Suppose that antitrust authorities are evaluating whether or not to allow a horizontal merger. Before the merger, the market was competitive, and the merging firms supplied a total of 5,000 goods to the market at a price of $40 per good. Of course, this means that the firms average costs were $40 per good pre-merger. After the merger, expert economists predict that the merged firm will be able to cut its average costs down to$38 per good, but their increased market power will also allow them to sell 4,000 goodsat $45 per good.

(a) Describe the Williamson Tradeoff or depict graphically

(b) Calculate the Williamson Tradeoff that results from this merger

(c) Should this merger be allowed?

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a The Williamson Tradeoff named after economist Oliver E Williamson is the tradeoff between the effi... View the full answer