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HW4 - (c Comment on whether the competition authority...

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Industrial Organization: EC460 Spring 2009 Instructor: Thomas D. Jeitschko Assistant: Nakarin Amarase Homework 4 Due: April 1—in class Instructions You must work in groups of at least two and no more than three students on this homework. Hand in one copy of your work per group. Please ask me if you seek clarification on any questions or the logistics of the homework and these instructions. Answer all questions. 1 Cournot mergers with cost gains Consider a three-firm Cournot market with demand given by P = 180 - 3 Q , with Q = Q 1 + Q 2 + Q 3 . Suppose that all three firms have a constant marginal cost equal to their average cost of MC i = AC i = 36 and hence no fixed costs. (a) Calculate the Cournot equilibrium (output, price, profit, consumer surplus, and total welfare). Now suppose that two of the three firms merge, and suppose that as a result of the merger their marginal cost drops 50 percent so that for the merged firm MC m = AC m = 18. (b) Calculate the post-merger equilibrium and compare it to the pre-merger equilibrium.
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Unformatted text preview: (c) Comment on whether the competition authority should allow the merger. Note: for the pre-merger market, once you have determined the optimal output of one firm as a function of the others’, you can use the shortcut that recognizes that in equilibrium all produce the same amount, because the firms are identical. However, this short-cut cannot be used for the post-merger analysis, since the firms are no longer symmetric, as the merged firm has lower costs, whereas the non-merged firm still has marginal costs of 36. 1 2 Acquiring a Company Consider the example in class about acquiring a company (which is also in the posted class notes on the web). Show whether there is a price at which you would want to buy the company if you expect to increase the value of the company by 20 percent so that your value is 1 . 2 V , and you believe that the current owner’s value of the enterprize V lies equally likely anywhere between 150 and 250. 2...
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HW4 - (c Comment on whether the competition authority...

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