Free Entry, Retail Services, and Vertical Restraints. Best Skis Corp. sells skis from ski shops located near ski hills and through a competitive supply of internet distributors. A service provided by ski shops is to allow skiers to try out the skis before buying. Best sells both on the internet and online because some customers prefer to demo their skis before buying, while some customers are happy relying on reviews and avoiding the time and effort of purchasing from a demo shop. The demand for skis from customers that do not wish to demo their skis before buying is D1 = 10 - p. The demand from customers that prefer to demo their skis is D2 = 10 + s - p where s represents demo service, which we assume can take on one of two values: s = 0, or s = s*. Thus, total demand for Best skis if service is zero is DT(p) = 20 - p, and the total demand for Best skis if service is s* is DT(p) = 20 + s* - p . A skier that demos skis and likes them does not have to purchase from the ski shop. Assume that both types of customers view the demo ski shops and the internet vendors as perfect substitutes once they have tried out the skis (if they do so). Best’s marginal cost in the upstream market is c, an internet provider’s marginal cost in the downstream market is v, and the demo operator’s marginal cost in the downstream market is v+(1/2)s. Assume that the demo shop incurs cost (1/2)s for each customer that demos the skis whether or not the customer purchases skis from the shop.

1. Suppose Best charges a single per-unit wholesale price and does not use vertical restraints. Find the equilibrium wholesale price, retail price, and service level.

2. Suppose Best can use RPM to specify the retail price and can charge different wholesale prices to the ski shops and internet distributors. Find the equilibrium wholesale prices, retail price, and service level.

3. Does Best make the socially optimal choice of whether to use RPM? Explain.

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Supp ose Best charges a single per unit wholesale price and does not use vertical restraints Find th... View the full answer