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 -1.9 and that it costs $16.90 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

Before the merger, each firm was a Cournot tripoly and after the merger each firm is Cournot duopoly

Pre merger price = MC x (n x ed / n x ed + 1) = 16.90*(3*(-1.9)/3*(-1.9) + 1) = 20.50

Post merger price = 16.90*(2*(-1.9)/2*(-1.9) + 1) = 22.94

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