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The following table presents the price, output and profits for identical firms at industry and firm level. Suppose there are currently four firms in the
The following table presents the price, output and profits for identical firms at industry and firm level. Suppose there are currently four firms in the market and two are proposing to merge (firm 3 and 4). Assume that the remaining three (the one merged firm plus the two unmerged firms) continue to exhibit Cournot behavior. a) Explain the merger paradox using data from the table below. How the merged firm (firm 3 and 4) will be worse off? [5 marks] b) How would this outcome differ if all four firms merged? [5 marks] c) Explain what is the motivation for two firms to merge. [15 marks] Number of Firms Industry level Output Profits 21 1092 Firm level Profits Output | 58 21 1092 28 1064 14 532 31.5 976.5 10.5 325.5 4 8.4 32.8 33.6 900.48 225.12 Output is measured in thousands of units and profits are measured in thousands of pounds per week
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