Consider an industry with demand Q = a - p where 6 identical firms that compete in quantities (i.e., the Cournot model describes their behaviour). Each firm's cost function is given by C = F + c q. Suppose two of the firms merge and that the merged firm's cost function is given by F = F' + c q, where F < F' < 2 F .

a) Determine the effect of the merger on the merging firms' profits as well as the non-merging firms' profits. Discuss.

b) Assuming that a = 5 and c = 2, determine the merger's effect on market price (in terms of expected percent variation).

c) Determine the value of the Herfindahl Index before the merger as well as the predicted change to the Herfindahl Index as a result of the merger.