A homogeneous products oligopoly consists of four firms, each of which has a constant marginal cost MC = 5. The market demand curve is given by P = 15 - Q.
a) What are the Cournot equilibrium quantities and price? Assuming that each firm has zero fixed costs, what is the profit earned by each firm in equilibrium?
b) Suppose Firms 1 and 2 merge, but their marginal cost remains at 5. What are the new Cournot equilibrium quantities and price? Is the profit of the merged firm bigger or smaller than the combined profits of Firms 1 and 2 in the initial equilibrium in part (a)? Provide an explanation for the effect of the merger on profit in this market.