Question about Vertical Restraints and Externalities Suppose that Dunkin' Donuts is the only upstream manufacturer of donuts
Question:
Question about Vertical Restraints and Externalities
Suppose that Dunkin' Donuts is the only upstream manufacturer of donuts in Utrecht and that there are two downstream competing retailers that buy at wholesale price w. Market demand for donuts in Utrecht is given by D(p) = 12 − p + e1 + e2, where e1 and e2 are effort levels that the retailers can put in to make the product look good and increase overall demand. Cost of effort for each retailer are given by ci = 4ei2 for i ∈ {1, 2}. There is no marginal or fixed costs and the downstream retailers are competing on price only.
a) What will be market prices and effort levels under vertical separation? How does this show the problem of 'free-riding' under horizontal externalises?
b) What will be market prices and effort levels under full vertical integration?
c) What is the consumer and producer surplus in both cases?
d) Discuss what solutions Dunkin' Donuts may have to solve the free riding problem without vertically integrating.
Financial Accounting An Integrated Statements Approach
ISBN: 978-0324312119
2nd Edition
Authors: Jonathan E. Duchac, James M. Reeve, Carl S. Warren