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According to some economists, horizontal merger may not always be profitable even though they reduce the...

According to some economists, horizontal merger may not always be profitable even though they reduce the number of suppliers. For example, assume a three-firm industry in which the firms behave according to the Cournot model. Let market demadn be Q = 20 −P. Each firm has a constant average cost of $4. Now assume that a merger reduces the number of firms to two. Calculate the combined profits of the two firms premerger, and then calculate the profit of the combined firm in the postmerger situations – a Cournot duopoly. Is a merger that converts the market structure from a triopoly to duoply profitable? What if all three firms merger that would create a monopoly?

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Expert Solution

substituting best response function for firm 3 in best repsonse function of firm 2 and best response function of firm 1

.

in a cournot tripoly, each firm produces equal output of 4 units and earns a profit of $ 16

Now out of these 3 firms, firm 1 and firm 2 under go a merger. market structure changes tripoly from duopoly

substituting best response function of firm 3 in best response function of merged firm

after merger of firm 1 and firm 2, combined profit falls from 32 to 28.44

whereas the profits of unmerged firm increase from 16 to 28.44

suppose all 3 firms undergo merger and monopoly is created

Rahul Sunny answered 1 year ago
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