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

10. Electronic Arts (EA) has decided to introduce a revolutionary video game. As the first firm in the market, it will have a monopoly position for at least some time. In deciding what type of manufacturing plant to build, it has the choice of two technologies. Technology A is publicly available and will result in annual costs of CA(q) 10 + 8q. Technology B is a proprietary technology developed in EA's research labs. It involves a higher fixed cost of production but lower marginal costs C'B (q) = 60 + 2q. EA must decide which technology to adopt. Market demand for the new product is p = 20 – Q, where Q is the total industry output. a) Suppose EA were certain that it would maintain its monopoly position in the market for the entire product lifespan (about five years) without threat of entry. Which technology would you advise EA to adopt? What would be EA's profit given this choice? b) Suppose EA expects its rival, Ubisoft, to consider entering the market shortly after EA introduces its…

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Explain why the cost structure associated with many kinds of information goods and services might imply a market supplied by a small number of large firms. (At the same time, some Internet businesses such as grocery home deliveries have continually suffered steep losses regardless of scale. Explain why.) Could lower transaction costs in e-commerce ever make it easier for small suppliers to compete? As noted in the previous chapters, network externalities are often an important aspect of demand for information goods and services. (The benefits to customers of using software, participating in electronic markets, or using instant messaging increase with the number of other users.) How might network externalities affect firm operating strategies (pricing, output, and advertising) and firm size?