WestJet and Flair Merger?

Suppose you work at the Bureau and your task is to assess a proposed merger between WestJet and Flair Airlines. For simplicity, these are the only two firms in Canada. The cost of this merger is that the two firms will become one joint firm, turning duopolists into a monopolist. This is likely to limit consumer choices, and the equilibrium price is likely to rise. However, this merger is likely to increase economies of scale, meaning production costs will fall. From existing studies, you know the following information, where P is the price per ticket and Q is the number of tickets:

- Demand for tickets: [tex]P = 800 - 2Q[/tex]
- Marginal revenue: [tex]MR = 800 - 4Q[/tex]
- Supply of tickets: [tex]MC = ATC = 200[/tex], identical across the two firms.

**Case #1: Before Merger - Duopoly - the government does not intervene**

The social surplus (SS) is equal to:
- a. $70,000
- b. $60,000
- c. $80,000
- d. $50,000

**Case #2: Allow Merger and Reap Economies of Scale**

Suppose that if WestJet and Flair were to merge, they can share inputs and cut marginal costs. The inputs they can share include flight terminals, meal services, flight crew, etc. You estimate that the [tex]MC = ATC[/tex] per ticket will fall from $200 to $100. The new SS is equal to:
- a. $183,750
- b. $91,875
- c. $61,250
- d. $122,500

**Case #3: Approve Merger but Regulate Price - Almost Constant PS**

Because the newly merged firm has more market power, you want to regulate this new monopolist. Suppose you want the new PS to be approximately equal to the PS under Case #1, before the merger. You solve for this quantity and, for convenience, you truncate the quantity into an integer. Truncation means that if [tex]Q = 100.2[/tex] or [tex]Q = 100.8[/tex], you set [tex]Q = 100[/tex]. The new SS is equal to:
- a. $117,316
- b. $44,659
- c. $121,476
- d. $111,300