Consider a good that requires two separate inputs to complete the final product. Specifically, an initial input A, made by Firm A, must be combined with input B, made by Firm B, who then can sell the completed product to consumers in a market with a demand P = 24 - q. Each firm has a constant marginal cost of production of $2 per input.
a. What is the profit-maximising outcome?
b. What is the outcome if each firm acts as a profit-maximising unit? Explain.
c. Given the relatively poor outcome in (b), Firm A suggests the two firms merge to overcome this problem. Critically evaluate this suggestion. Can you suggest any alternative solutions other than merging?