EC326
Andrew Harkins
Industrial Economics 2: Strategy & Planning
Exam (2023)
Exam
2 hour online exam via AEP.
Friday 2nd June 2023 at 9:30am.
‘Open book’ nature means we cannot place restrictions on access to course
materials.
The exam will have the exact same structure as last year.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
Exam Structure
2 Hour Exam - Two Sections:
Section A: 60 marks total
 Two compulsory questions (30 marks each)
 One from Week 1-5 , one from Week 6-10.
Section B: 40 marks total
 Answer one question from a choice of two (40 mark question).
 One question will be from Week 1-5 , the other from Week 6-10.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
A Typical Exam Question (AH)
Take a seminar question and make some minor adjustments for part (a)
and (b).
 (e.g. change the numbers in the payoffs)
Make another adjustment to the question for parts (c) and (d).
 (e.g. change order of play, set prices rather than quantities, etc)
Mostly ‘solving’/’analytical’ questions (like the seminars).
Some questions may require discussion at the end.
 (examples, applying insights from other areas of the module)
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick

Tips
Revision focus should be:
1. Understand the lecture material
2. Revisit the seminar questions (without looking at the answers)
3. Look at some past exam questions and try to solve them.
4. (Extra reading from textbook chapters)
Look for:
 Recurring themes, approaches, models.
 Possible extensions/adjustments to models and seminar Qs.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
More Tips
This is a 2 hour exam with 100 marks total.
 1.2 minutes per mark.
 Allowing 20 mins for reading/checking answers this means 1 mark per min.
 Do not spend 45 minutes doing part (c) of a question worth 15 marks.
 Remember the opportunity cost of your time.
Distinguish between ‘Discuss’/‘Describe’/‘Explain’ questions vs.
‘Solve’/‘Find’/‘Calculate’.
If you cannot finish or solve a question, give intuition/diagrams.
Do not leave a question blank.
Do not answer more than the required number of questions.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
Topics (Part 1) –AH
1. Dynamic and multi-market monopoly
 Durable goods, menu pricing, multiproduct pricing.
2. Information and reputation in markets
 Signalling, reputation building, herding vs. observational learning, reviews.
3(a). Platforms and Two-sided Markets (1)
 Network effects, demand for network goods, ratings and recommendations.
3(b). Platforms and Two-sided Markets (2)
 Pricing network goods, Chicken and egg model, Winner takes all.
3(c). Platforms and Two-sided Markets (3)
 Intermediated buyer-seller markets, platforms and sorting.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
Topics (Part 2) – JG
1. Horizontal and vertical relations
 Double marginalization, RPM, Two part tariffs, contracts, moral hazard, downstream
competition
2. Make or buy (vertical separation)
 Costs of production vs. costs of incentives, Backwards induction
3. Quality games and quality reputation
 Vertical differentiation, Strategic choice of quality in oligopoly, Asymmetric information
and quality premium, Long term vs. short term considerations
4. Judo economics
 The advantage of being “small” in oligopoly games, The value of commitment
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
EC326
Andrew Harkins
Industrial Economics 2: Strategy & Planning
Worked Question from 2021 Exam
2021 Exam Q3
3. A new hotel opens in a town. Their quality is either = 3 or = 1 but neither buyers
nor the hotel can observe the experienced quality before purchase.
There are holiday makers who visit this town once per year and must stay at either the
new hotel or an established hotel. If a holiday maker stays at the new hotel they receive
a payoff of = + − where ~[0,1] is the buyer’s type and is the quality.
Assume the public hold the view that ≥ 2 for the new hotel.
If the visitors stay in the established hotel their total utility after paying the price is 2.
(a) Find the expected demand for rooms at the new hotel as a function of the price per room ,
[] and the number of holiday makers . (6 marks)
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (a)
(a) Find the expected demand for rooms at the new hotel as a function of the price
per room , [] and the number of holiday makers . (6 marks)
Visitors will stay if
+ − ≥ 2
≥ 2 − +
The fraction who do this are
Pr ≥ 2 − + = 1 − Pr( ≤ 2 − + )
Pr ≥ 2 − + = − − 1
So total demand is
= ( − − 1)
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (b)
(b) Find the new hotel’s optimal price per room p∗ and their expected profit if all
costs are zero. (6 marks)
Profit for the hotel is = ( − − 1). Differentiating we get


= − − 1 − = 0
− 1
2
=
Expected profit is = − 1 −
−1
2
−1
2
, or
=
− 1
2
2
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (c)
A reviewer writes a review of the new hotel before it opens for the season. They can
give it either a good review ( = ) or a bad review ( = ). The reviewer always
recognises a bad hotel and gives it a bad review but with probability = 1/2 they
give a bad review to a good hotel.
(c) Let the prior be Pr[ = ] = = 2/3. Find the expected quality after a good
review and after a bad review. (8 marks)
Only good hotels get good reviews, so = = 3. (2 marks)
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (c)
For a bad review:
= = 1Pr[ = 1 ∣ = ] + 3Pr[ = 3 ∣ = ]
= = 1
Pr = = 1 Pr = 1
Pr =
+ 3
Pr = = 3 Pr = 3
Pr =
= = 1
1 ⋅ 1/3
1 ⋅ 1/3 + 1/2 ⋅ 2/3
+ 3
1/2 ⋅ 2/3
1 ⋅ 1/3 + 1/2 ⋅ 2/3
= = 2
(6 marks)
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (d)
(d) Allow the new hotel to alter their price after the review.
(i) Which prices would they pick in each case? (2 marks)
(ii) Would the hotel be better off if they made all the buyers
book rooms before the review is released? (8 marks)
(i) Using the answer in part (b)
− 1
2
=
So prices are = 1 after a good review and = 1/2 after a bad review.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (d)
(ii) Would the hotel be better off if they made all the buyers
book rooms before the review is released? (8 marks)
Setting = 1 and using the value of = 2/3 we know that = 1 ∗
1
3
+ 3 ∗
2
3
=
7/3. So profit from part (b) is
7/3−1
2
2
= 2/3 2 =
4
9
If we allow the hotel to condition on the review then expected profits in the good
and bad review cases are respectively:
= = 1
2 = 1 and = = 1/2
2 =
1
4
In expectation profits are therefore (
2
3
∗ 1) + (
1
3
∗
1
4
) =
9
12
>
4
9
. Pricing after is better.
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick
2021 Exam Q3 (e)
(e) Would having multiple reviewers be beneficial to the hotels or buyers? Discuss
with reference to material throughout the module. (10 marks)
This question is open ended and I expect varied answers. Here are some issues which may be raised:
• (+) If the review scores are aggregated somewhere (e.g. a website like tripadvisor) then we should
see the public belief converge towards the correct belief given a large number of reviews.
• (+) This depends on how credible reviews are. We may see the hotel attempt to manipulate the
public review scores. Students may reference the paper by Mayzlin et al (2014) which examines the
incentives for smaller firms to post fake reviews or pay people to write fake reviews.
• (+) It is harder to ‘game’ the review system if there are multiple reviewers/certifiers.
• (-) We may see ‘review shopping’ where the hotel only posts the most favourable reviews.
• (-) If the reviewer platforms market is segmented (e.g. by language) then more reviewers may be a
way to avoid competition on prices (buyers never find out about the new hotel)
• Any other insightful and original comments/examples should be rewarded
EC326: Industrial Economics 2: Strategy and Planning - Andrew Harkins, University of Warwick