Read the article, "Hyundai Suspends Chip Output" (Globe and Mail, June 4, 1998). Assume that Hyundai has market power (a downward sloping demand and MR curve) and maximizes current profits (rents) given its costs and its demand. a. Using the appropriate graph, show how Hyundai should respond if Samsung first reduces output unilaterally, other things equal. Explain your diagram and what it shows briefly. b. Give an economic rationale for Hyundai's actual reaction (reducing chip output). c. Cite (at least) two pieces of evidence in the article suggesting that the industry is an oligopoly.

Hyundai Suspends Chip Output: South Korean Firm's One-Week Halt Aimed At Stabilizing Prices By Namju Cho Globe and Mail, June 4, 1998 SEOUL - A leading memory-maker will temporarily halt production to ease the global glut that is sending chip prices plummeting Hyundai Electronics Industries Co., a unit of the Hyundai Group, South Korea's largest conglomerate, is stopping production for a week. The company hopes the move will "stabilize the semiconductor market supply-and-demand situation and help prices recover." While temporary production halts might boost chip prices and chip makers' shares in the next month or so, few analysts expect any increases to be sustained. Oversupply is likely to send chip prices plunging again by the third quarter, they said, slashing chip makers' earnings. Hyundai's move came after Samsung Electronics Co., the world's largest memory-chip producer, earlier this week said that it was considering reducing production for the same reasons. And an executive at Texas Instruments-Acer Inc., one of Taiwan's largest chip makers, said it also has recently begun reducing output because of low prices. South Korean producers control 40 per cent of the global market for dynamic random-access memory chips, known as DRAMs, and have moved chip prices before. An oversupply in memory chips has recently dragged prices down to alarming levels, seriously eroding the companies' balance sheets. SBC Warburg Dillon Read Securities in Seoul estimated there will be a DRAM oversupply of 18 per cent this year, compared with zero in 1995, because of a negative outlook on personal-computer sales growth. Prices of 64-megabit DRAMs, the companies' staple product that is mostly used in personal computers, fell from $60 (U.S.) in early 1997 to $20 toward the end of last year. This year, spotprices of tidwmegahit chips have fallen even further, to as low as $3. South Korean manufacturer's eomrnand El} per cent of the Eat-megabit chip market, according to analysts. If South Korea's three main chip makers cut production, analysts estimate that DRAM prices could jump to $15 during the next month. In January of last year, DRAM prices soared 3i} per cent in just one month after Samsung said it would cut production. Recovering chip prices could send the South Korean chip makers" shares up by as much as 3H per cent in the next month, predicts Jon Chong-hwa, an electronics analyst at HEB Salomon Smith Barney Securities Co. in Seoul. Indeed, the stocks rallied on news of Hyundai's cutback. Samsung Electronics jumped 5.5 per cent to close at 47,504] won {$33.89 U.S.}. Shares of chip maker LG Semieon Co. closed at 11,400 won, up 1.? per cent, and Hyrmdai Electronics rose 1.5 per cent to 19,300 won. The composite index rose 2.6 per cent, rehounding from an 11-year low hit last week. The next move could come from Japanese chip makers, which accmmt for 35 per cent of the world's ll-megabit chip output. If chip makers in Japan or to a lesser extent, Taiwan, use this as an opportunity to crank up production and eat away South Korean chip makers' market share, prices wouldn't fall as expected. George Huang, a member of the hoard of directors at TI-Acer, said the chip maker has hegtm to reduce DRAM production recently, though he wouldn't say by how much. The latest reduction follows a decision by TI-Aeer at the end of last year to halt production on some lines, a step that cut its DRAM output by one third, Mr. Huang said. But another leading Taiwan producer, 1Vanguard International Semiconductor Corp., said it has no plans to cut output