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Consider two firms that compete in Cournot oligopoly. They face inverse demand p(Q) =120-Q where Q=q1+q2 is the sum of the two firms' output. The firms can produce this good at a constant marginal cost of 60.
(a) Solve for the Cournot equilibrium quantities in the market. What is the equilibrium price?
(b) What is the HHI in this market?
(c) Suppose the firms merge to form a monopoly and do not realize any cost efficiencies from it. What is the new equilibrium price? What is the change in HHI arising from the merger?
(d) Suppose the firms merge to form a monopoly and as a result the new firm is able to produce at a marginal cost of 30. What is the new equilibrium price? What is the change in HHI arising from the merger?
(e) Comment on the following statement: "We are seeing an unprecedented increase in the size of firms and the concentration of industries and suggest the government intervene to protect the interests of consumers."
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