Vertical Merger.
Consider a model in which there is 3 vertically integrated firms, 2 non- integrated dealers and 2 non-integrated manufacturers. The marginal cost of the integrated firm and non-integrated manufacturer are both zero. The marginal cost of the non-integrated dealer is equal to the wholesale price (w) charged by the non-integrated manufacturers. Retail demand is given by P = 120 – Q.
a) Solve for the equilibrium outputs and profits of each dealer and manufacturer, the retail price (P) and the wholesale price (w).
b) Now suppose that a non-integrated manufacturer and a non-integrated dealer decide to merge. Solve for the equilibrium outputs and profits of each dealer and manufacturer, the retail price (P) and the wholesale price (w). Determine whether the merger is profitable and whether it raises or lowers the retail and wholesale prices.