Two firms struggle in an undifferentiated Bertrand market. Assume that the firms face a demand curve given by the P = 60 - Q and both firms have constant marginal cost of 40.
1. Determine the market clearing Bertrand price and quantity?
2. Assume the two firms merge and regulators want to make sure that welfare is not decreased by the merger. Discuss how much would marginal cost have to fall in order for welfare to be identical before and after the merger?
3. Instead, assume the regulator only cares about consumer surplus. Discuss how much would marginal cost have to fall in order for consumer surplus to be unchanged?
4. Assume instead of the firms competing Bertrand, the two firms compete Cournot prior to the merger. Describe whether you would expect your answer to part (c) to go up, down or stay the same.
5. Comment on the following statement is true, false or uncertain. "A horizontal merger that doesn't result in efficiency gains cannot be welfare improving."