2.2 Industry structure Promixed concrete is an important input for the construction industry. Concrete cannot be stored or tran5ported over long distances as it begins to set after only a few hours. For this reason, only the three local firm%r'~._r_1qregatc Inc. Big Industries and Cc-uCor'pare in a position to compete in the market. Moreover, the capital and regulatory requirements for constructing a new concrete plant are substantial. creating an effective barrier to entry. Pre mixed concrete is regarded as a homogeneous good by the construction industry. Inverse demand in the market has been estimated to be. Q P2500. where P represents the price of a cubic metre of concrete in dollars. and Q is the total number of cubic metres of concrete supplied into the market on a given day. At present the three firms appear have identical production costs, with each firm facing fixed costs of 5100.000 per day and a marginal cost of $200 per cubic metre. Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $170 per cubic metre, while the merged firm is expected to face fixed costs of $200,000 per day. 3 Industry analysis For your Industry Analysis you must complete each of the steps detailed below. When completing the steps you must: a Type all equations using the 'Insert Equation' function {or equivalent). o Show all of your working 0 Include sufficient written description for the reader to follow your process. 0 Use appropriate notation and economic terminology. Your audience for the industry analysis is other expert economists who may be required to review your work. There is no page limit for the Industry Analysis. 3.1 Required steps When completing the industry analysis you should aSSume that firms are engaged in Courllot Corlipt'titlon. Steps 1 to 4 apply to the market in the absence of a merger. Step 1: Using the information provided ln the scenario, derive a profit function for a typical firm in the industry Use GA to denote the quantity produced by this firm, and X to denote the combined production of the remaining two firms. (6 marks) Step 2: Derive the best-reSponse function for the typical firm. (4 marks) Step 3: Find the equilibrium quantity for the typical firm, the equilibrium market quantity, and the equilibrium market price. (? marks) Step 4: Find the equilibrium profit for the typical firm and the equilibrium consumer sur plus. (5 marks) When writing your brief you should assume that steps 3 and 4 describe the existing equi Iibrium in the market. Now suppose that the merger takes place and that the merged firm achieves the expected efficiencies. (Note that Aggregate |nc.'s costs are not be affected by the merger.) Step 5: Find the new equilibrium quantities and price for the market. Use On to denote the quantity produced by Aggregate Inc.. and QB to denote the quantity produced by the merged firm, BigCon. (18 marks) Step 6: Find the new equilibrium firm profits and consumer surplus. (6 marks) When writing your brief steps 5 and 6 represent your assessment of the likely market conditions ifthe merger is permitted to proceed. Step 7: Complete any additional calculations that you require to support your recommen dation. (4 marks)
