Question

3. Cournot merger analysis. Suppose the low-cost firm wants to purchase the high-cost firm to become a monopoly with a marginal cost equal to 50. The Department of Justice (DOJ), however, is skeptical of this merger and fears that the monopoly will harm consumers. The low-cost firm asserts, however, that because it will be operating all production at a low cost, its price will be low and consumers will benefit. The DOJ hires you as a consultant to forecast the effect of the proposed merger. If the merger is approved, what price and quantity will be set by the new monopoly? Will consumers be helped or harmed by the merger? If the DOJ cares only about consumer surplus, should the merger be approved?

Answer 1

Now New Monopoly equation, with MC' = 50, at eq^m MR = MC', MR = 800 - 8Q, Since dd curve p = 800 - 4Q so 800 - 8Q = 500 750/8 Q^m times 1 = 93.75, New price p' = 800 - 4Q^M times 1 = 800 - 4 times 93.75 = 425 $ So New P, Q = (425, 93.75) Now C.S = 1/2 times [800 - 425] times 93.75 = 17, 578.125 $ when No Merger, (with two times, MC_1 = 50, MC_2 = 80, then p = 310, Q = 122.5 Now CS = 1/2 [800 - 310] times 122.5 = 30, 125.5 $ Thus if DOJ cares about only C.S, Merger should not be approved Because Merger leads to fall in C.S Thus consumers are not benefitted from Merger, because total market output falls & Market price downarrow.