468_ps2_2008 - ECON 468: Industrial Organization Problem...

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ECON 468: Industrial Organization Problem Set 2 Due date: March 13th 2008 March 4, 2008 1. Consider a set of 3 identical firms i = 1 , 2 , 3 with cost function C i = 10 Q i participating in a market for homogeneous products with demand Q = 100 - P where Q = Q 1 + Q 2 + Q 3 . Assume that firms compete by choosing the QUANTITIES they produce. (a) Assume that firms interact only once. Find how much each firm produces in the unique Nash (Cournot) equilibrium of this game. What is the price and the profits of each firm? (b) Assume now that firms 2 and 3 merge. The market now includes firm 1 and the new entity 2 ± . Compute the new equilibrium outcomes of the quantity-setting game (i.e. quantities, price, and profits). (c) What is the impact of the merger on consumers’ surplus and firms’ profits? Are firm 2 and firm 3 benifiting from the merger? What about firm 1? (d) Assume now that the merger between firms 2 and 3 generates a reduction in the marginal cost of production. In particular C 2 ± ( Q ) = ω 10 Q , where ω (0 , 1]. Compute the new equilibrium outcomes of the quantity-setting game (i.e. quantities, price, and profits).
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This note was uploaded on 08/08/2008 for the course ECON 468 taught by Professor Houde during the Spring '08 term at University of Wisconsin.

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468_ps2_2008 - ECON 468: Industrial Organization Problem...

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