Question

Which of these are True or False involving vertical integration?

1.Both of an upstream and downstream VI Monopoly reduces output

2. VI for upstream and downstream Monopoly can reduce industry profits

3. the DWL from double marginalization can become bigger as basic inputs are monopolies

4. vertical mergers can be hardly profitable without cost savings

5. VI can happen to improve efficiency when the retail sector is perfectly competitive

Answer 1

Answer 1 - False

Reason - Downstream monopoly maxmizes the benefit of upstream thus it cannot reduce the output

Answer 2 - false

Reason - Downstream and upstream monopoly does not reduce the industry profits

Answer 3 - True

Reason - the deadweight loss from double marginalization can become bigger as inputs are monopolies

Answer 4 - False

Reason - Vertical mergers can be profitable as we assume there is no cost reduction in production side

Answer 5 - True

Reason -  Vertical integration improves efficiency when the retail market is perfectly competitve