Suppose that the widget market consists of three equally efficient sellers, each
with a marginal cost of $1.

a. Assume that competition is well described by the "pure" Bertrand model. If
two of these three firms merge, should we worry about a post-merger price
increase? Explain.

b. Now assume that Firm 1 finds a way to lower its marginal cost to $0.90.
What is the new equilibrium price? What is the new HHI? Are consumers
harmed?

Answer rating: 100% (QA)

a Pure Bertrand Model and Merger In the pure Bertrand model firms compete solely on prices striving ... View the full answer