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2. Read the following press release of the European Commission (Brussels, March 28, 2012): [Click here for press release|. For the sake of the exercise,

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2. Read the following press release of the European Commission (Brussels, March 28, 2012): [Click here for press release|. For the sake of the exercise, we model the Euro- pean air cargo market during the 72 months of the cartel existence as follows. First, only the 14 firms associated in the cartel were active on the market; second, these firms were symmetric; they all had the same constant marginal cost, , for supplying airfreight services; third, these firms competed a la Cournot (i.e., by choosing the quantity of airfreight services); finally, the inverse demand for airfreight services (per month) was given by p = a 2q, where denotes the total quantity of airfreight services supplied by the 14 firms. As written in the text, the Commission fined the cartel members a total of 169 million. Given that the cartel lasted for 72 months, this is roughly equivalent to a fine of 2.35 million per month. This fine is meant to compensate the European consumers for the surplus reduction that they suffered because of the existence of the cartel. (a) Show that (a ) had to be equal to 3.89 million (per month) to justify the fine of 2.35 million per month imposed by the Commission. (b) Set (ac) to 3.89 million. Assuming that the cartel profits were equally shared among the 14 cartel members, show that any of these firms would have been better off by unilaterally leaving the cartel (which would have then counted only 13 members) and by acting independently. What does this tell you about the stability of cartels? Discuss. (c) Continue to set (a ) to 3.89 million. Take now a tacit collusion perspec- tive. Suppose that the 14 firms were following a grim trigger strategy and were expecting to continue to compete indefinitely on that market. Compute the minimum discount factor that allowed the 14 firms to sustain full collusion (i.e., to behave as a cartel)

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