Consider an industry with demand Q = a − p where 3 identical firms that compete...

Consider an industry with demand Q = a − p where 3 identical firms that compete a la
Cournot. Each firm’s cost function is given by C = F + c q. Suppose two of the firms merge and that the
merged firm’s cost function is given by C = F'+C'q, where F<F'<2F
(a) Determine each firm’s market share before and after the merger.
(b) Suppose that a = 10 and c = 3. Determine the Herfindahl index after the merger takes place when
(i) c'=2 (ii) c'=1 Compare this to the post-merger Herfindahl index calculated based on
pre-merger market shares

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Expert Solution

Rahul Sunny answered 7 months ago

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