Reference no: EM132307132

Price Theory Assignment - Industry Analysis

Introduction - In this assignment you will take the role of an expert economist, employed by a government department or regulatory authority. Decision-makers in government rely on the advice of experts, like you, when formulating policy or discharging their statutory responsibilities. An expert economist's role in the government decision-making process is two-fold:

• Analysis: Experts are responsible for analysing alternatives, using the specialised knowledge and skills of their discipline. In this analysis, experts evaluate the alternatives against the government's objectives and statutory obligations.
• Communication: Experts must communicate their findings to the decision-makers in government-ministers and senior public servants-who, in many instances, do not share the experts' specialised knowledge.

This assignment will assess your aptitudes in both of these domains. You are to conduct an analysis of an industry based on the scenario. Your industry analysis will form the basis for a brief-a short report to the ultimate decision-maker in the scenario-summarising your recommendations and the associated rationale.

Scenario - Two producers of pre-mixed concrete, Big Industries and ConCorp, have applied to the Minister for Finance for Merger Authorisation. The two companies are proposing to combine into a single corporate entity to be known as BigCon. The two companies claim that the merger should be authorised as,

• the merged firm will be able to achieve substantial efficiency gains as a result of combining production and
• a third firm, Aggregate Inc., will remain as a competitor to the merged firm in the pre-mixed concrete market, ensuring that consumers are not adversely affected.

Task - The Minister for Finance has instructed you to determine the likely impact of the proposed merger on the market, and to recommend whether or not authorisation for the merger should be granted. Under the relevant legislation, authorisation for a merger can be granted if,

• the proposed acquisition would not be likely to substantially lessen competition OR
• the likely public benefit from the proposed acquisition outweighs the likely public detriment.

Note that competition policy prevents the government from imposing any other form of market regulation, including price caps.

The industry analysis - For your industry analysis you must complete each of the steps detailed below. The required analysis draws on content covered in lectures 6-10 (primarily lecture 9). When completing the steps you must:

• Type all equations using the 'Insert Equation' function in Microsoft Word (or equivalent).
• Show all of your working.
• Include sufficient written description for the reader to follow your process. (Use the lecture notes and worked solutions in the study guide as an indication of the required level of detail.)
• Use appropriate economic terminology.

Failure to follow these instructions will result in lost marks.

Required steps - For the purposes of this analysis you should assume that firms in the pre-mixed concrete industry compete by simultaneously selecting quantities (ie. the firms are engaged in Cournot competition). Steps 1 to 4 apply to the market in the absence of a merger.

Step 1: Using the information provided in the scenario, derive the marginal revenue function for a typical firm in the industry. Use QA to denote the quantity produced by this firm, and X to denote the combined production of the remaining two firms.

Step 2: Derive the best-response function for the typical firm.

Step 3: Find the equilibrium quantity for the typical firm, the equilibrium market quantity, and the equilibrium market price.

Step 4: Find the equilibrium profits for the typical firm and the equilibrium consumer surplus.

When writing your brief you should assume that steps 3 and 4 describe the existing equilibrium in the market.

Now suppose that the merger takes place and that the merged firm achieves the expected efficiencies.

Step 5: Find the new equilibrium quantities and price for the market. Use QA to denote the quantity produced by Aggregate Inc., and QB to denote the quantity produced by the merged firm, BigCon.

Step 6: Find the new equilibrium firm profits and consumer surplus.

When writing your brief steps 5 and 6 represent your assessment of the likely market conditions if the merger is permitted to proceed.

The brief - The purpose of the brief is to communicate your recommendations to the decision-maker who commissioned your analysis. You need to provide enough information for the decision- maker to understand your recommendations, and to reach a decision on the matter at hand.

However, senior government officials are extremely busy, so you must be brief.

• The maximum length for your brief is 2 pages.
• Any content in excess of 2 pages will not be read or graded.

The 2 page limit applies to the brief only. It does not apply to industry analysis detailed in section 3.

When writing the brief remember that it is for a non-expert audience. You must avoid using specialised economic terminology and state everything in 'plain English'. For example:

• Terms such as consumer surplus, producer surplus, and deadweight loss, have little meaning outside of economics and should be avoided. (Note: This is not a comprehensive list.)
• On the other hand, the significance of terms such as price, revenue, and profit, are generally well understood outside of economics.

The brief should not include any equations or diagrams. Tables and dollar amounts may be included as appropriate.

Attachment:- Assignment File.rar