Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 6

The market for a standard-sized cardboard container consists of two firms: CompositeBox and Fiberboard. As the manager of CompositeBox, you enjoy a patented technology that permits your company to produce boxes faster and at a lower cost than Fiberboard. You use this advantage to be the first to choose its profit-maximizing output level in the market. The inverse demand function for boxes is P = 1,200 - 6 Q, CompositeBox's costs are C C ( Q C ) = 60 Q C , and Fiberboard's costs are C F ( Q F ) = 120 Q F. Ignoring antitrust considerations, would it be profitable for your firm to merge with Fiberboard? If not, explain why not; if so, put together an offer that would permit you to profitably complete the merger.