In February 2005, the US Federal Trade Commission (FTC) went to court to undo the January 2000 takeover of Highland Park Hospital by Evanston Northwestern Healthcare Corp. The FTC accused Evanston Northwestern of antitrust violations by using its post-merger market power in the Evanston hospital market to impose 40% to 60% price increases. Hospitals, even within the same community, are geographically differentiated as well as possibly quality differentiated. The demand for an appendectomy at Highland Park Hospital is a function of the price at Evanston Northwesters Hospital q(H) = 500 -0.01p(H) + 0.005p(N). The comparable deman function at Evanston Northwestern is q(N) = 500 - 0.01p(N) + 0.005p(H). At each hospital the fixed cost of the procedure is $20,000 and the marginal cost is $2,000.

a) Find out the (Nash) equilibrium prices of the procedures at the hospitals?

b) After the merger, find the profit maximizing monopoly prices of the procedure at each hospital?

c) Does the merger result in price increases?