ECON1056: Two Producers of pre-mixed Concrete, Big Industries, and ConCorp have Applied to the Minister for Finance for Merger Authorisation: Price Theory Industry Analysis Assignment, SIM, Singapore

Scenario
Two producers of pre-mixed concrete, Big Industries, and ConCorp have applied to the Minister for Finance for Merger Authorisation. The two companies are proposing to combine into a single corporate entity to be known as big. The two companies claim that the merger should be authorized as,

• the merged firm will be able to achieve substantial efficiency gains as a result of combining production and
• a third firm, Aggregate Inc., will remain as a competitor to the merged firm in the pre-mixed concrete market, ensuring that consumers are not adversely affected.

 Your task
The Minister for Finance has instructed you to determine the likely impact of the proposed merger on the market and to recommend whether or not authorization for the merger should be granted. Under the relevant legislation, authorization for a merger can be granted if,

• the proposed acquisition would not be likely to substantially lessen competition OR
• the likely public benefit from the proposed acquisition outweighs the likely public detriment.

Note that competition policy prevents the government from imposing any other form of market regulation, including price caps.

Industry structure
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 meter of concrete in dollars, and Q is the total number of cubic meters of concrete supplied into the market on a given day.

At present, the three firms appear to have identical production costs, with each firm facing fixed costs of $400,000 per day and a marginal cost of $180 per cubic meter.

Big Industries and ConCorp estimate that the proposed merger would reduce their marginal cost to $120 per cubic meter, while the merged firm is expected to face fixed costs of $1,000,000 per day.

Industry analysis
For your Industry Analysis, you must complete each of the steps detailed below. The required analysis draws on the content covered in lectures 6–10 (primarily lecture 9). When completing the steps you must:

• Type all equations using the ‘Insert Equation’ function (or equivalent).
• Show all of your work.
• Include sufficient written description for the reader to follow your process.
• Use appropriate notation and economic terminology.

Your audience for the industry analysis is other expert economists who may be required to review your work. There is no page limit for the Industry Analysis.

 Required steps
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. (6 marks)

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.

When writing your brief steps 5 and 6 represent your assessment of the likely market conditions if the merger is permitted to proceed.