Two firms compete in an undifferentiated Bertrand market.

| November 24, 2016

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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