What would be the effect on the equilibrium price

Reference no: EM13190715

Two cournot duopolists produce in a market with a demand P(Q)=100-Q. The marginal cost for Firm 1 is constant and equals 10. The marginal cost for Firm 2 is constant and equals 25. The two firms want to merge, which would leave a monopoly. They argue that the merger should be approved because all output would be at the low margina cost of 10 after the merger. ie, firm 2's facilities would be shut down and all output shifted to firm 1's more efficient facilities.

a. What would be the effect on the equilibrium price of allowing the merger to proceed?

b. Assuming that firm 1 is buying firm 2, once the deal is complete, will its profits be high enough to come out ahead after having bought out firm 2?

Reference no: EM13190715

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