Question

Suppose a cellphone company is considering whether to sell its cellphones through a dealer or through its own stores. Refer to the following information: Demand for cellphones: P=200-2q if vertically integrated P=240-2q if selling through a retailer Cost of cellphones: MC=ATC=60

a. If the cellphone firm has monopoly power and is vertically integrated forward into retailing, what price, quantity, and profits exist for cellphones?

b. Suppose the firm is not vertically integrated; the cellphone producer sells cellphones through a retailer, which also has monopoly power (and thus the double-markup problem exists). What is the final price and quantity of cellphones under this scenario? What are the profits to each firm? Graph parts a and b, using separate diagrams, including profit.

c. Describe two ways the manufacturer can solve the double markup problem.

No other information is available.

Answer 1

Given,

MC=ATC=60

Answer A. When vertically integrated

Monopoly Quantity Monopoly Price

60=240-2q P=240-2q

2q=180 P=240-2*90

q=180/2= 90 P=60

Profit by subtracting total cost from revenue because MC is constant, ATC=MC. So we can write

=TR-TC

=Pq-MC(q)

=60*90-60*60

=0.

as a result, Profit will be zero

Answer B. When not vertically integrated, the retailer will set its own price considering double markup,

Quantity Price

60=200-4q P=200-4q

4q=140 P=200-4*35

q=35 P=60