2. In what way does territorial exclusivity in licensing to bottlers increase the profits of the...

 

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2. In what way does territorial exclusivity in licensing to bottlers increase the profits of the soft-drink syrup producers who sell their syrup to those bot- tlers? In what ways can these vertical restraints benefit consumers? In what ways can they lower consumer welfare? 3. ABC Inc. has just developed a new kind of machine. The unit cost of pro- ducing the machine is constant and for simplicity set equal to zero. The value of the machine can be enhanced if retailers provide eye-catching dis- plays and in-store demonstrations to potential customers. Specifically, ABC Inc. estimates that these retail services affect demand in the follow- ing way: P = 100-Q if services are provided; P = 50-Q if services are not provided. ABC is advised that the only practical way of ensuring the provision of services is to grant one retailer the exclusive right to sell and market the machine. There are no marginal costs of supplying retail services but there is a fixed or setup cost of $500 when the retailer provides such services. a. Explain why ABC is advised that in order to ensure the provision of services only one retailer should be granted the exclusive right to sell the machine? b. Suppose that ABC takes this advice and designates an exclusive re- tailer for its product. Assume, however, that ABC cannot impose any further restrictions on the designated retailer, such as a required retail price. Given this arrangement, at what wholesale price will ABC sell its machine to its retailer? What retail price will the retailer sell the ma- chine? What profit will ABC earn? c. What would happen if ABC did not designate an exclusive dealer? Does it make sense for ABC to do so? Are there other kinds of restric- tions that ABC would like to impose? 2. In what way does territorial exclusivity in licensing to bottlers increase the profits of the soft-drink syrup producers who sell their syrup to those bot- tlers? In what ways can these vertical restraints benefit consumers? In what ways can they lower consumer welfare? 3. ABC Inc. has just developed a new kind of machine. The unit cost of pro- ducing the machine is constant and for simplicity set equal to zero. The value of the machine can be enhanced if retailers provide eye-catching dis- plays and in-store demonstrations to potential customers. Specifically, ABC Inc. estimates that these retail services affect demand in the follow- ing way: P = 100-Q if services are provided; P = 50-Q if services are not provided. ABC is advised that the only practical way of ensuring the provision of services is to grant one retailer the exclusive right to sell and market the machine. There are no marginal costs of supplying retail services but there is a fixed or setup cost of $500 when the retailer provides such services. a. Explain why ABC is advised that in order to ensure the provision of services only one retailer should be granted the exclusive right to sell the machine? b. Suppose that ABC takes this advice and designates an exclusive re- tailer for its product. Assume, however, that ABC cannot impose any further restrictions on the designated retailer, such as a required retail price. Given this arrangement, at what wholesale price will ABC sell its machine to its retailer? What retail price will the retailer sell the ma- chine? What profit will ABC earn? c. What would happen if ABC did not designate an exclusive dealer? Does it make sense for ABC to do so? Are there other kinds of restric- tions that ABC would like to impose?

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