According to some economists, horizontal mergers may not always be profitable even though they reduce the...

 

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According to some economists, horizontal mergers may not always be profitable even though they reduce the number of suppliers. For example, assume a three-firm industry in which the firms behave according to the quantity-setting (Cournot) model. Let market demand be Q = 20 - P. Each firm has a constant average cost of $4. Now assume that a merger reduces the number of firms to two. (a) Calculate the combined profits of the two firms pre-merger, and then calculate the profit of the combined firm in the post-merger situation Cournot duopoly. Would the firms wish to merge? (b) Could these conclusions change if we did not assume the products are homogenous? Explain. According to some economists, horizontal mergers may not always be profitable even though they reduce the number of suppliers. For example, assume a three-firm industry in which the firms behave according to the quantity-setting (Cournot) model. Let market demand be Q = 20 - P. Each firm has a constant average cost of $4. Now assume that a merger reduces the number of firms to two. (a) Calculate the combined profits of the two firms pre-merger, and then calculate the profit of the combined firm in the post-merger situation Cournot duopoly. Would the firms wish to merge? (b) Could these conclusions change if we did not assume the products are homogenous? Explain.

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a Premerger each firm has a profit of 6 The postmerger firm has a profit of 10 The firms would not w... View the full answer