If the firms in a Cournot duopoly merge forming a monopoly, the effect on price, profit, and other variables depends on the trade-off between efficiency and market power. The firms produce identical products. Firm 1 has a constant marginal cost of $3, and Firm 2 has a constant marginal cost of $6. The market demand is Q = 105 m.
1. The Cournot-Nash equilibrium occurs where q 1 equalsand q 2 equals.
Market output is.
Furthermore, the equilibrium occurs at a price of $.
Firm 1 receives profit of $and Firm 2 receives profit of $(for total profit between the two firms of $).
Consumer surplus is $.
Finally, deadweight loss is $.
2. If the firms merge and produce at the lower marginal cost, then the new equilibrium occurs where 91 equalsand 2 equals.
Market output is.
The new equilibrium price is $.
The merged firm's profit is $.
Consumer surplus is now $.
Finally deadweight loss is $.
3. Discuss the change in efficiency (average cost of producing the output) and welfare-consumer surplus, producer surplus (or profit), and deadweight loss.
When the firms merge, production efficiency.
At the same time, consumer surplusprofitsand deadweight loss.