Consumers in a given industry have the demand curve: P = 1000 – 8*Q Production involves an upstream manufacturer, who incurs a constant marginal cost of $20 per unit, selling to a downstream retailer. The retailer’s additional cost (beyond the price paid to the manufacturer) is for sales labor, which costs $20 per unit. The retailer sells the product directly to consumers. Assume that the manufacturer and retailer are both monopolists in their respective sectors.
a) What is the final price that the retailer will charge consumers?
b) If the manufacturer can offer the retailer a two-part tariff, what is the optimal fixed fee that it should charge? Assume that the retailer will accept any contract that gives him at least zero profits.
c) If the firms are allowed to merge, what prices will the merged entity charge consumers?