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 = 600 −Q/50, 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 $180 per cubic metre. Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $120 per cubic metre, while the merged firm is expected to face fixed costs of $1,000,000 per day. When completing the industry analysis you should assume that firms are engaged in Cournot Competition. Steps 1 to 4 apply to the market in the absence of a merger. Step 1: Using the information provided in the scenario, derive a profit function for a typical firm in the industry. Use QA to denote the quantity produced by this firm, and X to denote the combined production of the remaining two firms. Step 2: Derive the best-response function for the typical firm. Step 3: Find the equilibrium quantity for the typical firm, the equilibrium market quantity, and the equilibrium market price. Step 4: Find the equilibrium profit for the typical firm and the equilibrium consumer surplus. When writing your brief you should assume that steps 3 and 4 describe the existing equilibrium in the market. 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.) Step 5: Find the new equilibrium quantities and price for the market. Use QA to denote the quantity produced by Aggregate Inc., and QB to denote the quantity produced by the merged firm, BigCon. Step 6: Find the new equilibrium firm profits and consumer surplus
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 = 600 −Q/50,
where P represents the
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 $180 per cubic metre.
Big Industries and ConCorp estimate that the proposed merger would reduce their
marginal cost to $120 per cubic metre, while the merged firm is expected to face fixed
costs of $1,000,000 per day.
When completing the industry analysis you should assume that firms are engaged in
Cournot Competition. Steps 1 to 4 apply to the market in the absence of a merger.
Step 1: Using the information provided in the scenario, derive a profit function for a typical
firm in the industry. Use QA to denote the quantity produced by this firm, and X to denote
the combined production of the remaining two firms.
Step 2: Derive the best-response function for the typical firm.
Step 3: Find the
and the
Step 4: Find the equilibrium profit for the typical firm and the equilibrium
When writing your brief you should assume that steps 3 and 4 describe the existing equilibrium in the market.
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.)
Step 5: Find the new equilibrium quantities and price for the market. Use QA to denote
the quantity produced by Aggregate Inc., and QB to denote the quantity produced by the
merged firm, BigCon.
Step 6: Find the new equilibrium firm profits and consumer surplus
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