There are two firms in an industry where the consumer demand function is: P= 160 – Q/2. The firms produce identical goods, and each firm has a constant marginal cost of $10. They engage in Bertrand competition.
The two firms decide to seek a merger, which is challenged by the government. The firms believe that the merged firm will have a marginal cost of $8.
a) The government argues that there will be no cost savings from the merger and instead a merged firm would raise prices to the monopoly level. If this is true, by how much would Consumer Surplus decrease if the merger is permitted?
(b) Suppose the courts agree with the government’s prediction of a higher price, but also agree that the merger will lower costs. Will the courts approve or deny the merger? Why?