Consider the following hypothetical merger between two perfu…
Consider the following hypothetical merger between two perfume firms, Cocoa and Baton. Pre-merger, the profit-maximizing price for Cocoa is $100 and the margin earned on each sale is $25. The same is true for Baton. Each sells 100 units before the merger. The price elasticity of demand for Cocoa is -2. The diversion ratio between Cocoa and Baton is 20%. If the new combination of Cocoa and Baton increases the price of Cocoa by 5%, what will be the total change in profits for the post-merger firm assuming no entry, efficiencies, or repositioning by others?