Two firms compete in an undifferentiated Bertrand market

| November 24, 2016

ECN121B – Industrial Organization II
Prof. Muehlegger

page 1 of 1

Due: Start of class, Monday, October 19th

Group Work: I encourage all of you to work on the problem set in groups, but each member of the group
must write up his or her own solutions. Problem sets that are verbatim copies will receive
a zero.
When submitting your problem set your problem set in make sure that you hand it in:



With your name at the top


Listing of all of the people with whom you worked

Question 1:
Two firms compete in an undifferentiated Bertrand market.
Suppose that the firms face a demand curve given by P = 80 – Q and both firms have constant marginal
cost of 60.
(a) What is the market clearing Bertrand price and quantity?
(b) Suppose the two firms merge and regulators want to make sure that welfare is not decreased by the
merger. How much would marginal cost have to fall in order for welfare to be identical before
and after the merger?
(c) Instead, suppose the regulator only cares about consumer surplus. How much would marginal
cost have to fall in order for consumer surplus to be unchanged? Is you answer the same as in part
(b)? If not, briefly explain why.
(d) Suppose instead of the firms competing Bertrand, the two firms compete Cournot prior to the
merger. Explain whether you would expect your answer to part (c) to go up, down or stay the
same. Note: you do not need to do any calculations here. An intuitive argument is fine.
(e) Comment on the following statement is true, false or uncertain. “A horizontal merger that doesn’t
result in efficiency gains cannot be welfare improving.”

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