From: Robin Hanson (rhanson@gmu.edu)
Date: Fri Oct 01 1999 - 13:31:40 MDT
Robert Bradbury wrote:
> > Intel and Microsoft both seem to have strong near-
> > monopoly market power, and their products are clearly
> > strong complements. So the standard industrial
> > organization analysis would suggest that merging them
> > would produce lower prices *and* more profits for the
> > merged firm.
>
>... you may be speaking at an economics level most
>people don't have. ... only way I can interpret this statement
>is that if you mean that merging the two corporations makes
>a more efficient corporation by reducing management overhead
>... In short, I think you need to explain the case better so
>people can see what you see.
I wasn't trying to defend or explain the standard claim, just
presuming that as in all conversations those who understand
the topic might join in, and those who don't would stay out.
We have conversations all the time here about topics many
subscribers must be clueless about.
But in this case, I'll explain. Consider a product made of
two parts, X,Y, such that there is no point in having one of
the parts without the other (e.g. computer chip and OS). The
quantity demanded D(P) of this product is therefore in terms
of the price P of the two parts together. If the two parts
are sold by separate monopolists, then P = PX + PY and each
monopolist does something like
max (PX - CX) * D(PX + PY)
PX
Where CX is the cost of making X. If the two firms are
merged, then together they
max (P - CX - CY) * D(P)
P
This leads to both a lower price P, and more profits. QED.
Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323
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