suppose that a manufacturer and its retailer both operate as a market monopoly.

Question

suppose that a manufacturer and its retailer both operate as a market monopoly. The retailer experiences no transacition cost for buying form the manufacturer, and the marginal cost of manufacturing is constant at 20. Market demand for the manufactured product is p=100-2Q

(a) How much would the manufacturer and the retailer charge if they operate separetely? Calculate their individual and joint profits.

(b) Based on your answers to (a), explain what Double Marginalization is.if calculation is needed, please write down

(c) If the manufacturer and the retailer merge, how much would the vertically integrated firm charge the consumers? Calculate the profit and the Lerner Index of the integrated firm.(please give detail)

(d) Quantify the welfare improvement due to vertical integration. What is your intuition that welfare improves in this scenario?

Explanation / Answer

If a manufacturer and retailer operate separately, the demand curve would be: p= 100 - 40Q because they have to add their marginal cost which is 20. Now setting 100 - 40Q= 20, we get Q= 2. Putting Q in the original demand equation p= 100 - 2Q, we get p= 96.

Double marginalization is when there are two firms in the supply chain, both adding a margin to the good whcih leads in higher prices.

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