Two producers of pre-mixed concrete, Big Industries and ConCorp, have applied to the Minister for Finance for Merger Authorisation. The two companies are proposing to combine into a single corporate entity to be known as BigCon. The two companies claim that the merger should be authorised as, ? the merged firm will be able to achieve substantial efficiency gains as a result of combining production and ? a third firm, Aggregate Inc., will remain as a competitor to the merged firm in the pre-mixed concrete market, ensuring that consumers are not adversely affected.
Two producers of premiked concrete1 Elig Industries and ConCorp, have applied to the Minister for Finance for Merger Authorisation. The two companies are proposing to com bine into a single corporate entity to be known as EligCon. The two companies claim that the merger should be authorised as, o the merged firm will be able to achieve substantial efciency gains as a result of combining production and o a third firm, Aggregate Inc., will remain as a competitor to the merged firm in the premiked concrete market, ensuring that consumers are not adversely affected. 2.1 Your task The Minister for Finance has instructed you to determine the likely impact of the proposed merger on the market, and to recommend whether or not authorisation for the merger should be granted. Under the relevant legislation, authorisation for a merger can be granted if, I the proposed acquisition would not be likely to substantially lessen competition OR o the likely public benefit from the proposed acquisition outweighs the likely public detriment. Note that competition policy prevents the government from imposing any other form of market regulation, including price caps. 2.2 Industry structure F'remixed concrete is an important input for the construction industry. Concrete cannot be stored or transported over long distances as it begins to set after only a few hours. For this reason, only the three local firmsAggregate lnc., Big Industries and ConCorpare in a position to compete in the market. Moreover, the capital and regulatory requirements for constructing a new concrete plant are substantial, creating an effective barrier to entry. Promixed concrete is regarded as a homogeneous good by the construction industry. Inverse demand in the market has been estimated to be, 0 PEUUE. P = 600 50 where P represents the price of a cubic metre of concrete in dollars, and Q is the total number of cubic metres of concrete supplied into the market on a given day. At present the three firms appear have identical production costs, with each firm facing fixed costs of $400,000 per day and a marginal cost of $180 per cubic metre. Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $120 per cubic metre, while the merged firm is expected to face fixed costs of $1,000,000 per day. 2 3 Industry analysis For your Industry Analysis you must complete each of the steps detailed below. The required analysis draws on content covered in lectures 6-10 (primarily lecture 9). When completing the steps you must: . Type all equations using the 'Insert Equation' function (or equivalent). . Show all of your working. . Include sufficient written description for the reader to follow your process. . Use appropriate notation and economic terminology. Your audience for the industry analysis is other expert economists who may be required to review your work. There is no page limit for the Industry Analysis.3.1 Required steps When completing the industry analysis you should assume that firms are engaged in Cournot Competition. Steps 1 to 4 apply to the market in the absence of a merger. Step 1: Using the information provided in the scenario. derive a profit function for a typical firm in the industry. Use {3,4 to denote the quantity produced by this firm1 and X to denote the combined production of the remaining two firms. [6 marks) Step 2: Derive the bestresponse function for the typical firm. [5 marks) Step 3: Find the equilibrium quantity for the typical firm, the equilibrium market quantity, and the equilibrium market price. I? marks] Step 4: Find the equilibrium profit for the typical firm and the equilibrium consumer sur plus. [5 marks) When writing your brief you should assume that steps 3 and 4 describe the existing equi librium in the market. Now suppose that the merger takes place and that the merged firm achieves the expected efficiencies. ( Note that Aggregate Inc. 's costs are not be affected by the merger.) Step 5: Find the HM equilibrium quantities and price for the market. Use GA to denote the quantity produced by Aggregate Inc., and Q5 to denote the quantity produced by the merged firm. BigCon. (18 marks) Step 15: Find the new equilibrium firm profits and consumer surplus. [3 marks] When writing your brief steps 5 and Er represent your assessment of the likely market conditions if the merger is permitted to proceed
