If there are three big telecommunications companies: A, B and C. A has a 60% market share of all retail cell phone customers, while B and C have a 20% share each. C and B plan to merge. B explains that “by virtue of the increased coverage and capacity created by combining the spectrum assets of the two carriers, the post-merger B will be able to provide the same quality product to consumers at half the marginal cost of B absent this transaction”. Independent experts suggest that this is a reasonable estimate of the cost reduction that would result from the merger. You find an academic study using data from prior to the merger announcement that reports the demand for cellular phone service to be accurately modeled as Q = 2000 − 20p. The market price of cellular service is $50. In the course of the investigation a series of emails internal to B, among their senior executive team, are uncovered that include the following language “...This is the only way to reach the 2-firm solution. With two firms post-merger, A will finally see us as an industry leader. This will allow us to signal prices to the industry that will enable a stable operating environment going forward...” A also recently released a press release advising investors that, due to a series of adverse legal judgements, they expect to be reporting a record loss on their balance sheet in the coming year. You are a staff economist at the DOJ. What analytical conclusions can be drawn from the above facts? What are the likely implications of the transaction for consumers? And what are further useful lines of investigation that these facts suggest? Is there economic basis for enforcement action? Use a Cournot style model as a starting point for organizing any analysis or discussion.
Answer) I will answer the given question in following five parts
1.Cournot model and Cournot model for duopoly-A model in which competing firms choose quantity of goods to produce independently that is not knowing what other firms are producing,firms cannot collude as they are producing without an idea of other firm 's production,duopoly model is just a path of this model with only 2 firms involved in it.
2.Analytical conclusions drawn from given facts-There are 3 important conclusions to be drawn from here,first B is signalling towards cost reduction behind this merger but its email suggests creating a duopoly which dictates market,this merger should rather be seen as a leverage building move from B,second the emails indicate a possibility of tacit collusion and setting prices at their own will,third A needs to offset its losses and this gives B even more belief that they both can dictate markets at their own will.
3.For consumers,combining above conclusions,price hike is inevitable,whats worse is that consumers may have to continue paying high tariifs for forseeable future,this is a case when something like these happens,customer pays always in the end.
4.Further investigation points-DOJ needs to investigate whether there is a collusion which is not visible,such as from viewpoint of A who wants to recover losses,moreover is there any collusion between B and C as well beyond merger.
5.Yes,from an economic view point this is a serious case where firms are potentially looking to form a collusion and can lead to significant damage to average consumer as well as hamper competency in this sector.
Answer is complete.Thank you!
If there are three big telecommunications companies: A, B and C. A has a 60% market...