In exercises 25.8 and 25.9, we illustrated how firms in an oligopoly can collude through mergers or through the formation of cartel agreements. We did this for different bargaining and economic environments and concluded that payoffs for the firms might differ dramatically depending on the environments in which the negotiations between firms take place. Suppose now that you are a lawyer in the anti-trust division of the Justice Department —and you are charged with limiting the efficiency costs from collusive activities by oligopolists.
A: Suppose that cartel agreements are always negotiated through alternating offers — i.e. suppose the firms always split the gains from forming a cartel 50-50. Suppose further, unless otherwise stated, that demand curves are linear, firms face the same constant marginal costs and no recurring fixed costs.
(a) Suppose you have limited resources to employ in pursuing antitrust investigations. Given that breaking up some forms of collusion leads to greater efficiency gains than breaking up others, which firms would you focus on — those that would revert to Bertrand, Cournot or Stackelberg environments?
(b) Given that some cartels are more likely than others to last, which would you pursue if you wanted to catch as many as possible?
(c) Given the likelihood that one form of collusion is more likely to last than the other, would you focus more on collusion through mergers and acquisitions or on collusion through cartel agreements?
(d) Suppose that you were asked to focus on collusion through mergers and acquisitions. In what way would the size of recurring fixed costs figure into your determination of whether or not to pursue an antitrust case against firms that have merged? What tradeoff do you have to consider?
B: Suppose that demand is given by x (p) = 1000−10p and is equal to marginal willingness to pay. Firms face identical marginal costs c = 40 and identical recurring fixed cost FC.
(a) Suppose two Cournot oligopolists have merged. For what range of FC would you decide that there is no efficiency case for breaking up the merger?
(b) Repeat (a) for the case of Stackelberg oligopolists.
(c) Repeat (a) for the case of Bertrand oligopolists.
(d) It is often argued that antitrust policy is intended to maximize consumer welfare, not efficiency. Would your conclusions change if you cared only about consumer welfare and not efficiency?