The (hypothetical) market for commercial passenger travel to Mars has two firms offering homogeneous products (identical...
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The (hypothetical) market for commercial passenger travel to Mars has two firms offering homogeneous products (identical space craft, service and schedules). The market is currently operating as a Cournot duopoly. The firms have applied to the Commerce Commission for approval to merge. They argue that the merger will allow them to achieve cost synergies sufficient to ensure that prices will not rise, and may even fall. The Commerce Commission is gathering information to assess the application. It has established that the market inverse demand function for travel to Mars is > = 220-24. The Commission has also established that each firm supplies 80 units under the current Cournot structure. However, the Commission must rely on the firms for information about their costs. The firms claim that they each have constant marginal and average costs of $115 per unit. [In answering the questions below you may use the following formulas for the output of a monopolist and a Cournot duopolist without proving them: ikk ik 910 (Monopolist) (Duopolist) where a is the vertical intercept of the market demand curve, -b is its slope and c is unit production cost.] (a) Given the information that the Commission has established, prove that the firms' claimed unit cost must be wrong. (b) Assuming that both firms have constant unit costs of $c, identify the value of a that is consistent with the market data. (c) Assume that the value of a you found in (b) is the correct one. i. If the merger achieves no cost synergies (ie, the post-merger monopoly would also have costs of 80 per unit), by how much would the price rise if the firms were to merge? What would be the associated reduction in consumer surplus? ii. Suppose the merger achieves synergies and let & denote the post-merger unit cost, so < c. For what value of & would the merger have no impact on price? The (hypothetical) market for commercial passenger travel to Mars has two firms offering homogeneous products (identical space craft, service and schedules). The market is currently operating as a Cournot duopoly. The firms have applied to the Commerce Commission for approval to merge. They argue that the merger will allow them to achieve cost synergies sufficient to ensure that prices will not rise, and may even fall. The Commerce Commission is gathering information to assess the application. It has established that the market inverse demand function for travel to Mars is > = 220-24. The Commission has also established that each firm supplies 80 units under the current Cournot structure. However, the Commission must rely on the firms for information about their costs. The firms claim that they each have constant marginal and average costs of $115 per unit. [In answering the questions below you may use the following formulas for the output of a monopolist and a Cournot duopolist without proving them: ikk ik 910 (Monopolist) (Duopolist) where a is the vertical intercept of the market demand curve, -b is its slope and c is unit production cost.] (a) Given the information that the Commission has established, prove that the firms' claimed unit cost must be wrong. (b) Assuming that both firms have constant unit costs of $c, identify the value of a that is consistent with the market data. (c) Assume that the value of a you found in (b) is the correct one. i. If the merger achieves no cost synergies (ie, the post-merger monopoly would also have costs of 80 per unit), by how much would the price rise if the firms were to merge? What would be the associated reduction in consumer surplus? ii. Suppose the merger achieves synergies and let & denote the post-merger unit cost, so < c. For what value of & would the merger have no impact on price?
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Related Book For
South Western Federal Taxation 2015
ISBN: 9781305310810
38th Edition
Authors: William H. Hoffman, William A. Raabe, David M. Maloney, James C. Young
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