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EC2310Industrial Economics 1: Strategic Behaviour – Past paper Q&A selection.
Time Allowed: 2 Hours
Read all instructions carefully - and read through the entire paper at least once before you
start entering your answers.
There are TWO sections in this paper. Answer TWO questions in Section A (60 marks in
total) and ONE question in Section B (40 marks).
Approved pocket calculators are allowed.
You should not submit answers to more than the required number of questions. If you do,
we will mark the questions in the order that they appear, up to the required number of
questions in each section.
1
, EC2319
Section A: Answer TWO questions
1. A pay-per-view streaming service (hereafter “the streamer”) finds through experience
that there are broadly two categories of shows; those that are successful blockbusters
(denoted using subscript ) and those that are flops (denoted using subscript ). On
average, 50% of shows are successful and the rest are flops. From past records, the
streamer estimates the demand for each type of show as
= 180 − 0.1
and
= 150 − 0.2
respectively (with is the price of a view in pence and is the quantity of downloads
sold). Subject to the service’s maximum capacity of 300 downloads per show, the
marginal cost per download is zero, and we can treat the fixed costs of running the
streaming service as sunk costs that cannot be recovered in the short run.
a. If the streamer can find out in advance which shows will be successful and can charge
different prices for downloads of ‘successes’ and ‘flops’, what would be the profit-
maximising price for each type of show? What are the per-type gross profits and
average gross profits (in pounds) in this case? (9 marks)
∗ ∗
= 1800 − 20 = 90 = £9.00 = £810
∗ ∗
= 750 − 10 = 75 = £3.75 = £281.25
∗ ∗ ∗
.5 ∗ + ∗
= ∗ ∗ = £3.307
+
b. Assuming the streamer is not able to tell which shows will be successes and has to
charge the same price for all shows, what would be the optimal price to charge and
what average per-film gross profits will ensue? (9 marks)
( ) = ( ) + ( ) = 330 − 0.3 ∗ ∗
= 1100 − 6.67 = 165 = £5.5 = £907.5
c. The streamer incurs fixed costs of £500 per show and asks an economist friend how
to make more money despite not knowing which shows will be successful and which
failures. The streamer points out to the economist that: subscribers book downloads
in advance for some of the shows; and for some shows there is considerable excess
download capacity when the streamer charges the same price for all shows. Then
the economist suggests two different strategies that the streamer can adopt:
i. Charge a lower price to those who book in advance; or
ii. Charge a booking fee for advance download reservations that is not charged
to customers who arrange and pay for their downloads on the day.
Discuss positive and negative features of each of these strategies and suggest what
strategy you might recommend, making clear your assumptions. (12 marks)
It depends on the extent of correlation between willingness to book in advance and
the success or failure of a show, whether customers’ information improves as the
streaming date gets closer and whether customers have different utilities for shows
arranged in advance. Note that the profits on a flop are less than the fixed costs of
2
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