Differentiated Bertrand Mergers and Merger Waves. FULL SOLUTIONS PLEASE!
a) Use reaction function analysis to explain why differentiated Bertrand mergers are always profitable even if there are zero cost efficiency gains.
b) If the own price elasticity is 2 and the cross price elasticity is 0.5 then explain how the differentiated Bertrand model can be used to determine the impact of merger on price cost margins.
c) Explain the impact of mergers of two neighbouring firms on prices if firms are spatially differentiated and engage in spatial price discrimination. Be sure to indicate whether the merged firm raises prices for all buyers and the price response of outsiders. d) (5 marks). Explain why merger waves occur.