Suppose the European Union (EU) is investigating a proposed merger between two o

Question

Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is –1.3 and that it costs $16.20 to produce and distribute each liter of Scotch.

Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices in the wholesale market for premium Scotch liquor.

Instruction: Do not round intermediate calculations. Round your final answers to the nearest penny (two decimal places).

Pre-merger price: $

Post-merger price: $

Explanation / Answer

The profit maximizing price when two firms compete is given as:-

P=[3(-1.3)/1+3(-1.3)}*16.20=[-3.9/(-2.9)]*16.20 =$21.786 per ltr

If two out of three firms are allowed to merge each other, then the profit-maximizing price

P=[2(-1.3)/1+2(-1.3)}*16.20=[-2.6/-1.6]*16.20= $26.33 per ltr

If we see above, with a merger, the price level is increased by (26.33-21.79)/21.79=20.8% and thus EU has some apprehensions.

Pre-merger price: $21.79 per ltr

Post-merger price: $26.33 per ltr

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