Two firms compete in an undifferentiated Bertrand market.
Suppose that the firms face a demand curve given by P = 60 - Q and both firms have constant marginal cost of 40 (MC=40).
(a) What is the market clearing Bertrand price and quantity?
(b) Suppose the two firms merge and regulators want to make sure that consumers are not hurt by the merger. How much would marginal cost have to fall in order for consumer surplus to be identical before and after the merger?
(c) Instead, suppose the regulator cares about total welfare. Explain whether the marginal cost that would leave welfare unchanged would be higher, lower or the same as the marginal cost you calculated in part (b). (Note: you do not have to calculate the exact marginal cost to answer this question)