Two firms (Natural Salt and Healthy Salt) compete in the market for Himalayan table salt Consumers see the salt produced by both firms as perfect substitutes. In this market, each firm chooses what output to produce and price is determined by aggregate output. Market demand is given by Q 450-2P, where Q is kgs and P is Ekg. The initial marginal cost of Natural s 506/kg. The respective for Healthy Salt is 40/kg. A process innovation in the production technology of Himalayan table salt would reduce the Natural Salt’s margi to 44 and Healthy Salt’s marginal cost to 34 (a) Consider that only one of the two firms can introduce the aforementioned process marginal cost. How much would each firm be willing to pay so as to introduce the aforementioned process innovation in its production technology? IMark 1.0) (b) Consider that each firm has the option to pay 1,000 euros so as to introduce the aforementioned process innovation in its production technology. Given each firm’s decision, on whether to introduce the innovation or not, firms compete in the market by choosing simultaneously their level of output. If you were the Natural Salt’s manager would you suggest the introduction of the innovation or not? What would you suggest if you were the Healthy Salt’s manager? [Hint: Construct a payoff matrix. IMark 1.51 (c) Assume that Natural Salt and Healthy Salt decide on the following: Healthy Salt pays 1,000 euros and introduces the process innovation. Then, the two firms merge and produce with marginal cost equal to 34. Healthy Salt keeps 500 euros of the post-merger firm’s rofits (half of the process innovation’s cost) and the remaining profits are equally shared to the merger participating firms. Do both firms have incentives for such a merger, compared to the equilibrium in (b)? IMark 0.5 (d) How does the merger change consumer’s suplus and social welfare, compared to the respective ones in (b)? IMark 0.5
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