Question

Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is -1.3 and that it costs $15.70 to produce and distribute each liter of Scotch.

Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices in the wholesale market for premium Scotch liquor.

Instruction: Do not round intermediate calculations. Enter your final responses rounded to the nearest penny (two decimal places).

Pre-merger price: $

Post-merger price: $

Answer 1

Ans.

market elasticity of demand,e = -1.3

Marginal Cost = $15.40

No. of Firms , n = 3 , because we are calculation pre merger price

pre merger price = [n x e / (1 + (n x e) ] x Marginal Cost

by putting the values we will get the following -

pre merger price = [ 3 x -1.3 / 1 + ( 3 x -1.3 ) x 15.40

                            = -3.9 / 2.9 x 15.40

                            = 1.334827 x 15.40

                            = $20.71 (approx.)

for post merger ,

no. of firms will change to 2, n = 2, same fomula will be used here , Hence,

post merger price = [ 2 x -1.3 / 1 + ( 2 x -1.3 ) x 15.40

                             = [ -2.6 / 1 + ( - 2.6 ) ] x 15.40

                             = ( - 2.6 / 1.6 ) x 15.40

                             = 1.625 x 15.40

                             = $25.03 (approx.)

It shows that , the price of liquor will increase after the merger .

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