Two firms, Antaeus and Benina dominate the market for toaster ovens. They compet

Question

Two firms, Antaeus and Benina dominate the market for toaster ovens. They compete Cournot.

i). How do the prices, profits, and quantities of Antaeus and Benina compare to the outcomes of a competitive market? How does Cournot competition generate these results?

ii). Antaeus wants to acquire Benina and become a monopoly. Benina will only accept the buyout if Antaeus will pay Benina more than Benina’s profits. Can Antaeus afford to do this and still come out ahead? Why or why not?

iii). Suppose that the Department of Justice gets wind of this proposed merger and decides to stop it from happening. Why would the DoJ do such a thing?

iv). After the merger is blocked, the two firms decide that they’d like to collaborate to produce the monopoly outcome, rather than compete. What is this called? Why might Antaeus and Benina want to do this? What could go wrong if they do?

Explanation / Answer

i). How do the prices, profits, and quantities of Antaeus and Benina compare to the outcomes of a competitive market? How does Cournot competition generate these results?

The prices charged by Antaeus and Benina will be higher then that in competitive market as they charge the price above marginal cost wheras in competitive market, Price is equal to MC and tthus, as they charge higher price , the Quantities supplied by them are less than hat in competitive market.

As they are charging price higher than in competitive market , their profits will be positivee an higher than the one in competitive market,

In  Cournot competition , both  Antaeus and Benina competes in quanties, given the price as each firm just considers the supply of other firm as given and chooses the best strategy/output given the output of other firm. And as they just compete with each other only and considers the output of that only while deciding how much to produce, they produce where there profit is maximized and hence produces output which is less than in competitive market.

ii). Antaeus wants to acquire Benina and become a monopoly. Benina will only accept the buyout if Antaeus will pay Benina more than Benina’s profits. Can Antaeus afford to do this and still come out ahead? Why or why not?

Yes, Antaeus can afford to do this and still come out ahead as if Antanaeus acquires Benina , then it will become a monopoly and thus will charge the monopoly price in the market and will earn a monopoly profit which will be higher then the combined profits of both before Antanaeus acquiring Benina. Since Monopoly can charge the price where MR=MC , it will always be able to earn a larger profit then a duopoly.

iii). Suppose that the Department of Justice gets wind of this proposed merger and decides to stop it from happening. Why would the DoJ do such a thing?

The DoJ would do such a thing because if they merge and become a monopoly then competition in the market will decrease and they can exploit the market by the charging the Monopoly price which will be higher then the present market price in duopoly and will reduce the the consumer surplus and increase the dead weight loss in the society as they will produce a lesser quantity now which is equal to monopoly output,

iv). After the merger is blocked, the two firms decide that they’d like to collaborate to produce the monopoly outcome, rather than compete. What is this called?

This is collusion.

Why might Antaeus and Benina want to do this?

  Antaeus and Benina want to collude to eliminate the competition between them, and thus can reduce the output and produce the outpu twhich is equal to monopoly Output and charge the monopoly price which will lead to he higher profits for both the firms.

What could go wrong if they do?

If they do so , then they will reduce their output to a monopoly output and increase the prices and thus the consumer surplus will decrease and dead weight loss will increase.

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