Transcript Vertical Markets - The Economics Network

Question:
• What is worse for consumers than a
Monopolist?
• Two monopolists.
Vertical Markets: An analysis.
Single Monopolist
• As usual, p=12-q and mc=4.
• Monopolist profits are (12-q)q-4q=(8-q)q
• Monopolist produces q=4 and the price is p=124=8.
• Monopolist profit is 16.
• Another way of looking at it is Monopoly’s
profits=revenue – costs.
• Choice should set marginal revenue=marginal
costs
Two Monopolists:Supplier and Retailer.
• Supplier has marginal costs of 4 and
charges price ps to Retailer.
• Retailer buys q from the supplier at price ps
and (charges consumers price pc that would
clear the market).
• Retailer faces demand curve of q=12- pc.
• Profit of Retailer is (12- q- ps)q
• Profit of Supplier is q(ps - 4)
Two monopolists
• Profit of Retailer is (12- q- ps)q
– Retailer sets price q= (12- ps)/2
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Profit of Supplier is (ps - 4)q
Sub. in for q yields (ps - 4)(12- ps)/2
Supplier sets ps =8
Retailer sets q=2, so pc = (12-q)=10
Price to consumers is higher than a single
monopolist (10 vs. 8)!
• Quantity is less as well (2 vs. 4)!
Solutions.
• Allow the Supplier to buy the Retailer.
• Allow the Supplier to charge a franchise fee (as
with McDonalds).
– Supplier charges ps =mc=4.
– Supplier charges franchise fee F=16
– What does retailer charge and what are his profits
before paying F?
– Same as monopolist: pc =8 (q=4), profits 16.
– He must pay the franchise fee F. This leaves him
w/ no profits.
– Supplier gets all the profits. Retailer is barely in
business.
Homework
• A monopoly has marginal cost of 5 and faces a demand of
q=20-p.
• What price should he charge to maximize profits?
• Let us say it is a vertical market of two firms: supplier and
retailer.
• What would the price would the supplier charge the
retailer?
• What would be the price charged to the end consumer?
• If the supplier charged a franchise fee in addition to
wholesale price, what would they be?
• Extra: Solve the above problem for the general case of
marginal cost of c facing demand of q=A-p where (A>c).