In Q&A 16.2, under what conditions (if any) would a cost-reducing merger that converts a duopoly into a monopoly cause a Pareto improvement? Would a cost-reducing merger always increase total surplus? Explain briefly.

Q&A 16.2 

A1 Concrete and Apex Concrete are Cournot duopoly producers of ready-mix concrete. The market inverse demand function is p = a - bQ = 80 - 0.5Q. Each firm has a constant marginal cost m = 20 and no fixed costs. The firms are considering a merger. Such a move may reduce their marginal cost. Use a spreadsheet to show the quantity, price, consumer surplus, profit, and total surplus under Cournot duopoly and a (merged) monopoly. Remember that a Cournot duopoly facing a linear inverse demand function p = a - bQ and with constant marginal cost m produces market output Q = 2(a - m)/3b and a profit maximizing monopoly produces Q = (a - m)/2b (see Chapter 9). Is total surplus after the merger higher or lower than under duopoly if the marginal cost falls to 16 or to 12? How much would marginal cost have to fall to avoid a reduction in consumer surplus?

Augment the following spreadsheet to calculate the quantity, price, consumer surplus (CS), profit, and total surplus (TS) if the two firms merge to form a monopoly for values of marginal cost ranging from 0 to 20 in increments of 4.