Reference no: EM132310826

Industry Analysis

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.

Your 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.

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.