1. Incentive to Raise Prices after a Merger. Consider the application Heinz and Beech-Nut Battle for Second...

Question:

1. Incentive to Raise Prices after a Merger. Consider the application Heinz and Beech-Nut Battle for Second Place. Suppose the merger of two firms will reduce the price elasticity of demand for each firm€™s product from 3.0 to 1.50. For each firm, the average cost of production is constant at $5 per unit. Suppose Heinz initially has a price of $10 and is considering raising the price to $11.
a. Fill in the blanks in the following table, showing the payoffs from raising the price before the merger (elasticity = 3.0) and after the merger (elasticity = 1.50).

b. Before the merger, raising the price would_______ the firm€™s profit. After the merger, raising the price would _______the firm€™s profit.
c. Why is it reasonable to assume that the merger will decrease the elasticity of demand for each firm€™s products?
2. Recovering the Acquisition Cost. The long-run average cost of production is constant at $6 per unit. Suppose firm X acquires Y at a cost of $24 million and increases the price to $14. At the new price, X sells 1.5 million units per year.
a. How does the acquisition affect Xs annual profit?
b. How many years will it take for X to recover the cost of acquiring Y?
3. Check YellowPages.com? On Yellin s first day on the job as an economist with the FTC, she was put on a team examining a proposed merger between the country s second- and fourth-largest hardware store chains. Her job was to predict whether a merger would increase hardware prices. Her boss handed her some CDs with checkout scanner data from the second largest chain. Each CD contained scanner data from one small town, listing the prices and quantities of hammers, wrenches, nuts, bolts, rakes, glue, drills, and hundreds of other hardware products. Her boss also gave her the Web address for YellowPages.com. How can she use the information in the disks and YellowPages.com to make a prediction?
4. Cost Savings from a Merger. Consider the following statement from a firm that has proposed a merger between two companies: The two companies could save about $50 million per year by combining our production, marketing, and administrative operations. In other words, we could realize substantial economies of scale. Therefore, the government should allow the merger. In light of the new guidelines concerning mergers, how would you react to this statement?
5. Deadweight Loss from a Merger. Consider a market that is initially served by two firms, each of which charges a price of $10 and sells 100 units of the good. The long-run average cost of production is constant at $6 per unit. Suppose a merger increases the price to $14 and reduces the total quantity sold from 200 to 150. Compute the consumer loss associated with the merger. How does it compare to the increase in profit? What is the net loss from the merger?