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Merger and acquisition of firms operating under Cournot competition

Question:

Suppose firm 1 and firm 2 merge. Call the new firm A. It has output xA and profit πA. Suppose there is Cournot competition after the merger. For now, we assume that the marginal cost of Firm A, the merged firm, still is 40 

e) Compute quantities for both the merged firm and firm 3. Also, compute the market price and profits.

f) Is the total quantity produced (and sold) larger or smaller than before?

g) Compare the initial sum of profits of the two individual firms, π1 + π2, with the profits of the merged firm, πA. Explain and comment.

If the merged firm were able to exploit economies of scale it would affect costs, maybe even marginal costs. Assume that the marginal cost of the merged firm (only!) was not 40, but 30.

h) Is the merger profitable in this case? What happens to the non-merged firm’s (firm 3) profits compared to the original situation with 3 firms?

i) Can you say something about how much reduction in the merged firm’s MC must be able to achieve for the merger to become profitable?

j) Relate this to a real-world merger. Are they usually profitable? Can you give examples? Are there other things to consider than marginal cost?

Summary:

 The question is that if two firms in the Cornout market merge into one firm, what would the merger result in? how much of marginal cost would prevail in the market, etc are answered in a detailed in manner in the solution.

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