1 Introduction
In this assignment you will take the role of an expert economist, employed by a government
department or regulatory authority. Decision-makers in government rely on the advice of
experts, like you, when formulating policy or discharging their statutory responsibilities. An
expert economist’s role in the government decision-making process is two-fold:
• Analysis: Experts are responsible for analysing alternatives, using the specialised
knowledge and skills of their discipline. In this analysis, experts evaluate the alternatives against the government’s objectives and statutory obligations.
• Communication: Experts must communicate their findings to the decision-makers in
government—ministers and senior public servants—who, in many instances, do not
share the experts’ specialised knowledge.
This assignment will assess your aptitudes in both of these domains. You are to conduct
an analysis of an industry based on the scenario detailed in section 2. Your industry
analysis will form the basis for a brief—a short report to the ultimate decision-maker in
the scenario—summarising your recommendations and the associated rationale.
1.1 Formatting requirements
Your assignment must be typed using Microsoft Word, or a similar word processor. Both
parts of the assignment should be included in the same document with the brief placed
before the industry analysis. The document should have a professional appearance, appropriate to a government workplace. Format your assignment as follows:
• Use A4 sized paper with all margins at least 2.5cm.
• Body text to be 12pt and black. (There is no minimum line spacing.)
• All pages to be numbered.
• DO NOT include a cover sheet or table of contents.
1.2 Grading
There are a total 100 marks available in this assignment (50 marks for the industry analysis
and 50 marks for the brief), and the assignment contributes 40% of your grade for Price
Theory. The marks allocated to each step of the industry analysis are detailed in section
3. The marking criteria for the brief can be found in the rubric detailed in section 5.
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2 Scenario
Two producers of pre-mixed concrete, Big Industries and ConCorp, have applied to the
Minister for Finance for Merger Authorisation. The two companies are proposing to combine into a single corporate entity to be known as BigCon. The two companies claim that
the merger should be authorised as,
• the merged firm will be able to achieve substantial efficiency gains as a result of
combining production and
• a third firm, Aggregate Inc., will remain as a competitor to the merged firm in the
pre-mixed concrete market, ensuring that consumers are not adversely affected.
2.1 Your task
The Minister for Finance has instructed you to determine the likely impact of the proposed
merger on the market, and to recommend whether or not authorisation for the merger
should be granted. Under the relevant legislation, authorisation for a merger can be granted
if,
• the proposed acquisition would not be likely to substantially lessen competition OR
• the likely public benefit from the proposed acquisition outweighs the likely public
detriment.
Note that competition policy prevents the government from imposing any other form of
market regulation, including price caps.
2.2 Industry structure
Pre-mixed concrete is an important input for the construction industry. Concrete cannot
be stored or transported over long distances as it begins to set after only a few hours. For
this reason, only the three local firms—Aggregate Inc., Big Industries and ConCorp—are
in a position to compete in the market. Moreover, the capital and regulatory requirements
for constructing a new concrete plant are substantial, creating an effective barrier to entry.
Pre-mixed concrete is regarded as a homogeneous good by the construction industry.
Inverse demand in the market has been estimated to be,
P = 600 −
Q
20,
where P represents the price of a cubic metre of concrete in dollars, and Q is the total
number of cubic metres of concrete supplied into the market on a given day.
At present the three firms appear have identical production costs, with each firm facing
fixed costs of $200,000 per day and a marginal cost of $140 per cubic metre.
Big Industries and ConCorp estimate that the proposed merger would reduce their
marginal cost to $115 per cubic metre, while the merged firm is expected to face fixed
costs of $350,000 per day.
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3 The industry analysis
For your industry analysis you must complete each of the steps detailed below. The
required analysis draws on content covered in lectures 6–10 (primarily lecture 9). When
completing the steps you must:
• Type all equations using the ‘Insert Equation’ function in Microsoft Word (or equivalent).
• Show all of your working.
• Include sufficient written description for the reader to follow your process. (Use the
lecture notes and worked solutions in the study guide as an indication of the required
level of detail.)
• Use appropriate economic terminology.
Failure to follow these instructions will result in lost marks.
3.1 Required steps
For the purposes of this analysis you should assume that firms in the pre-mixed concrete industry compete by simultaneously selecting quantities (ie. the firms are engaged in Cournot
competition). Steps 1 to 4 apply to the market in the absence of a merger.
Step 1: Using the information provided in the scenario, derive the marginal revenue function for a typical firm in the industry. Use QA to denote the quantity produced by this
firm, and X to denote the combined production of the remaining two firms. (4 marks)
Step 2: Derive the best-response function for the typical firm. (4 marks)
Step 3: Find the equilibrium quantity for the typical firm, the equilibrium market quantity,
and the equilibrium market price. (5 marks)
Step 4: Find the equilibrium profits for the typical firm and the equilibrium consumer
surplus. (10 marks)
When writing your brief you should assume that steps 3 and 4 describe the existing equilibrium in the market.
Now suppose that the merger takes place and that the merged firm achieves the
expected efficiencies.
Step 5: Find the new equilibrium quantities and price for the market. Use QA to denote
the quantity produced by Aggregate Inc., and QB to denote the quantity produced by the
merged firm, BigCon. (20 marks)
Step 6: Find the new equilibrium firm profits and consumer surplus. (7 marks)
When writing your brief steps 5 and 6 represent your assessment of the likely market
conditions if the merger is permitted to proceed.
Hint: In step 3 you can use the fact that all three firms in the market have identical
marginal costs. When completing step 5 it may be possible to reuse some of your earlier
calculations. Note that Aggregate Inc.’s costs are not be affected by the merger.
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4 The brief
The purpose of the brief is to communicate your recommendations to the decision-maker
who commissioned your analysis. You need to provide enough information for the decisionmaker to understand your recommendations, and to reach a decision on the matter at hand.
However, senior government officials are extremely busy, so you must be brief.
• The maximum length for your brief is 2 pages.
• Any content in excess of 2 pages will not be read or graded.
The 2 page limit applies to the brief only. It does not apply to industry analysis detailed
in section 3.
When writing the brief remember that it is for a non-expert audience. You must
avoid using specialised economic terminology and state everything in ‘plain English’. For
example:
• Terms such as consumer surplus, producer surplus, and deadweight loss, have little meaning outside of economics and should be avoided. (Note: This is not a
comprehensive list.)
• On the other hand, the significance of terms such as price, revenue, and profit, are
generally well understood outside of economics.
The brief should not include any equations or diagrams. Tables and dollar amounts may
be included as appropriate.
4.1 Template
You must compose your brief according to the template detailed on the following pages.
Instructions for each required element of the brief are included within this template. These
instructions are reflected in the requirements of the rubric detailed in section 5. Ensure
that your brief includes each of the elements detailed in the template, and that you do not
reorder, rename, or omit any of these elements.
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Briefing for the (insert decision-maker’s title here)
Subject: Include a brief but descriptive subject line. Maximum length 1 line.
Hint: The subject is, in effect, the title of your brief. Compose the subject as you
would the title of a report.
Prepared by: Your name here.
Core Message
Write an executive summary of the brief. Your core message should consist of three
sentences: The first sentence providing a summary of the scenario. The second sentence summarising the key rationale for your recommendation. And the third sentence
summarising your recommendation(s). Maximum length 5 lines.
Hint: The statements in the core message should stand on their own. Provide specific
information and avoid generalities. The reader should be able to understand the core
message without referring to the scenario or the rest of the brief.
Recommendations
a) Concisely state the principal recommendation that arises from your analysis.
b) Optional: State any additional recommendations on subsequent lines.
Hint: Each recommendation should be stated as a clear course of action for the government to pursue. Be precise. Avoid generalities and ambiguous statements. DO NOT
explain or seek to justify your recommendations in this section. DO NOT describe the
consequences of your recommendations. DO NOT state conditions or caveats for your
recommendations.
Key Information
Begin your key information section with a short (1–2 paragraph) outline of the context for
the brief (as detailed in the scenario), the problem under consideration, and any additional
issues raised.
Hint: These 1–2 paragraphs should set the scene for the reader. They should provide
the reader with sufficient background information to understand the purpose of the brief.
DO NOT use these paragraphs to foreshadow, explain, or justify your recommendation(s).
Use the remainder of the key information section to present the rationale behind your
recommendation(s). You should highlight any trade-offs involved in your recommendation(s), and address any additional issues raised in the scenario. Your rationale should be
presented as follows:
• Use subheadings to concisely state the key findings of your industry analysis. The
maximum length for a subheading is 2 lines (1 line is preferable).
• Write a short paragraph following each subheading to briefly explain the finding.
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Taken together, the findings stated in the subheadings should form a logical argument
supporting your recommendation(s). The following subheading and paragraph provide an
example of the correct presentation of a finding:
For the best possible grade it is necessary to follow the instructions closely.
Assignments are graded against marking criteria that incorporate the requirements set out
in the assignment instructions. Failing to appropriately include all of the requirements
detailed in the instructions typically precludes the awarding of top marks.
Hint: Incorporate all information required to support your recommendation(s) in this
section, regardless of whether or not the same information has been included elsewhere in
the brief. Each subheading should be written as a statement of fact. DO NOT include an
explanation within a subheading, leave that for the following paragraph. DO NOT assert
facts that are unsupported by either the scenario or your industry analysis.
Financial Implications
Briefly summarise the direct financial implications of your recommendation(s) (if any) for
the Government. Include the precise dollar amounts that come out of your analysis.
Hint: The financial implications section should provide the reader with easy access to
the financial cost and/or benefit of your recommendations to the government. This section
is not a substitute for stating the financial implications elsewhere in the brief. Specifically,
if the financial implications form a part of the rationale for your recommendation(s), they
will need to be included in both the key information section AND the financial implications
section. DO NOT use this section to summarise other market outcomes (eg. profit and
price). DO NOT use this section to present arguments in support of your recommendation(s). This section must be included even if there are no direct financial implications
from your recommendation(s).