Firms 1 and 2 are proposing to merge. They offer symmetrically differentiated products and have identical costs and , therefore, identical premerger prices. (Note that “symmetrically differentiated products” means that if they charge the same price, then they have the same demand.) The common premerger price for firms 1 and 2 is 90, and the common marginal cost is 60. If firm 1 were to raise its price to 100, we estimate that its demand would drop by 20 units and firm 2’s demand would rise by 5 units.
a. Assume the merger would reduce marginal cost by 10 percent. Using UPP, is there reason to be concerned with the merger?
b. Suppose the prospective merger partners want to convince the DOJ that the merger will not raise price. Using UPP, how large must they argue the efficiency is?
c. Suppose there are improved estimates of firms’ demand functions and now we know that if firm 1 were to raise its price to $100, its demand would (still) drop by 20 units, but firm 2’s demand would rise by 10 units. Are unilateral effects stronger or weaker with this new demand estimate? Is the merger more or less likely to be approved?