Exercise 3: merger example Algoma Steel Inc. and Stelco Steel Inc. Merger? Suppose you work at the Bureau and your task is to assess a proposed merger between Algoma Steel Inc. and Stelco Steel Inc. For simplicity, these are the only two firms in Canada. The cost of this merger is that the two firms will become one joint firm, or the duopolists become the monopolist. This is likely to limit consumer choices and the equilibrium price is likely to rise. However, this merger is likely to increase economies of scale, or production cost will fall. From existing studies you know the following information, and P is the price per ton of steel and Q is the number of tons of steel. Demand for steel: P = 1,800 - Q Marginal revenue: MR = 1,800 - 2Q Supply of steel: MC = ATC = 600, identical across the two firms. Case #1: Before Merger - Cournot duopoly - the government does not intervene The total surplus (TS), defined as the sum of consumer surplus and producer surplus, is equal to ________________. a.$720,000 b.$360,000 c.$640,000 d.$540,000 Case #2: Reject the merger If Algoma Inc. and Stelco Inc. were to merge, they can cut marginal cost. They can cut costs because they can share technology know-how, purchase iron ore in bulk to bargain for discounts, etc. You estimate that the MC = ATC per ton will fall from $600 to $500. The firms will benefit from this merger because their joint profit rises by _______. The TS is equal to ___________. You should reject this proposed merger. a.$160,800; $325,500 b.$102,500; $633,750 c.$160,800; $705,000 d.$102,500; $550,750 Case #3: Approve the merger Suppose the firms send you more cost information and you revise the MC = ATC per ton from $500 to $400. The TS is equal to ________ and you decide to approve the merger. a.$735,000 b.$685,000 c.$825,000 d.$395,000
Exercise 3: merger example
Algoma Steel Inc. and Stelco Steel Inc. Merger?
Suppose you work at the Bureau and your task is to assess a proposed merger between Algoma Steel Inc. and Stelco Steel Inc. For simplicity, these are the only two firms in Canada. The cost of this merger is that the two firms will become one joint firm, or the duopolists become the monopolist. This is likely to limit consumer choices and the
Demand for steel: P = 1,800 - Q
Marginal revenue: MR = 1,800 - 2Q
Supply of steel: MC =
Case #1: Before Merger - Cournot duopoly - the government does not intervene
The total surplus (TS), defined as the sum of
Case #2: Reject the merger
If Algoma Inc. and Stelco Inc. were to merge, they can cut marginal cost. They can cut costs because they can share technology know-how, purchase iron ore in bulk to bargain for discounts, etc. You estimate that the MC = ATC per ton will fall from $600 to $500. The firms will benefit from this merger because their joint profit rises by _______. The TS is equal to ___________. You should reject this proposed merger.
Case #3: Approve the merger
Suppose the firms send you more cost information and you revise the MC = ATC per ton from $500 to $400. The TS is equal to ________ and you decide to approve the merger.
Case #4: Approve merger because MC = ATC = $400 but regulate price to keep constant CS
Suppose you keep CS constant at the level you have found under Case #1, before the merger. The new TS is equal to _________.
Case #5: Approve merger because MC = ATC = $400 but regulate price to keep almost constant PS
Because the newly merged firm has more market power, you want to regulate this new monopolist. Suppose you want the new PS to be approximately equal to the PS under Case #1, before the merger. You solve for this quantity and for convenience, you truncate the quantity into an integer. Truncation means that if Q = 100.2 or Q = 100.8, you set Q = 100. The new TS is equal to _________.
a.$625,448
b.$1,022,755
c.$396,888
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