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Two firms in a city compete as duopolists and face the industry demand curve: P = 120 - .2Q, where Q denotes total output (in thousands of units). For each firm, LAC = LMC = $60 per unit. In equilibrium, each firm produces: Q1= Q 2 = 100 thousand units.
a. Compute total industry profit and consumer surplus.
b. Now suppose that the two firms have decided to merge to take advantage of economies of scale that will drive long-run average cost down to LAC = $50 per unit for the merged firm. With no other rivals, the merged firm will act as a monopolist. Determine the monopoly price and quantity.
c. Antitrust authorities are considering blocking the merger on the grounds that it is anticompetitive. The firms argue that the merger is pro-competitive because of the significant cost reductions. Is total welfare (accounting for both the effect on consumers and the effect on industry profit) higher or lower after the merger than before?
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