Answer Happy

Problem III (Horizontal Mergers) Consider a homogenous-product Cournot oligopoly with 4 firms. Suppose that the inverse demand function is P(Q)=64-Q. Suppose that firms incur a constant marginal cost c=4. Answer the following questions. (a) Suppose that firm 1 and 2 consider merging and that they are synergies leading to marginal cost cm < c. Characterize the Nash Equilibrium. (b) At which level cm (you may want to give an approximate number) are the two firms indifferent whether to merge or not? (c) Does such a merger that just makes the two firms indifferent between merging and not merging increase consumer surplus? (d) Suppose instead that firm 1, 2, and 3 consider merging. They new marginal cost of the merged firm is cn <c. At which level cn are the three firms indifferent whether to merge or not? (e) Compare your findings in (4) and (2). What can you say about incentives to merge in this case?