Econ 571 Homework 2
Spring 2025
Due Date: March 13, 2025 12:00pm (before class time)
1. Short Answer Question
a. (Preparation for the Final Project) Identify one recent antitrust case that involves platform horizontal merger behavior. Apply the
economic analysis we learned in class to investigate the antitrust matter and explain your thoughts. You may use academic literature, news article and court documents to support your argument.
b. (Preparation for the Final Project) Identify one recent antitrust case
that involves platform. vertical merger behavior. Apply the economic analysis we learned in class to investigate the antitrust matter and explain your thoughts. You may use academic literature, news article and court documents to support your argument.
c. (Preparation for the Final Project) Identify one recent antitrust case that involves platform. conglomerate merger behavior. Apply the economic analysis we learned in class to investigate the antitrust matter and explain your thoughts. You may use academic literature, news article and court documents to support your argument.
2. Quantitative Question: Horizontal Merger 2.1 Basic Multi-Firm Model
The market consists of 5 firms before the merger. Each firm’s marginal cost of production is mc1 = mc2 = … = mc5 = 40. The market demand is P = 220 − 2Q. Two of the firm decides to merge together. After merger, the marginal cost of the merged firm remains unchanged at mcm = 40
a. Characterize the market equilibrium before the merger. In particular, characterize the equilibrium price and quantity, and each firm’s supply and profit, consumer surplus pre-merger.
b. Characterize the market equilibrium after the merger. In particular, characterize the equilibrium price and quantity, and each firm’s
supply and profit, consumer surplus post-merger.
c. Compare the pre- and post-merger market outcomes. Explain how such merger can impact the market outcomes and whether it is
considered as a pro- or anti-competitive merger.
2.2 Extended Multi-Firm Model
After merger, the merged firm generates cost efficiency gains. That is, the marginal cost of the merged firm decreases to mcm = 20.
a. Recharacterize the market equilibrium after the merger. In particular, characterize the equilibrium price and quantity, and each firm’s supply and profit, consumer surplus post-merger.
b. Compare the pre- and post-merger market outcomes. Explain how such cost efficiency gain can impact the market outcomes and
whether it is considered as a pro- or anti-competitive merger.
3. Quantitative Question: Vertical Merger
Firm 1 and Firm 2 are the monopolists in the upstream and downstream
markets. Firm 1 purchases the input at the marginal cost of mc1 = 30 and
sells its product to downstream Firm 2 at an intermediate price P1 . Firm 2
purchases the product from Firm 1 at marginal cost of mc2 = P1 and sells its product to consumers at a final price P2 . Consumers’ demand for the final
product is P2 =300-Q. Firm 1 and Firm 2 decide to merge together. After merger, the market has only one merged firm, with the marginal cost of production remaining unchanged at mcm = 30.
a. Before the merger, Firm 1 and Firm 2 choose its optimal price
independently to maximize individual profit. Characterize the market equilibrium price and quantity, each firm’s profit and consumer surplus pre-merger.
b. After the merger, Firm 1 and Firm 2 choose the optimal price Pm to
maximize the overall profit. Characterize the market equilibrium price and quantity, the merged firm’s profit and consumer surplus post-merger.
c. Compare the market equilibrium pre- and post-merger. Explain how the elimination of double marginalization applies here and conclude whether this vertical merger is pro- or anti-competitive.
d. Assuming there are additional cost efficiency gains through
decreasing marginal cost of production post-merger, i.e., mcm = 20. Recharacterize the post-merger market equilibrium and explain how the additional cost efficiency gains can impact the market equilibrium post-merger.
4. Quantitative Question: Conglomerate Merger 4.1. Foreclosure in Firm 1’s Market
Firm 1 and Firm 2 produce in product A and product B’s markets respectively. There are a total of 200 units of product A sold. Among them, Firm 1’s product A accounts for 60% of these sales. There are a total of 100 units of product B sold, with Firm 2 accounting for 70% of these sales. The profit margin is $10 for product A and $20 for product B. Firm 1 and Firm 2 decide to merge together. After the merger, the merged firm ceases to supply Firm 2’s product B on a stand-alone basis and only supply it when it is bundled together with Firm 1’s product A. Firm 1’s product A can still supply on a stand-alone basis.
a. Calculate the market share of customers in each consumer group. Explain which group is impacted by this foreclosure strategy.
b. Calculate the diversion ratio of the impacted group’s customers that would switch to the other three alternative groups respectively.
Explain how switching to each alternative group may impact the sale (and profit) of Firm 1 and Firm 2’s products respectively.
c. Calculate the costs and benefits associated with such foreclosure strategy. Explain whether the merged firm may an incentive to use such strategy to foreclose rivals in Firm 1’s market.
4.2. Foreclosure in Firm 2’s Market
After the merger, the merged firm ceases to supply Firm 1’s product A on a stand-alone basis and only supply it when it is bundled together with Firm 2’s product B. Firm 2’s product B can still supply on a stand-alone basis.
d. Explain which group is impacted by this foreclosure strategy.
e. Calculate the diversion ratio of the impacted group’s customers that would switch to the other three alternative groups respectively.
Explain how switching to each alternative group may impact the sale (and profit) of Firm 1 and Firm 2’s products respectively.
f. Calculate the costs and benefits associated with such foreclosure strategy. Explain whether the merged firm may an incentive to use such strategy to foreclose rivals in Firm 2’s market.