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 -1.7 and that it costs $16.80 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

Market elasticity of demand is given at -1.7

Before the merger there are three firms and after the merger there are only two firms

Marginal cost of production is 16.80

Use the following rule to find the post and pre merger price

P = MC * n*ed/(n*ed + 1)

Pre merger price = 16.80 * (3*-1.7)/(3*-1.7 + 1) = $20.90

Post merger price = 16.80 * (2*-1.7)/(2*-1.7 + 1) = $23.80