Week 7

Question 1

For any firm in the market, what is the pre and post-merger profit?

Answer 1

Pre-merger: ((a-c)/(n+1))^2
Post-merger: ((a-c)/(n-m+2))^2

Question 2

For a firm inside the merged one, what is the post-merger profit?

Answer 2

(1/m)((a-c)/(n-m+2))^2

Question 3

When is the merger profitable?

Answer 3

When ((n+1)/(n-m+2))^2 > m

Question 4

Explain how to solve the Stackelberg model and the impacts:

Answer 4

-The Stackelberg model is when firm 1 maximises its profits given firm 2’s reaction curve
-Profit will be larger for the leader and less for the follower, compared to the Cournot model
-It is a form of asymmetric Cournot model

Question 5

What is double marginalisation and how do we eliminate them?

Answer 5

When the manufacturer applies its own margin and then the retailer applies a further margin, meaning the final price is above monopoly level, with a reduced profit… Vertical mergers can eliminate them and become profitable, with lower prices and higher welfare

Question 6

What is market foreclosure?

Answer 6

There is 2 retailers and 1 manufacturer and 1 of the retailers merges with the manufacturer… Before the merger, both of the firms compete and there is downward pressure on retail prices… However, after the merger, the merged retailer receives goods at lower cost so sells at lower cost, forcing the other retailers out of the market and it becomes a monopoly