Scenario

In the island nation of Autarka, cardboard boxes are manufactured by four firms: Andrew’s Industries, Brett’s Boxes, Carla’s Cardboard, and Delia’s Durables. Cardboard boxes are purchased by numerous local manufacturers and food producers as an input into their respective production processes.

In recent years, the customers of the cardboard box manufacturers have begun to complain that cardboard box prices are considerably higher in Autarka than in other countries.

They accuse the four manufacturers of colluding to set high prices; exploiting the fact that it is not economical to import cardboard boxes from another country.

In response, the manufacturers claim that the market price for cardboard boxes reacts the competitive reality of manufacturing in a small country. They argue that local prices must be higher as they are unable to take advantage of the scale economies available in larger markets.

Your task

Collusion is a criminal oence in Autarka. As such, the Treasurer has instructed you to conduct a preliminary investigation into collusion in the cardboard box market. Your investigation should determine,

• whether collusion or competition better explains the price in the cardboard box market,
• whether a more extensive criminal investigation is warranted and,
• what, if any, impact collusion is having on the industries that rely on cardboard boxes as an input.

(Note: A criminal investigation and prosecution would likely cost the government $25,000,000.)

Industry structure

In Autarka, cardboard boxes are sold in bundles of 100. At present, the market price for a bundle of boxes is $30.

The technology for manufacturing cardboard boxes is readily available and common to all manufacturers. The cost of plant and machinery for a rm in the box manufacturing business is $7,000,000 per year. The labour, material, and energy cost of producing a bundle of 100 boxes is $20.

A market study indicates that demand for cardboard boxes is given by the function, where P represents the price of a bundle of 100 boxes, and Q is the total number of bundles of boxes sold each year.

Industry analysis

For your Industry Analysis you must complete each of the steps detailed below. When completing the steps you must:

• Type all equations using the `Insert Equation’ function (or equivalent).
• Show all of your working.
• Include sufficient written description for the reader to follow your process.
• Use appropriate notation and economic terminology.
• Your audience for the industry analysis is other expert economists who may be required to review your work. There is no page limit for the Industry Analysis.

Required steps

When completing the industry analysis you should assume that rms are engaged in Cournot Competition.

Step 1: Using the information provided in the scenario, derive a total cost function for a typical cardboard box manufacturer. Use QA to denote the quantity produced by the typical firms.

Step 2: Derive a profit function for the typical firm. Use X to denote the combined production of the remaining three firms in the market.

Step 3: Find the profit of the typical firm if all firm’s in the market sell at the current market price of $30.

Step 4: Find the consumer surplus if all firm’s in the market sell at the current market price of $30.

Step 5: Derive the typical firm’s best-response function.

Step 6: Find the equilibrium quantity and profit for the typical firm.

Step 7: Find the equilibrium price and consumer surplus.