Question

Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists’ definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is -1.5 and that it costs $16.20 to produce and distribute each liter of Scotch.

A) Based only on these data, provide quantitative estimates of the likely pre- and post merger prices in the wholesale market for premium Scotch liquor.

Pre-merger price: $   

Post-merger price: $

Answer 1

Premerger condition has 3 firms. Hence pre-merger price is P = 16.20 3x-1.5+1) nr 3x-1.5 = 16.20 x( 14:52 = 20.83 Post-merger condition has 2 firms. Hence pre-merger price is 2x-1.5 P = 16.20 (2x-1.5+1 = 16.20 x 3.0 = 24.30 Hence premerger price is $20.83 and post-merger price is $24.30|