Q1. In an oligopolistic market, there are three firms (A, B, C) which compete by setting quantities. All firms have a to

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Q1 In An Oligopolistic Market There Are Three Firms A B C Which Compete By Setting Quantities All Firms Have A To 1 (215.34 KiB) Viewed 98 times

Q1. In an oligopolistic market, there are three firms (A, B, C) which compete by setting quantities. All firms have a total cost of production given by: 609; + F, for i = A, B, C. Frepresents the fixed costs. The market demand function is: P = 300-Q Where Q is the total quantity sold by the three firms. a. Find the equilibrium quantities, price and profits. (5 marks] b. Assume that firms A and B merge and that all firms continue to act as Cournot competitors after the merger. Total production costs are unchanged. Show that, if F = 0, firms A and B don't have an incentive to merge. (5 marks] c. Briefly describe the "Merger Paradox” (Salant et al., 1983) and explain how your results in part b illustrate this paradox. (5 marks) d. Now assume that firms A, B and C incur a fixed cost F = 3,000. When firms A and B merge, their fixed costs are reduced to aF, where a € (1,2). The fixed costs of firm C remain unchanged. Show that there is no a € (1,2) such that firms A and B have an incentive to merge. (5 marks] e. Now assume that besides the reduction in their fixed costs, firms A and B also benefit from a lower marginal cost after the merger, i.e. their marginal cost post-merger is 45 (instead of 60). For which values of a € (1,2), do firms A and B have an incentive to merger? Explain the intuition behind this result. [10 marks] f. Show that there is no a € (1,2) such that a merger between firms A and B is beneficial to consumers (i.e. increases the consumer surplus). Why is it the case? [10 marks] g. Briefly explain how an alternative model of price competition with product differentiation can also resolve the merger paradox. [10 marks]