Question: two physical therapy firms are exploring the possibility of merging...
Two physical therapy firms are exploring the possibility of merging. The data for each of these firms are:
Firm #1 Firm #2
Visits: 12,000 14,400
Marginal Cost: $25.00 $25.00
Fixed Costs: $75,000 $100,000
Market Share: 10% 12%
After the merger, marginal costs are expected to stay the same at $25.00 per visit. Combined fixed costs are estimated to remain at $175,000. If there were no loss of patients, the combined volume for the merged firms would be 26,400 visits, or a 22% market share.
The overall price elasticity of demand for physical therapy is estimated to be -0.40.
The Assigned Analysis
- Utilize Cornot’s economic pricing model and Lerner’s index of monopoly power to calculate the firm-specific elasticity that Firms 1 & 2 each face and the profit-maximizing price for each. Using these prices, calculate the current total costs, revenues, and profits for each of the firms.
- (i) Calculate total costs, revenues, and profits for the merged entity, assuming current price and patient visit levels. (ii) Using the merged organization’s higher market share, calculate the profit-maximizing price it theoretically might charge and estimate total revenues, costs, and profits under this scenario.
- How realistic/probable is the scenario you just analyzed in (B) (ii) above? Provide an explanation for your answer.
- What is a more realistic scenario with respect to post-merger pricing and visit volume? Provide estimates of total revenues, costs, and profits under this scenario.
- What additional information might you seek and (pricing) strategies might you pursue to maximize the marketshare and profitability of this merger?