Exercise 8. Synergy v reallocation of production

Consider a simple Cournot model where there is an industry with two firms producing the same identical homogeneous good. Firm 1 has constant marginal cost c1=0 and firm 2 has constant marginal cost c2<1>p=1-Q.

Q1) Find the equilibrium quantities, price, profits, consumer surplus and welfare of the industry (this will be your 'benchmark' case, that is the industry 'absent the merger').

Q2) Suppose now that the two firms merge, and that the most inefficient plant is shut down, so all the production will take place at the 'site' of what was previously firm 1. Find the equilibrium quantities, price, profits, consumer surplus and welfare after the merger.

Q3) Compare the two results. Is the merger harming consumers? Is it resulting in higher or lower welfare, and in what circumstances?