Merger with cost synergie) Suppose the demand for widgets is p(Q) = 100 – Q. Initially there are two firms producinwidgets, each with cost functioC(q) = 40q, and these firm engage in Cournot quantity cmpetition. Now suppose these two firms propose to merge so as to reduce their marginal costs by 0<Δ. In other words, after the merger there will be a monopoliswith cost functioMq) = (40 – Δ)q.

a)

For what values of Δ will the me

rger increase social welfare,

and for what values of Δ will the

merger decrease social welfare?

b)

One case where the antitrust au

thorities often accept an effic

iency defense (i.e. a claim that the

merger would lower cost making

production more efficient) for a

n anticompetitive merger is

when the efficiency gains are so large that the market price wi

ll actually decrease despite the

anticompetitive effects. How large

would Δ have to be for this

case to hold?