Answered: Consider a 3 firm market in which firms…

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter12: Price And Output Determination: Oligopoly

Section: Chapter Questions

Problem 3E

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Consider a 3 firm market in which firms sell differentiated products. Assume that firm A has a 50% market share and the firms B and C both have 25% market shares. Assume further that firms B and C have marginal costs equal to 2, and that firm A has a marginal cost of 1. Assume all firms have an own price elasticity of demand equal to -2, and that the diversion ratio between the firms B and C equals -.2. Suppose that firms B and C announce that they want to merge. a. What is the profit maximizing price for firms B and C before the merger? b. How much will the merger increase the prices charged by firms B and C? c. Suppose that firms B and C argue that the merger will reduce their marginal costs from 2 to 1. What would be the effect of the merger on their prices if their costs fall to 1?

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