence against anti-trust efforts to break up large firms.

Part B. (Two hours) Answer three (3) of the following questions.

1. A judge asks for your expert opinion with regard to a case in which the three major manufacturers of competing lines of washing machines are accused of engaging in violations of anti-trust law. Consider the following list of pricing practices. On pure economic grounds, which of them support the government’s case? What would be the legal significance of each?
   1. The manufacturers list identical prices for each type of machine. When price changes are made, in most cases one particular firm initiates the change and the other two follow within a week.
   2. Large purchasers are given quantity discounts.
   3. In a recessionary period, the major manufacturers temporarily reduce their prices 25% below their historical average cost. During this time several minor firms go bankrupt.
   4. In a recessionary period, the major manufacturers maintain their prices at pre-recessionary levels and experience a sharp decline in sales.
   5. The manufacturers have all taken advantage of resale price maintenance, where state law has permitted it.
2. How do you think the domestic airlines would change their fare structures and service quality if government regulation in these areas was eliminated? Support your answer.
3. “Oligopoly theory is in such poor shape that it is unlikely ever to serve as a reliable guide to policy.” Comment.
4. “A concentration ratio is a deceptively simple number. In fact, once one begins looking closer, it becomes nearly impossible to determine satisfactorily the level of concentration in an industry. Consequently, antitrust policy simply does not have a good foundation.” Comment.
5. “There is no satisfactory solution to the problem of regulating a natural monopoly.” Discuss.

_______________________________

PRINCETON UNIVERSITY
Department of Economics

General Examination
for the Degree of Doctor of Philosophy
Industrial Organization

Time: 3 Hours

October 1976

Do not write your name on any of your examination papers, but identify them a Code Number which you have obtained from Mrs. Coleman.

Start a new paper or book for each question so that the examination can be assembled by question rather than by candidate. Be sure that your Code Number appears on each sheet or book.

Answer Parts I, II and III.

Part I: Write for roughly 15 minutes each on THREE of the following five questions:

1. Suppose that you had access to data concerning a number of firms which had been subject to take-over attempts via tender offers, some successful and some unsuccessful. The data includes accounting profits, stock market prices, and dividends paid over a number of years both prior to and subsequent to the take-over attempt. How would you use this data to reach conclusions concerning the efficiency of the market for corporate control and the extent of X-inefficiency in the economy?
2. Comment on the validity of the following remark:
   “Wasteful self-cancelling advertising can not exist unless consumers act irrationally, because rational consumers will always prefer to buy a less intensively advertised good at a lower price.”
3. Suppose that you believe advertising expenditures should be treated as capital investments, in the same manner as investments in buildings and equipment, rather than as current expenses. Show precisely how this would affect your measure of a firm’s equity and its rate of return. How would such a change in accounting affect your interpretation of regression equations relating accounting profits to advertising/sales ratios?
4. Fair trade laws should be re-enacted because they provide an irreplaceable means by which manufacturers can ensure that their goods receive sufficient promotion at the retail level. Comment.
5. “It is an absurdity to believe that reciprocal dealing by oligopoly firms is anything more than a device for strengthening already rigid price structures.”
   Comment on the validity of this statement.

Part II: Write for roughly 45 minutes on the following question:

6. Some economists hold that the amount of concentration in an industry, measured by, say, the Herfindahl index, bears a very tenuous relation with the degree of monopoly power, in the sense of ability to control market price and quantity. Furthermore, they claim, even if there were such a relationship it would not necessarily imply that a policy of industrial deconcentration is advisable. What arguments can be used to support this point of view? What weaknesses do they have?

Part III: Answer questions 7 and EITHER question 8 OR question 9. You should spend no more than a half hour on question 7.

7. There is a durable good, say, a milling machine, which company X alone manufactures at constant costs. This milling wears out in precisely ten years, but is as good as new until it wears out. It cannot be repaired or in any other way made to last more than ten years and its life does not depend on rate of use. Company X contemplates either (a) selling machines outright, in which case there will be a competitive second hand market or (b) retaining ownership in the machines and renting them out.

(i) Show how to determine the ultimate optimum long-run position for company X in both cases (i.e., neglect the initial stage of building up its market) and show that its optimum output is the same in the two cases. Assume perfect capital markets, perfect foresight on its part and its customers’ part, etc.

(ii) Change the preceding case by supposing that the life of milling machines can be prolonged by spending money repairing them, and assume that the repair services can be obtained competitively. Prove that the company’s optimum output would now be different in cases (a) and (b) and indicate in which case, and why, the net rental value would be lower.

8. The Cable Report to the President, prepared by the Office of Telecommunication Policy, supports a recommendation requiring separation of ownership (or control) between cable television installations and television program sources with the following language: (By “cable system operator,” the OTP means the owner of a local cable facility. That owner is assumed to sell access to the systems to “channel users” who in turn are the owners and/or originators of programs. The “cable system operator” may also charge local viewers for access to the system.)

“If the cable system operator were to have such an interest in a channel user he would have an economic incentive to favor the user in which he had a financial interest. Simply requiring the system operator to treat all channel users on a non-discriminatory basis would not be adequate to prevent anti-competitive behavior. The cable operator could, for example, charge artificially high, but still ‘non-discriminatory’ rates to users of his channels and use the excess profits …  to subsidize his programming affiliate. This cross-subsidization would place the other channel users at a severe competitive disadvantage. Moreover, requiring ‘arms length’ transactions between companies in the same corporate structure and prohibiting cross-subsidization present severe enforcement problems. Such problems typically lead federal or state enforcement agencies to impose rate-of-return, public utility-type regulation to control cross-subsidization and other anti-competitive abuses.”

Elsewhere in its report, the OTP recommends that “rate-of-return regulation of the rates which cable operators charge cable users should not be imposed by any level of government unless there is a clearly defined need for it,” and notes that “the need for such regulation may never arise, since the power of the operator to charge excessive rates for channel leasing would be held in check by the presence of competition from broadcast stations, telephone companies and new technologies.”

Evaluate the economics and the consistency of this pair of recommendations.

9. Following a decision several years ago to relocate the Newark airport terminal, American Motor Inns, Inc., acquired property facing the new location and proceeded to plan the construction of a Holiday Inn. American Motor Inns at the time was the largest franchisee of Holiday Inns, operating large number of these “motels” throughout the country. After howls of protest from the operator of the existing Holiday Inn at the old Newark airport (and from the operators of other nearby Holiday Inns) Holiday refused American the necessary added franchise. American responded by announcing its intention to build and operate the motel under a Ramada franchise. Holiday then threatened litigation: their existing contracts with American provided that no owner of a Holiday Inn franchise could operate an inn or similar facility under a competing franchise. American promptly sued Holiday for treble damages alleging violation of federal antitrust statutes.

(1) Assess the likely outcome of this litigation on the basis of your knowledge of the law and similar cases.

(2) Indicate and explain briefly your impression of the legality of the exclusive Holiday Inn franchise agreement.

(3) Prior to a final decision in this case, Holiday bought American thereby providing an automatic settlement. Would you argue that such an acquisition could itself be held in violation of the antitrust laws? Why?

(4) From the standpoint of resource allocation, evaluate the effects of:

(a) The Holiday Inn exclusive franchise;
(b) Holiday’s acquisition of American.

In your answers to (a) and (b), make whatever assumptions you feel to be necessary and appropriate regarding the structure or other aspects of this industry.

_______________________________

PRINCETON UNIVERSITY
Department of Economics

General Examination
for the Degree of Doctor of Philosophy
Industrial Organization

Time: 3 Hours

May 1977

Do not write your name on any of your examination papers, but identify them with a Code Number which you have obtained from Mrs. Coleman.

Start a new paper or book for each question so that the examination can be assembled by question rather than by candidate. Be sure that your Code Number appears on each sheet or book.

Answer Parts I, II, and III according to the instructions given in each

PART I. (45 minutes)

1. Write for not more than five minutes on 6 of the following, indicating that you are familiar with the concept or expression and with its relevance to industrial organization:
   1. Satisficing
   2. Regulatory lag
   3. Limit pricing
   4. Per se rule
   5. Gibrat’s law
   6. Standard Industrial Classification
   7. Survivorship Method
   8. Cournot Equilibrium

PART II. Answer EITHER Question 2 OR Question 3
(45 minutes)

2. Every recent proposal for antitrust reform has advocated either repeal or very substantial revision of the Robinson Patman Act. In contrast there are few economists who would argue that price discrimination, except under very special circumstances, is desirable.
   Are these two positions — one regarding the desirability of anti-price discrimination law, and the other the desirability of price discrimination itself — inconsistent? Explain carefully, making certain that you both define price discrimination and identify the major problems associated with Robinson Patman or alternative instruments of control.
3. “Perhaps the major area for concern in the economics of American industry today is oligopoly, and oligopoly is precisely that form of organization with which the American antitrust laws cannot satisfactorily cope. Here, as so often elsewhere in that country, the law is written as though by the major corporations themselves.” Do you agree or disagree? Why?

PART III. Answer TWO of the following THREE Questions. (45 minutes each)

1. “Advertising is not per se a market imperfection; it arises as a corrective response to other market imperfections, such as the public goods nature of information and the peculiarities of the television market. Banning advertising or regulating it significantly is thus inadvisable.”
   Write a broad, coherent essay on the economics of advertising in response to this statement.
2. In recent Congressional hearings, most airlines have opposed the Civil Aeronautics Board recommendations that the airline industry be substantially deregulated. They have used the following arguments:
   1. We currently have the world’s “finest air transportation system” and “if it ain’t broke, don’t fix it.”
   2. “Airlines are already highly competitive.”
   3. “Deregulation will increase the number of competitors on major routes, reducing load factors and giving rise to wasteful duplication of resources.”
   4. Advocates of deregulation fail to consider network effects. For example, entrants may institute non-stop service from Buffalo to Los Angeles, thereby making unprofitable flights from Buffalo to Chicago, which are more efficient.
   5. Airlines cannot fine-tune capacity to meet demand, since there are a very small number of flights per day on most routes. It is thus unrealistic to expect large improvements in load factors to occur.
   6. Deregulation will hurt airlines’ financing prospects, according to experts in the financial industry.
   7. Airports’ financing of passenger terminals, through the issue of airport revenue bonds, will be undermined by deregulation, because they will no longer be able to get long-term commitments from airlines to use the terminals.

Do these arguments provide valid reasons for opposing deregulation? If not, how would you rebut them?

3. Vertical integration, under different circumstances, may:
   1. Permit discriminatory pricing that would not be possible without integration.
   2. Be a competitive response to market imperfection.
   3. Be a device for the avoidance of regulation in regulated industries.
   4. Create barriers to entry unrelated to any efficiency gain.

Discuss the validity of each of these propositions using either real or hypothetical cases to illustrate your answer.

_______________________________

PRINCETON UNIVERSITY
Department of Economics

General Examination
for the Degree of Doctor of Philosophy
Industrial Organization

Time: 3 hours

May 1978

Do not write your name on any of your examination papers, but identify them with a Code Number which you have obtained from Mrs. Coleman.

Start a new paper or book for each question so that the examinations can be assembled by question rather than by candidate. Be sure that your Code Number appears on each sheet or book.

Answer either IA or IB, but not both. (20%)

IA. What does the survivor technique purport to show about economies of scale, and what are some of its pitfalls? Relate these to pitfalls in estimating a production cost function from a cross-section of firms of different sizes. Which of these pitfalls can lead to mistaken policy conclusions?

IB. What are some of the factors that make firm and plant economies of scale differ? Explicitly model one of them. Do these factors suggest using firm or plant degree of scale economies as a guide for policy towards the firm?

Answer any one of IIA, IIB, or IIC. (20%)

IIA. Explicitly show that a duopoly has the elements of a “Prisoners’ Dilemma” for the two firms. What are some aspects of the industry that would make implicit collusion between the two firms difficult?

IIB. Explain several factors that would lead to the larger firms in an industry being more fully vertically integrated than the smaller firms. Do all of these factors suggest that such integration is socially counterproductive?

IIC. Carefully explain what empirical evidence would support the proposition that market power is socially desirable in that it promotes technological progress.

All must answer this question. (35%)

III. Write and explain a system of simultaneous industry structural relations among the profit level, concentration, minimum efficient scale, advertising intensity, and some exogenous variables. From this perspective, what could be inferred from cross-sectional positive correlations between profit rates, concentration, and advertising intensity? What are some invalid inferences that are sometimes drawn from such findings?

Answer either IVA or IVB, but not both. (25%)

IVA. Consider a new electric utility company which is planning its production facilities. It can choose to install divisible but nonfungible generators dollars of two types. Type i requires a_i dollars in fuel cost per KWH generated (up to capacity) and incurs b_i dollars in capital costs per KWH of capacity per 24 hour period. The company can operate equipment of either or both types.
Let a₁ < a₂, b₁ > b₂, b₁ + a₁ > b₂ + a₂ and b₁ + 2a₁ < b₂ + 2a₂.
Each 24 hour period is divided into a 12 hour day subperiod and a 12 hour night subperiod. Demand is homogeneous during each subperiod, but day demand far exceeds night demand.
What is the least cost per 24 hour period of generating x KWH each day and y KWH each night, with x > y? If day and night prices were equated to long run marginal costs, would revenues cover total costs? Would the peak period customers pay all capacity costs?
Suppose the plant is built according to plan, new capacity requires one year construction time, and demands in both subperiods exogenously and unexpectedly grow a bit. Describe the new efficient prices. What do they signal about a desirable investment plan?

IVB. Contrast price regulation that constrains the anticipated rate of return on capital with that which constrains the rate of return calculated on the basis of last period’s output, last period’s cost, but current price. In both cases, assume that the regulated firm will do all it can to maximize profit. Can the regulator equate the allowed rate of return on capital to the market rate of return?

_______________________________

PRINCETON UNIVERSITY
Department of Economics

General Examination
for the Degree of Doctor of Philosophy
Industrial Organization

Time: 3 hours

May 1979

Do not write your name on any of your examination papers, but identify them with a Code Number which you have obtained from Mrs. Coleman.

Start a new paper or book for each question so that the examinations can be assembled by question rather than by candidate. Be sure that your Code Number appears on each sheet or book.

*  *  *  *  *  *  *  *  *  *  *  *  *  *  *

Because this is a relatively long test, be sure to allocate your time in accord with the numbers in parentheses below. These numbers will serve as the relative weights aggregating the grades of the different questions. Pithy answers to all questions are suggested.

All must answer this question. Do not spend more than 20 minutes on it. (20 minutes)

I. Consider a monopoly TV station that changed from collecting all its revenues from advertisers to a system by which it collected all its revenues from viewers by means of prices attached to individual programs. Characterize the changes you would expect in the station’s choices of aired programs. Explain how the station would have incentives to implement a price system which would, coincidentally, and alleged externalities aside, give the station incentives to select socially desirable programs.

Answer either IIA or IIB, but not both. (40 minutes)

IIA. Describe some ways in which a firm’s motives for vertical integration would depend on the structure of its own industry and on the structure of the industry into which it might integrate. Briefly, by reference to some polar cases, indicate how your assessment of the social desirability of such integration would be affected by knowledge of those industry structures.

IIB. It is now considered illegal for the manufacturer of a product in interstate commerce to require a franchisee to sell at retail at a specific price. Explain why a manufacturer might have incentives to control the prices at which its franchisees will sell its products, and evaluate the consequences of prohibiting such controls.

Answer either IIIA or IIIB, but not both. (50 minutes)

IIIA. It is a common practice of petroleum retailers in establishing new outlets (gas stations) to buy nearby potentially (or actually) competing sites and subsequently to re-sell those sites with covenants precluding their use for the retailing of petroleum products. Would society necessarily benefit if this practice were prohibited?

IIIB. Describe several different modes of entry deterrence and briefly trace their effects on industry welfare performance. Would these modes of entry deterrence be effective without structural entry barriers? Are there observable clues that such deterrence is taking place?

Answer either IVA or IVB, but not both. (70 minutes)

IVA. [Time-varying rates]

(i) What are the common economic features of the electric power and telecommunications industries that argue for different prices at different times of day?

(ii) Do time-invariant prices necessarily cause cross-subsidization in industries in which the characteristics you identified above are important? How does the answer depend on the presence of product-specific scale economies?

(iii) What factors would enlarge the welfare loss from such time-invariant rates?

(iv) Why might it be appropriate to see peak rates suddenly rise and then later fall after an unanticipated permanent expansion of demand for service during peak times? Might the same considerations pertain to off-peak times?

(v) Why might a regulated firm resist setting time-varying rates?

IVB. [Natural monopoly with no barriers to entry]

(i) Carefully describe a scenario in which an industry is a natural monopoly with no barriers to entry.

(ii) On the basis of a reasonable theory of firm behavior, characterize the principal features of the industry equilibrium.

(iii) In particular, if arbitrage were very costly to consumers, why or why not would you expect to see price discrimination?

(iv) Why or why not would you expect to see cross-subsidization?

(v) If subsidies to the industry were ruled out, and if regulation were costless, what, if any, aspects of industry welfare performance could be improved by regulation?

Source: Duke University. David M. Rubenstein Rare Book & Manuscript Library. Economists’ Papers Archive.  William J. Baumol Papers, Box 20, Folder “Indust[rial] Org[anization]”.

Image Source: Princeton seal from Wikimedia Commons.