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

Exercise 15

Suppose the European Union (EU) is investigating a proposed merger between two of the largest distillers of premium Scotch liquor. Based on some economists' definition of the relevant market, the two firms proposing to merge enjoyed a combined market share of about two-thirds, while another firm essentially controlled the remaining share of the market. Additionally, suppose that the (wholesale) market elasticity of demand for Scotch liquor is -1.3 and that it costs $16.20 to produce and distribute each liter of Scotch. Based only on these data, provide quantitative estimates of the likely pre- and postmerger prices in the wholesale market for premium Scotch liquor. In light of your estimates, are you surprised that the EU might raise concerns about potential anticompetitive effects of the proposed merger? Explain carefully.