Firms A and B are Cournot duopolists producing a homogeneous good. Inverse market demand is P...

Firms A and B are Cournot duopolists producing a homogeneous good. Inverse market demand is P = 100 − Q , where P is market price and Q is the market quantity demanded. Each firm has marginal and average cost c = 40.

(a) The two firms propose to merge. Derive total output, market price, profit and consumer surplus before the merger and after the merger. Explain intuitively any changes you see to these variables when the merger occurs.

(b) A regulator for this market has objective function W = λΠ + (1− λ)CS , where Π is industry profit, CS denotes consumer surplus and λ is a constant, 0 ≤ λ ≤ 1. Will a regulator with λ = 0 permit the merger? Will a regulator with λ = 1 permit the merger? Interpret these two regulatory stances and explain the implications of your answer for competition policy. At what level of λ would the regulator be indifferent to the merger?

(c) The firms now claim that there will be efficiency gains to the merger, so that the marginal cost of production will fall to c = 30. How does this affect your answer in part (b)? Explain the implications of your answer for competition policy.

Expert Solution

Rahul Sunny answered 2 years ago

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