Early on in his tenure as CEO of Bananarama, Jesse prided himself in having established an agreement with Walmart to serve as the exclusive retailer of the Bananarama. Walmart is now expressing interest in acquiring Bananarama Manufacturing Company and giving Jesse the title of Top Banana at Walmart.

a. Would you classify Walmart’s potential acquisition of Bananarama Manufacturing Company as a horizontal or a vertical merger? Why?

b. Chiquita informs Jesse that according to her analysis, she believes that the proposed acquisition by Walmart would lead to an increase in the retail price of the Bananarama and a resulting decrease in joint profits from the manufacture and sale of the Bananarama. List and explain two reasons why you disagree with Ms. Dole.

c. Assume that, prior to the proposed acquisition, Walmart faced demand of q = 100 – 5p for the Bananarama and Bananarama Manufacturing Company faced a cost of c(q) = 4q. What is the equilibrium retail price p, wholesale price w, and profits from the manufacture and sale of Bananaramas if Jesse decides not to move forward with the proposed acquisition and continue to operate as a separate firm?

d. Now assume Jesse goes forward with the acquisition, assuming the title of Top Banana at Walmart. What is the equilibrium retail price pm and profit from sales of the Bananarama?

e. Is Jesse and Walmart better off merging? How about consumers? Explain your answer

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AnswerA the acquisition by the Walmart here is the Vertical since it has acquired the company which ... View the full answer