Reference no: EM132396931
The market for a standard-sized electronic equipment consists of two firms: Company T and Company M. As the manager of Company T, you enjoy a technological advantage that allows your company to produce the equipment more efficiently than Company M. You use this advantage to be the first to choose the profit-maximizing output level in the market. The inverse demand function for electronic equipment is P = 800 - 4Q, where Q is the combined output of Company T and Company M, i.e. Q = QT + QM. Company T's costs are CT(QT) = 40QT, and Company M's costs are CM(QM) = 80QM. Ignoring antitrust considerations, would it be profitable for your firm ( Company T) to merge with Company M? If not, explain why not; if so, put together an offer that would permit you to profitably complete the merger with Company M. For this question, you may want to follow the steps below:
(1) From Company M's residual demand function, find its marginal revenue function. Based on its profit maximization, derive Company M's reaction curve or best response function
(2) From Company T's residual demand function, find its profit function after incorporating Company M's best response function. Based on profit maximization, find Company T's profit maximizing quantity.
(3) Find Company M's profit-maximizing quantity, the equilibrium price and, hence, Company T's and Company M's profits.
(4) Consider the merger scenario and derive the monopoly's price, quantity and profit. [Assume that, following merger, Company T will use its technological advantage in terms of its lower cost for the merged entity.]
(5) Compare (3) and (4) and evaluate the merger proposition.