In Australia there are three large telecommunications companies: AusTalk, B-Mobile and CellStarr. AusTalk has a 60% market share of all retail cell phone customers, while B-Mobile and CellStarr have a 20% share each.

CellStarr and B-Mobile announce that they plan to merge. In the announcement, the Lead Engineer of B-Mobile explains that "by virtue of the increased coverage and capacity created by combining the spectrum assets of the two carriers, the new B-Mobile will be able to provide the same quality product to consumers at half the marginal cost of B-Mobile absent this transaction". Independent engineering experts suggest that this is actually a reasonable estimate of the cost reduction that would result from the merger.

You find an academic study using data from six months prior to the merger announcement that reports the demand for cellular phone service to be accurately modeled as Q = 2000 20p. The market price of cellular service is $50.

In the course of the investigation a series of emails internal to B-Mobile, among their senior executive team, are uncovered by DOJ lawyers that include the following language "...This is the only way to reach the 2-firm solution. With two firms post-merger, AusTalk will finally see us as an industry leader. This will allow us to signal prices to the industry that will enable a stable operating environment going forward..." A lot of similarly worded emails are found in the investigation with related indications of a lively internal discussion of these type of ideas.

Further, AusTalk recently released a press release advising investors that, due to a series of adverse legal judgements, they expect to be reporting a record loss on their balance sheet in the coming year. The AusTalk board is meeting in the coming weeks to discuss the implications of this for the ongoing viability of the company.

You are a staff economist at the DOJ. You are asked by your section head to write four page memo describing the economic basis for a possible enforcement action against this merger in the Australian retail cell phone market. The memo should outline any analytical conclusions that can be drawn from the above facts, the likely implications of the transaction for consumers, and any further useful lines of investigation that these facts suggest. You are instructed to use a Cournot style model as a starting point for organizing any analysis or discussion.