Suppose that market demand is D(p) = 100 − 2p. A downstream monopolist D sets a retail price p and an upstream monopolist U sets a wholesale price w paid by the downstream firm. Assume marginal costs of respectively C_D = 20 and C_U =10 and fixed costs of FC_D =10 and FC_U =20.

1. What is the price and profits under vertical separation?
2. What are the price and firm profit under vertical integration? How does this show the problem of double marginalization? How might this be resolved?
3. What are an optimal wholesale price w and franchise fee F from the per- spective of the upstream firm? How does this resolve double marginalization?

Answer rating: 100% (QA)

1 The market demand function is given as Dp1002p where p represents the price of the concerned good and the marginal costs of the downstream and upstream monopolists are given as CD20 and CU10 respect... View the full answer