Reference no: EM132548471

a) Define horizontal mergers.

b) Suppose there are three firms, each with a constant marginal cost = average cost = $30, and jointly facing an industry demand curve described by P = 150 - Q, where Q = q1 + q2 + q3 . qi (i = 1, 2,3) = output of firm i. The Cournot equilibrium results in each firm producing one-fourth of the competitive output or 30 so total output is 90. The price therefore is P = 150 - 90 = $60, and each firm earns a profit of 30($60 - $30) = $900.

Now suppose that two of these firms merge. In the wake of a two-firm merger, the industry will become one with two firms, each of which will produce one-third of the competitive output or 40 so that total output now falls to 80. The price will then rise to P = 150 - 80 = $70 and each of the two remaining firms will earn a profit of 40(70 - 30) = $1600.

Given the information, critically evaluate with explanation the impact of the merger. (Your evaluation must focus on consumers welfare, firms' profits, etc.)