A small town is served by many perfectly competing supermarkets, which have constant marginal cost. there is no deadweight loss.

a. Now suppose that the supermarkets combine to form one chain. Using a new diagram, show the equilibrium price and quantity. What is the deadweight loss in this case? Indicate the consumer and producer surplus, how have they changed?

b. Assume that the newly formed supermarkets chain can perfectly price discriminate (hint: it means they can charge each consumer the maximum price they he/she is willing to pay - think about our experiment in the lecture deriving the demand curve for your favourite singer's tickets). How much will be sold and what will be the deadweight loss in this case? Discuss how policymakers approach these sorts of situations, and why.?