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Exercise 2: Please help! A monopolist manufacturer sells to competitive retailers. The competitive retailers currently provide...

Exercise 2: Please help!

A monopolist manufacturer sells to competitive retailers. The competitive retailers currently provide no services for the manufacturer’s good.

Suppose the final consumer demand for the good at the retailer level is

P = 100–Q

and the costs for the manufacturer of producing the good are represented by

MC = AC = 20.

Currently, the manufacturer sell the good to the retailer at

w=60.

1. Calculate the profit of the retailers and of the manufacturer The manufacturer wants to increase its profits and has the option to use a RPM. Therefore retailers would have to set a minimum price of 80 and continue to sell the good to the retailers at w= 60. The retailers must invest in publicity in order to attract customers. Demand increases to P = 150–Q.

2. What would be the profit of the manufacturer in this case? Will he set the RPM?The CEO of the manufacturer has another idea to improve the profit. He can merge with retailers in order to control the good market. In order to have the increased demand he will have to pay $1000.

3. What will he choose? What is the maximal price that the manufacturer will be OK to pay for the merge?

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