Industry Analysis Report: Price Theory and Merger Impact (ECON1056)

This report analyzes the impact of a merger on an industry using price theory, focusing on the pre- and post-merger scenarios of three firms (Aggregate Inc., Big Industries, and ConCorp Inc.) operating under Cournot competition. The analysis determines equilibrium prices and profits, revealing that the merger of Big Industries and ConCorp Inc. increases overall industry profit, consumer surplus, and market equilibrium. The report calculates marginal revenue, best response functions, and equilibrium quantities to assess the financial implications, demonstrating that the merged entity benefits from increased profitability compared to the individual firms. The report concludes that the industry is better off post-merger.

Briefing Industry Position before and after Merger
Subject: Price Theory
Prepared by: _______________
Core Message of Report
The purpose of the report is to analyse the profitability of the individual entities
before and after merger along with impact of such merger on the industry as a
whole. The report also seeks to comment on the success of such action.
Recommendations
On the basis of computation and methodology working, it has been given to
understand that the merger is beneficial for merged firms as their profit stands
increased and also the industry margin increases. Thus, merger is beneficial from all
round. Further, consumer surplus too increase post-merger.
Key Information
Aggregate Inc., Big industries and ConCorp Inc. equilibrium price stands at $250
while post-merger equilibrium Price stands at $284. Also the profit of ConCorp Inc.
and Big Industries stands $ 42,000 each while the merged firm profit together stands
at $112080. Further, the profit of overall industry shall too increase and price shall
increase on account of decrease in quantity. Further, there shall be an increase in
the consumer surplus. (Big Industries and ConCorp Inc. has merged)
Financial Implication
In the present scenario, Curnot competition has been conducted to determine the
price under equilibrium situation for three firms. Based on Inverse demand equation
the price under equilibrium has been determined at $250 and the profit of industry
has been determined at $ 42,000 each. Further, under the merged scenario the profit
of the industry is ($112080+ 214720= $3,26,800 approx.). Thus, merger is beneficial
from overall point of view.
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Attachment: Industry Analysis
I have used Curnot Competition for computation of prices in equilibrium under
different scenario. Cournot competition is nothing but a form of oligopoly competition
in which the entity in the market at a same time select the quantities they will
produce. The courot model of competition works very well for those industries in
which the entity has to take advance decisions in the competitive market.
Aggregate Inc. Foundry and Other two firms i.e. Big Industries and ConCorp Inc.
engage in the cournot competition model for the widgets.
Notation
P= Price at Equilibrium
Qx= Quantity of goods demanded for Big Industries and ConCorp Inc.
QB = Merged Entity Turnover.
Qa= Quantity of goods demanded for Aggregate Inc.
TR= Total Revenue
MR= Marginal Revenue
Analysis
Inverse demand in the market is represented by
Type equation here.
P=580- Q/20
P=580-0.05Q
=580-0.05QA-0.05Qx
STEP 1: Deriving Marginal Revenue Function
Assuming Aggregate Inc =Firm A
Other Industries =Firm X
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In a cournot model, the total amount of revenue for the firm A who is competing
against firm X can be stated as
TRA=QA*P
At present three firms have an identical marginal cost of $140 per cubic metre and a
fixed cost of $ 2,00,000 per day.
Three firms have a constant marginal cost of MCA=MCx =$140
P= 580-0.05(Q A+ Q x )
TR A=(580−0.05(Q A +Q x ))∗Q A
Differentiating
MRa=580−0.1 Q A−0.05 Q x (Answer 1)
STEP 2: Best Response Function of a Typical Firm
MRx=580−0.1Q x−0.05 Q A
At equilibrium marginal revenue=marginal cost
580-0.1QA -0.05 Qx =140 (Answer 2)
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STEP 3: Equilibrium Quantity
580-140= 0.1QA + 0.05 Qx
OR,440=0.1QA + 0.05 Qx.....(i)
OR 8800= 2 QA + Qx
440=0.1QX+ 0.05 QA.........(ii)
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140

OR 8800= 2 Qx + QA.
Since Each firm will produce equal goods at Nash Equilibrium = Qx= 2 QA
Putting the value in Equation 1, We get
QA= 2200 (Answer 3)
As the big industries and aggregate Inc. produces 2200 quantity at equilibrium level.
The presence of big industries in the market expands the market level of output.
The competition is increasing on a daily basis as the entity big industries is not taking
into account the effect of its production on aggregate Inc.
STEP 4: Equilibrium Profits and Consumer surplus
The equilibrium price of the widgets stands for:
Price= 580-0.05(Q)
= 580-0.05*(2200*3)
= 580-330
=$ 250
Total Revenue = 250*2200= $550,000
Profit = Price * Quantity- - Fixed Cost- MC* Quantity
= 250* 2200 – 140*2200- 2, 00,000= 242000- 200,000= $42000 for each company
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Consumer Surplus = 0.5* (250-140)*6600= $363,000
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STEP 5: New Equilibrium Quantity and Price
Generally the market price of the firm is determined by the two firm quantity choices.
Assuming Aggregate Inc =Firm A
Merged Industries =Firm B
Where QA is Aggregate Inc Qty, QB is Combined of other two quantity and Q=QA+QB
Marginal cost of QA $140 per cubic metre and QB= 132 and a fixed cost of $
200,000 and $ 350,000 per day.
P=580−0.05(Q A+Q B)
TRA=(580−0.05(Q A +Q B))∗Q A
D differentiating,
MRA=580−0.1Q A−0.05Q B
MRx=580−0.1Q B−0.05Q A
At equilibrium marginal revenue=marginal cost
580-0.1QA -0.05 QB =140
OR, 580-140= 0.1QA + 0.05 QB
OR, 440=0.1QA + 0.05 QB.....(i)
448=0.1QB+ 0.05 QA.........(ii)
Solving for I and ii
432=0.15QA
QA= 2,880
QB= 3,040 (Answer 5)
The equilibrium price of the widgets stands for:
Price= 580-0.05QA-0.05QB
= 580-0.05*(2880)- 0.05*(3040)
= 580-144-152
=$ 284
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STEP 6: New Equilibrium Profits and Surplus
Profit = Price * Quantity- MC* Quantity- Fixed Cost
= 284*2880 – 2880*140- 200,000= 414720-200000= $214,720
Profit = Price * Quantity- MC* Quantity- Fixed Cost
= 284*3040- 132*3040-3, 50, 000= 462080-350000= $112,080
Consumer Surplus = 0.5* (580-140)*2880= $633,600
CONCLUSION
Industry is better off post-merger.
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