RC SET

DIRECTIONS for Questions 61 to 63: The passage given below is followed by a set of questions. Choose

the best answer to each question.

PASSAGE - 3

TWO decades before he won the Nobel prize for economics in 1991, Ronald Coase wrote an essay decrying

the poor state of research in industrial organization, the discipline in which he established his reputation. The

field, he complained, was devoted to the study of monopoly and antitrust policy. That, he said, made for bad

scholarship: an economist faced with a business practice that he cannot fathom, according to Mr Coase,

"looks for a monopoly explanation".

A lot has changed in the 37 years since that lament. The broader research effort for which Mr Coase called has

fostered a richer understanding of how firms respond to customers and rivals. Monopoly explanations now

compete with theories that see the same behaviour as helpful to consumers. That has made it harder to sort

malign from benign business practices. The recent antitrust finding against Intel, a maker of computer chips,

is a case in point. After a long investigation, ending in a bulky 524-page verdict, the European Union in May

fined Intel •1.06 billion ($1.44 billion) for illegally using its muscle to price AMD, a rival chipmaker, out of

the market. Intel rejects the charge of predatory pricing and plans a court appeal. Its lawyers have a block of

theory on which to build a defence.

Allegations of predatory pricing have a long history. The Sherman Antitrust Act of 1890, the foundation of

America's competition policy, was partly a response to complaints by small firms that larger rivals wanted to

drive them out of business. Trustbusters need to be wary of such claims. Low prices are one of the fruits of

competition: penalising business giants for price cuts would be perverse. But in rare circumstances, a big firm

with cash in reserve may cut prices below costs in order to starve smaller rivals of revenue. The profits

sacrificed in the short term can be recouped by higher prices once competitors are out of the way.

Establishing that a firm is guilty of predation is difficult. If rivals stumble or fail, that may be down to their

own inefficiency or poor products, and not because they were preyed upon. Proving that a firm is pricing

below its costs is tricky in practice. Even where a reliable price-cost or profit-sacrifice test is feasible, failing

it need not imply sinister intent. There are often pro-competitive reasons to forgo short-term profits. Firms

with a new product, or a new version of an existing one, may wish to pick a lossmaking price to defray the

cost to consumers of switching, or because they expect their own costs to fall as they perfect the production

process (video-game consoles are a classic example). Losses would then be a licit investment in future profits.

61. It can be inferred that

(a) The author is criticizing Ronald for his lament which has in fact made it difficult to sort malign from

benign business practices.

(b) The author considers Ronald's lament unwarranted since a lot has changed in the years after that.

(c) The broader research effort advocated by Mr. Coase has only led to a lot of confusion in understanding

the behaviour of firms.

(d) None of these.

62. The author in the passage is primarily concerned with

(a) Changes in the field of Industrial Organization since Ronald Coase's essay.

(b) Monopolistic Competition

(c) The difficulties in distinguishing between 'malign' and 'benign' business practices.

(d) The benefits and curses of competition.

63. Establishing that a firm is guilty of predation is difficult because of all the following reasons except

(a) Rivals may not stumble or fail because of their inefficiencies even if they are preyed upon.

(b) Failing a price –cost test does not necessarily mean that a firm sought to engage in predatory pricing.

(c) Firms may be perfecting the production process of a new product which would make costs fall in the

long run.

(d) Firms may want to decrease price of a new version of an existing product so as to compensate costs

to consumers of switching