Suppose that the retail market for widgets has inverse demand curve P = 100 – Q....

Suppose that the retail market for widgets has inverse demand curve P = 100 – Q. Widget retailing is controlled by a monopoly retailer, R Inc., which obtains its widgets from the monopoly wholesaler W Inc. at a wholesale price of w per widget. In addition R Inc. incurs a cost of $2 per widget to promote the product and sell to consumers. Wholesaler W Inc. obtains the widgets in from monopoly manufacturer M Ltd. at a manufacturing price of m per widget. Wholesaler W incurs an additional cost of $1 per unit to stock its inventory. M Ltd., the manufacturer incurs a unit production cost of $9 per unit in making widgets.

1) What is the equilibrium widget price to consumers, P, the equilibrium wholesale price w, and the equilibrium manufacturing price m? What is the profit earned by each firm at these prices?

2) Why would vertical integration by any two of these firms increases profit and could benefit consumers?

3) If all three sectors were perfectly competitive industries what would be the final consumer price? If all three sectors were vertically integrated what would be the final price.

Expert Solution

Rahul Sunny answered 2 years ago

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