The following questions refer to the accompanying diagram, which shows the effects of a horizontal merger. Before the merger, the firm behaves competitively producing Q0 and charging P0. The merger lowers the firm’s marginal cost and gives the firm enough market power to switch to the monopoly equilibrium
a) What is the consumer surplus and producer surplus before the merger?
b) What is the consumer surplus and producer surplus after the merger?
c) Provide two possible mechanisms of how the merger may affect the social gain.