Once upon a time there was a market in a kingdom far far away. This market could

Question

Once upon a time there was a market in a kingdom far far away. This market could be expressed by the demand Q = 200 P in which Q = Ni=1 qi was the aggregate quantity. There were N 1 firms in this market, and the marginal cost for each firm i was a constant ci.

ANSWER THESE QUESTIONS

Suppose firms in this market compete choosing level of output, and marginal cost is the same across firms ci = 30 i.

What will be the Cournot-Nash Equilibrium in this firm if N = 4?

What will be the market price?

How about each firm’s profit in equilibrium?

What is the Herfindahl-Hirschman Index?

Is this market concentrated according to the FTC & DOJ Guidelines?

What is the consumer surplus in this case?

There was a change in legislation in this market which required a massive amount of investment to be performed by each firm to stay in business. The value of the investment shifted the cost structure of the firm in such a way that marginal costs remained the same, but average total cost became decreasing over a larger range of output. The fixed costs (6000$) were so high that it generated a merger wave in the market, and the only way to stay in business was to concentrate the market and become a monopolist.

(a) What is the monopolist’s chosen level of output?

(b) What will be the market price?

(c) How about the monopolist’s profit in equilibrium? How is this profit compared to the case in which there was an oligopoly? Why is that the case?

(d) What is the Herfindahl Hirschman Index in this market?

(e) How much is consumer surplus in this case? Were consumer shared by the increase in market concentration

After a little while the Antitrust Agencies were concerned with the effect on market concentration generated by this regulation, so they decided to open exceptions for new entrants creating a competitive fringe with marginalcostMCCF =30+Q.Sincetheincumbentwasalreadythereas a monopolist, it retained its price-maker status. The previous investment made by the incumbent were then sunk costs.

(a) What is the dominant firm’s residual demand?

(b) What is the level of output the dominant firm chooses to produce?

(c) What is the market price determined by the dominant firm?

(d) What is the dominant firm’s profit in equilibrium?

(e) How much is the competitive fringe producing?

(f) How much is consumer surplus in this case? How did it change compared with the monopolist case? Why is that so?

(g) What is the Herfindahl Hirschman Index in this market?

Explanation / Answer

All firms choose output simultaneously.The basic Cournot assumption is that each firm chooses its quantity,taking as given the quantity of its rivals.

The solution

y1=120-q/2

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