Economics Assignment: Market Structures, Mergers, and Pricing Analysis

This economics assignment analyzes market structures, pricing strategies, and mergers using Boeing, Honeywell, and cartel agreements as examples. The assignment explores pricing decisions under different engine costs, the impact of mergers on pricing and profits, and the outcomes of Cournot competition. It examines the conditions for cartel formation and stability, as well as the incentives for firms to deviate from cartel agreements. The assignment also considers the implications of mergers in an oligopolistic market, discussing whether a merger would take place and the conditions under which it would be beneficial. The analysis covers concepts such as marginal costs, inverse demand functions, and profit maximization in various market scenarios. The solutions provided offer insights into how firms make strategic decisions in competitive environments and the effects of different market structures on pricing and profitability.

1.Boeing sells aircraft worldwide and it is one of the leading companies in the sector. Boeing faces a
demand for new aircrafts given by the function qB=30-2pB. A key input for Boeing's production are jet
engines: each aircraft needs exactly one engine and Boeing signed a supply contract with Honeywell
establishing a unit price pH. Honeywell faces a constant marginal cost of 5 per engine.
(1.1) What is the optimal price of Boeing's aircrafts, if the engines' price is pH=5? Variable costs are
assumed to be variable cost here.
Price of Boeing = _________10
(1.2) What is instead the optimal price of Boeing's aircrafts, if the engines' price becomes pH=13?
Price of Boeing = __________11.25
(1.3) Find the engines' price pH that maximizes the profits of Honeywell, the associated profits of
Honeywell and the price and profits of Boeing?
a) Equilibrium Price of Honeywell = ________9
b) Equilibrium Profit of Honeywell = ______40
c) Equilibrium Price of Boeing = ______12.5_______
d) Equilibrium Profit of Boeing = _________37.5____
(1.4) The results in (2.3) constitute a typical case of: ___monopoly with vertical integration__
2. In the same context of Question 2
(2.1) Suppose now Boeing and Honeywell decide to merge to integrate the production of aircrafts.
What are the consequences of the merger in terms of:
a) Price of an engine = _______5__
b) Price of an aircraft = __________12.5___
c) Profits of the new Boeing-Honeywell company = ______87.5_______
(2.2) Suppose Boeing and Honeywell split the profits of the new company in shares 60% and 40%. Do
they have an incentive to merge? ___No. Since the profits earned by Honeywell will reduce even
though the profits earned by Boeing will increase.
3. Two firms (1 and 2) produce good x. Each firm has a total cost function C(x)=40x. The inverse
demand function is: p=640-X, where X=x₁+x₂ is the total output.
(3.1) Suppose firms compete à la Cournot.
a) What is firm 1′s equilibrium output x1CN? ________200
b) What is firm 1′s equilibrium profit? ________40000_____
(3.2) Firms decide to form a cartel and maximise joint profits. They also decide to split equally
production and profits.
a) What is firm 1′s equilibrium output x1CA in this case? _____200_____
b) What is the profit of firm 1 from the cartel? _______40000______
(3.3) Suppose firm 2 sticks to the cartel agreement. Does firm 1 have an incentive to deviate from the
agreement? If yes, find the optimal deviation output and associated profit of firm 1. If not, just report
the Cournot-Nash equilibrium output and profit found above.
a) Firm 1′s output x1? _______200_
b) What firm 1′s profit in this case? _____40000________
c) Firm 2′s output x2? ______200______
d) What firm 2′s profit in this case? ___40000________
(3.4) Suppose the one-shot game in points (3.1)-(3.3) is repeated finitely many times. Can the cartel
agreement be supported as an equilibrium? If yes, briefly explain under what conditions?
_____________A cartel can be supported with a self enforcing agreement under the condition that
the Nash equilibrium quantity of total market production is higher that the total production
otherwise.___
4. Five firms (1, 2, 3, 4 and 5) produce good x. Each firm has a total cost function C(x)=x, hence there
are no fixed cost and the marginal cost is constant. The inverse demand function is: p=10-X, where
X=x1+x2+x3 +x4 +x5 is the total output. Output choice is the key strategic decision in this industry.
Firms 1 and 2 consider to merge into firm A: the resulting market would be an oligopoly with four
firms in which firm A competes with firms 3, 4 and 5.
Do you think the proposed merger will take place? Complete the answer.
a) No. this is a typical case of _____Cournot market and in a Cour not market mergers make
sense only if the resulting firm holds a gig Shrewsbury of the market. The proposed merger

would only have 40% of the share of the market. However, given the joint scale of production,
Economic efficiencies of production may be realised on some cases which may offer a
competitive advantage over other firms that compete individually. The possibility is however
low since this is a Cour not market and marginal costs tend to be constant in a Cour not
market.
b) Would your answer change if firm 1, 2 and 3 were merging. Yes. If firms 1,2,3, were merging,
they would hold a high percentage of the market. Mergers make sense only when the
percentage of share held by the resulting company is high which is this case would be
60%.Additionally, there is a possibility of realizing economies of scale I some cases.
However, the possibility is low since marginal costs tend to remain constant in a Cournot
market.