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Question: 3 cournot mergers with efficiency gains consider an industry with...

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3. [Cournot mergers with efficiency gains] Consider an industry with three identical firms each selling a homogenous good and producing at a cost c> 0. Industry demand is given by p(Q)1-Q, where Q1 2+93 denotes aggregate output. Competition in the marketplace is in quantities (a la Cournot) (a) Find the equilibrium quantities, price and profits (b) Consider now a merger between two of the three firms, resulting in duopolistic structure of the market. The merger might give rise to efficiency gains, in the sense that the firm resulting from the merger produces at a cost e x c, with e 1 (whereas the outsider still has a cost c) 1. Find the post-merger equilibrium quantities, price and profits 2. Under which conditions does the merger reduce prices? 3. Under which conditions is the merger beneficial to the merging firms?

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