Merger with cost synergie) Suppose the demand for widgets is p(Q) = 100 – Q. Initially there are two firms producinwidgets, each with cost functioC(q) = 40q, and these firm engage in Cournot quantity cmpetition. Now suppose these two firms propose to merge so as to reduce their marginal costs by 0<?. In other words, after the merger there will be a monopoliswith cost functioMq) = (40 – ?)q.
For what values of ? will the me
rger increase social welfare,
and for what values of ? will the
merger decrease social welfare?
One case where the antitrust au
thorities often accept an effic
iency defense (i.e. a claim that the
merger would lower cost making
production more efficient) for a
n anticompetitive merger is
when the efficiency gains are so large that the market price wi
ll actually decrease despite the
anticompetitive effects. How large
would ? have to be for this
case to hold?