A small town is served by many competing supermarkets, which have constant marginal cost.
a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus.
b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?
c. What things should the government consider in deciding whether or not to allow the merger to go ahead? What conditions might it attach to the merger?
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