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. Additionaly, suppose that the (whol esale 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. Enter your final responses rounded to the nearest penny (two decimal places) Pre-merger price: $ Post-merger price: $

Explanation / Answer

Elasticity of demand for scotch liquor= -1.3

Costs to produce= $16.20

Profit maximisation price ,when three firms compete, P = [ 3(-1.3)/ (1 + 3(-1.3))] (16.20)

= 631.8/ 29

= $ 21.78

If two of the three firms were unconditionally permiitted to merge , then profit maximising price is

P = [ 2(-1.3) / (1+ 2(-1.3))] (16.20)

= 421.2/16

= $ 26.32

Therefore Pre-merger price = $ 21.78

And post-merger price = $ 26.78.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.