2. Two cereal firms that set prices and sell differentiated products propose to merge. Firm 1 sells CrunchyCrunch for a price of $10 with a marginal cost of $6. Firm 2 sells FibryFibre for a price of $12 and a marginal cost of $6. (a) When the price of CC rises, 20% of its lost demand goes to FF. What is the marginal cost reduction for CC that is required to offset the upwards pricing pressure on the CC price? (b) You are employed as a consultant by the merging firms. You know that the DOJ knows that the marginal cost of FF will fall by 50 cents as a result of the merger, but that the agency is unsure of the diversion between FF and CC. How small will you need to claim that the diversion is in order for there to be no net upwards pricing pressure on the CC price?

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a Marginal cost of CC after raising the pr... View the full answer