ECO410H1F, Workshop 1: Merger Simulation: Cournot with Linear Demand
Instructions: Work in groups on 3 to 6 people sharing a laptop with Excel. This worksheet guides your exploration
of TWO Cournot merger simulation spreadsheets (part of today is figuring out which is applicable in a given case)
at http://homes.chass.utoronto.ca/~murdockj/eco410/. All cases require you to use one or both spreadsheets
and to write sentences explaining the economic intuition.
Complete your own copy of this worksheet.
I will circulate to address questions as you work. After about 60 minutes I will call on groups to address some of
the cases below. Please designate a group spokesperson (although, other members may chime in). Manage your
time so that your team has answers to all six cases.
Case 1 (12 mins): Given market demand = 100 − and assuming all firms have marginal costs of 10, compare
mergers (of Firms 1 & 2) in Cournot markets with 5, 4, 3, and 2 firms, respectively, by filling in this table.
Merger type
Pre-merger HHI
P
CS
TS
5 to 4
4 to 3
3 to 2
2 to 1
 In 1 or 2 sentences, summarize the economic concepts illustrated by your completed table above.
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Case 2 (12 mins): Consider a merger in a four-firm Cournot industry with market demand = 300 − . However,
while you do not observe firms’ marginal costs, you observe each firm’s output is 30 units.
 Absent any efficiencies, do Firms 1 and 2 have a profit incentive to merge? Answer in 1 – 2 sentences, making
sure to include the relevant numbers from the simulations.
 How big must efficiencies be (approximately) for this to be a profitable merger? With those efficiencies, is this
merger desirable from a total surplus perspective? What about under a price standard? Answer in 2 – 3
sentences, making sure to include the relevant numbers from the simulations.
Case 3 (6 mins): Consider a merger to monopoly in a two-firm Cournot industry with demand = 1000 − 0.5 .
However, while you do not observe firms’ marginal costs, you observe each firm’s output is 500 units.
 Is there a profit incentive to merge to monopoly even absent any efficiencies? How big must efficiencies be
(approximately) for this merger to be permissible under a total surplus standard? Under a price standard? Answer
in 2 – 3 sentences, making sure to include the relevant numbers from the simulations.
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Case 4 (10 mins): Consider two scenarios for a merger of Firms 1 and 2 in a seven-firm Cournot industry with
market demand of = 1000 − . In Scenario A, you observe each firm’s output is 90 units: the total market
output of 630 is divided evenly. In Scenario B, Firm 1 has a market output of 330 and the remaining firms each sell
50 units: the total market output of 630 is not divided evenly. Fill in the table assuming no efficiencies.
Scenario
Pre-merger HHI
P
CS
TS
A
B
 What is going on with these results: they seem to contradict the pattern observed in Case 1? Explain the
economic concepts illustrated by the table (immediately above) in 2 – 3 sentences. (Hint: You will need to
consider some other numbers not in the table above.)
Case 5 (10 mins): Consider two scenarios for a merger of Firms 1 and 2 in a five-firm Cournot industry with market
demand of = 100 − . In both scenarios market output is 70. In Scenario A, Firms 1 and 2 have the biggest
market shares each producing 20 units and the remaining firms each produce 10 units. In Scenario B, the market
structure is the same except that Firms 1 and 2 produce 10 units and two non-merging firms have the biggest
market shares each producing 20 units. Fill in the table assuming no efficiencies.
Scenario
Pre-merger HHI
P
CS
TS
A
B
 Explain the economic concepts illustrated by the table (immediately above) in 2 – 3 sentences. (Hint: You will
need to consider some other numbers not in the table above.)
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Case 6 (10 mins): Consider a merger in a five firm industry (Cournot competition) where you know market
demand is = 5 − 0.01 . However, while you do not observe firms’ marginal costs, you observe each firm’s
market share (in terms of units of output). Firm 1 has a market share of 40%, Firm 2 10%, Firm 3 10%, Firm 4 20%
and Firm 5 20%. Industry output is 350. Firms 1 and 2 propose merging and will produce at the lower of the
marginal costs. Further, the merged firm expects marginal costs to decline by 10 percent due to merger-specific
efficiencies.
 Does this merger substantially lessen competition? Answer in 2 – 3 sentences and support your assessment
with specific numbers from a merger simulation.
 Later that week you obtain the private business data from all relevant firms. It reveals that Firm 1’s marginal
costs are $0.70, Firm 2’s are $1.40, Firm 3’s are $0.80, Firm 4’s are $1.20, and Firm 5’s are $1.60. Assess the
validity of your original merger simulation in 2 – 3 sentences. (Include specific numbers.)
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