Answer to Question #116613 in Microeconomics for Rosi

Question

a) Suppose that the long-distance market is a monopoly following the merger between AT&T and Sprint and that x = 5/4. Assume that s remains constant at 12. Should the DOJ allow this merger to proceed? Provide a careful economic analysis in support of your recommendation.

Answer 1

Since demand is constant, and the presence of firms in the market is approximately equal shares, the merger can lead to monopolization of the market, which will negatively affect the consumer qualities of the services provided and the price level.

However, the provision of communication services requires complex and very expensive equipment. Lack of the possibility of acquiring this equipment may negatively affect the quality of communication. Consequently, the Ministry of Justice may permit the organization of a subsidiary of both enterprises whose functions will include the engineering part of projects, which will reduce the cost of each of the companies on equipment, while significantly affecting the quality of communications.