Assume that the widget industry has three firms, with market shares as follows: Firm 1 (40%), Firm 2 (35%) and Firm 3 (25%). Firm 1 and Firm 2 want to merge. You are an analyst at BRG, a consulting firm. You have been retained to analyze whether prices are likely to increase or not after the merger.

Firm 1's price (P1) is 30, Firm 2's price (P2) is 28, and each firm has a margin of 50%. Assume that consumers choose between these firms according to the logit choice model. Finally, suppose that Firm 1 and Firm 2 both will be able to reduce their marginal costs by 5% as a result of the merger.

Based on UPPI calculations, do you expect prices to go up or not after the merger, should it take place?

Please show all calculations and explain your answer!