Vertical mergers
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1. You are the Chief Economist of the Antitrust Division of the Department of Justice. There is a single producer of streaming video services that has a patent on the technology so that no one else can provide the service. But it only works on high speed access services. Assume that there is also a single provider of high speed access services. The companies have agreed to merge. Assume that no one wants high speed access without streaming video service and no one wants streaming video without high speed access.
Demand for the package of streaming video and high-speed access is
Q = 200 - 2P
The constant marginal cost of streaming video service is $5 per subscriber
The constant marginal cost of high-speed access is $15 per subscriber.
a. Assume the firms currently price their service to maximize their own separate profits and the high speed access provider buys video streaming services from the other company to package with its service to sell to retail customers. The parties claim that they will be able to eliminate double marginalization if they merge. If they are right, what will be the change in consumer welfare?
b. How would you view the merger if the streaming video services patent was declared invalid and many firms entered with streaming their own video services?
c. What other considerations might there be about the merger? In other words, why would anyone be concerned about a vertical merger? What requirement might you put onto the merger to try to ameliorate any anticompetitive effects?
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Solution Summary
Vertical mergers are summarized. The economics of internets are determined.
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1. You are the Chief Economist of the Antitrust Division of the Department of Justice. There is a single producer of streaming video services that has a patent on the technology so that no one else can provide the service. But it only works on high speed access services. Assume that there is also a single provider of high speed access services. The companies have agreed to merge. Assume that no one wants high speed access without streaming video service and no one wants streaming video without high speed access.
Demand for the package of streaming video and high-speed access is
Q = 200 - 2P
The constant marginal cost of streaming video service is $5 per subscriber
The constant marginal cost of high-speed access is $15 per subscriber.
a. Assume the firms currently price their service to maximize their own separate profits and the high speed access provider buys video streaming services from the other company to package with its service to sell to retail customers. The parties claim that they will be able to eliminate double marginalization if they merge. If they are right, what will be the change in consumer welfare?
When the firms operate to maximize their own profits. The price will we set as follows:
Streaming video:
Q=200-P rewriting we get P=200-Q
Total revenue (TR)=P*Q=Q*(200-Q)
Marginal Revenue (MR)=dTR/dQ=200-2Q
For profit Maximization MR=MC
So we get 200-2Q=5
Q=97.5
High Speed ...
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