Pre-mixed concrete is an important input for the construction industry. Concrete cannot be stored or transported over long distances as it begins to set after only a few hours. For this reason, only the three local firms—Aggregate Inc., Big Industries and ConCorp—are in a position to compete in the market. Moreover, the capital and regulatory requirements for constructing a new concrete plant are substantial, creating an effective barrier to entry. Pre-mixed concrete is regarded as a homogeneous good by the construction industry. Inverse demand in the market has been estimated to be, P = 670 − Q/40, where P represents the price of a cubic metre of concrete in dollars, and Q is the total number of cubic metres of concrete supplied into the market on a given day. At present the three firms appear have identical production costs, with each firm facing fixed costs of $400,000 per day and a marginal cost of $190 per cubic metre. Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $145 per cubic metre, while the merged firm is expected to face fixed costs of $600,000 per day. Now suppose that the merger takes place and that the merged firm achieves the expected efficiencies. (Note that Aggregate Inc.’s costs are not be affected by the merger.) Find the new equilibrium firm profits and consumer surplus. Recommend if the merger should be permitted to proceed or not.
Pre-mixed concrete is an important input for the construction industry. Concrete cannot be stored or transported over long distances as it begins to set after only a few hours. For this reason, only the three local firms—Aggregate Inc., Big Industries and ConCorp—are in a position to compete in the market. Moreover, the capital and regulatory requirements for constructing a new concrete plant are substantial, creating an effective barrier to entry. Pre-mixed concrete is regarded as a homogeneous good by the construction industry. Inverse demand in the market has been estimated to be,
P = 670 − Q/40,
where P represents the price of a cubic metre of concrete in dollars, and Q is the total number of cubic metres of concrete supplied into the market on a given day. At present the three firms appear have identical production costs, with each firm facing fixed costs of $400,000 per day and a marginal cost of $190 per cubic metre. Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $145 per cubic metre, while the merged firm is expected to face fixed costs of $600,000 per day.
Now suppose that the merger takes place and that the merged firm achieves the expected efficiencies. (Note that Aggregate Inc.’s costs are not be affected by the merger.)
Find the new equilibrium firm profits and
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