Vertical Merger. In the pre-merger setting there are 4 vertically integrated firms, 3 non-integrated dealers and 3 non-integrated manufacturers. The marginal cost of the integrated firm and non-integrated manufacturer are both zero. The marginal cost of the non-integrated dealer is equal to the wholesale price (w) charged by the non-integrated manufacturers. Retail demand is given by P = 480 – Q. In the post-merger setting a nonintegrated manufacturer merges with a non-integrated dealer to become a vertically integrated firm. a) (15 marks). (i) Solve for the pre-merger equilibrium outputs and profits of each firm, the retail price (P) and the wholesale price (w). (ii) Solve for the post-merger equilibrium outputs and profits of each firm, the retail price (P) and the wholesale price (w). Determine whether the merger is profitable and whether it raises or lowers the retail and wholesale prices. b) (5 marks). Explain the empirical evidence regarding the impacts of vertical integration and/or vertical merger in the cement industry.

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