The demand curve for a perfectly competitive firm is a horizontal line. The horizontal demand curve means that the firm can sell as much as it wants at the prevailing market price (Baumol, & Blinder, 2009). Similarly, the firm cannot sell any unit if it attempts to raise the price. Conversely, for a perfectly competitive market, the market demand curve is a downward sloping curve because it includes all firm in the market.
TC= F.C + V.C
For the firm to maximize profits, it should produce at output level 3. This is because, at this output, the firm uses the same supplies and resources to make the same profit realized at output level 4. However, in output level 4, the firm uses more labor to make profit.
In the short-run, the firm should continue to produce but it should reduce the revenue to level 4 to regain maximum profit.
In the case of a monopoly, the firm maximizes profit at the point where the marginal revenue equals the marginal cost. Due to its downward slopping demand curve, the marginal revenue will be less than the price (Bumas, 2015). For instance, maximum profit is MR=MC<Price. On the other hand, the perfectly competitive firm maximizes profit where the marginal cost intersects the marginal revenue or price. With a monopoly firm, the price is not equal to the marginal cost. A monopoly creates inefficiency by setting prices above the marginal cost. Besides, firm does not efficiently allocate its resources. Therefore, due to higher prices and less output, the monopoly firm will cause a deadweight loss (Baumol, & Blinder, 2009). In a perfectly competitive market, the firm maximizes profit where marginal revenue equals marginal cost and price. Similarly, the firm achieves an efficient allocation of resources because the price equals the marginal cost.
The HHI market concentration is given by summing the square of individuals firms.
Coca-Cola =37^2 = 1,369
Pepsi-Co =35^2 =1,225
Cadbury Schweppers= 17^2 = 289
Other = 11^ = 121
The HHI pre-merger = 3,004
Based on the information from the table, the merger from Coca-Cola and Pepsi-Co will be highly concentrated. For instance, (35+37)^2 = 5,184.
The post-merger HHI is 5,184 + 289 + 121 = 5,594
The change in point is 5,594 -3,004 = 2,590
The Post-merger HHI is above 2,500. Similarly, the mergers are producing an increase in the HHI of more than 200 points (The United States Department of Justice, n.d.). Therefore, the mergers will be challenged because they are likely to increase market power.
The Department of Justice would not approve a merge between any of the first three companies. The merge between any of the first three companies produces an increase in HHI of more than 200 points and will likely be challenged by the Department of Justice and the Federal Trade Commission.
The market has barriers to entry. The first barrier is large economies of scale. Established firms in the industry retain the monopoly power because of the cost advantage they have (Bumas, 2015). The firms can produce at lower cost compared to the rivals. Second, the government can grant monopoly to firm through the issue of patent or copyright. This will prevent other firms from entering into the business.
Baumol, W. J., & Blinder, A. S. (2009). Economics: Principles and policy. Mason, OH: South-Western/Cengage Learning.
Bumas, L. O. (2015). Intermediate Microeconomics: Neoclassical and factually-oriented models. Routledge.
The United States Department of Justice. (n.d.). Monopoly Power and Market Power in Antitrust Law. Retrieved September 25, 2016, from https://www.justice.gov/atr/monopoly-power-and-market-power-antitrust-law
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