When titans team up what impact does this have on internal and external stakeholders? Here, the titans are unlisted public company Chemist Warehouse and ASX listed public company Sigma Healthcare. Sigma has started the legal process seeking approval from the Australian Competition and Consumer Commission $($ACCC$)$to acquire the Chemist Warehouse business. The deal would merge Chemist Warehouse with Sigma Healthcare to create Australia's largest pharmacy company. Chemist Warehouse is one of the largest retail pharmacies in Australia, with over $500$ locations. Sigma Healthcare has a significant pharmaceutical wholesale, distribution, and retail presence, and owns a range of retail pharmacies including Discount Drug Stores, Amcal, and Guardian Pharmacy. The Australian pharmacy sector is already heavily concentrated, and the proposed merger would both concentrate the ownership of several retailers and involve the integration of a major retailer and several wholesalers. As a result, the ACCC has expressed concerns that the merger will lessen competition.

Question $2$:

Consider the following scenario: Suppose that Chemist Warehouse and Discount Drug Stores $($one of Sigma$$s retail pharmacy brands$)$ are the only two pharmacies in the $($fictional$)$ town of Woodheath Falls. Both pharmacies incur a constant marginal cost of $$10$ per unit of over$-$the$-$counter $($OTC$)$ medicine and fixed costs of $$15,000$ per month.

Monthly demand in town for OTC medicine is given by:

P $=282$Q$,$ where Q represents thousands of units of medicine. Thus, if they were to act like a monopoly by coordinating their pricing to maximise their collective profits, their marginal revenue would be

P $=284$Q$.$

However, suppose that if either pharmacy does not coordinate, it will charge $$16.$ Because the law does not allow them to collude on prices, each must decide which price to charge without knowing what the other will do$.$

a$)$ Using a payoff matrix, explain whether the pharmacies will coordinate to charge the monopoly price. Assume that if both charge the same price, they will each serve half the market. Otherwise, all consumers will buy from the firm with the lowest price.

b$)$ Now suppose that Chemist Warehouse and Sigma Healthcare merge. They decide to keep both pharmacies in Woodheath Falls open, but now they can explicitly coordinate their prices. At the same time, because both will be supplied by Sigma$$s distribution centre, their marginal cost falls to $$8,$ and their fixed cost falls to $$12,000.$ Explain whether and why consumer surplus will increase as a result of the merger.

c$)$ Identify one key assumption in the setup of the scenario in part B and explain how changing it could lead to a different impact on consumers. Justify with supporting evidence which scenario you believe to be more likely in the context of this merger.