Three firms (A, B, and C) compete in the widgets market. Demand for widgets is g
ID: 1189244 • Letter: T
Question
Three firms (A, B, and C) compete in the widgets market. Demand for widgets is given by P(Q) = 130 qA qB qC . Assume that firm A is more efficient than B, and B more efficient than C. In particular, MCA =5,MCB =10,andMCC =15.
1) What is the market share of each firm? Compute the HHI of this industry.
2) Firm A and C are merging. Find the equilibrium of this game assuming that the marginal cost of the new firm (the one that results from A and C merging) is the average marginal costs of A and C.
3) Compute the new HHI. According to what you have learned in class, would this merger be approved?
4) Suppose that to merge, A and C claim that the merge would benefit consumers. How would you evaluate this statement? Specifically, given the equilibrium you find above, are consumer better or worse off?
5) Regardless of your results above, assume the claim to be false and the merger not to be authorized. What would be needed, in terms of costs, for the merger to benefit consumers. Be specific, meaning that if you are going to claim that costs have to be even lower, then you should provide a cost level that would make the merger beneficial for consumers.
Explanation / Answer
1) The total market share is equally divided within A, B and C : P(q) = 130 - qa- qb - qc
which means the market share for each firm is 33.33% and the HHI = 3*(0.33)^2 = 0.3267
2) Firm A and C are merging. The market share is split 66.66 and 33.33% within the two firms left.
3) The new HHI is (0.66)^2 + (0.33)^2 = 0.4356 + 0.1089 = 0.5445
The resultant merger would raise anti trust concerns and would not be approved.
4) After the merger of A and C, the consumers would be left with limited choices and the marginal cost of the two firms left are same which means there would not be any benefits passed on to the customer from the merger even with increased production capacity.
5) For the merger to be beneficial, the marginal costs should be lower than the competition. This would result in the firm reducing price even if the profit margins are kept the same. This reduction in prices will directly help the consumers.