Suppose a manufacturer produces a product that it sells to retailers who sell it to consumers.
• Consumer demand for the product is given by inverse demand curve: P = 100 – Q
• The marginal cost of production for the manufacturer is 20.
• The fixed cost of the retailer is 300.
• There are no marginal costs for retailing.
(a) What wholesale price maximizes the manufacturer profits? If the manufacturer charges this wholesale price, what retail price maximizes retailer profits?
(b) How might the upstream firm use resale price maintenance to maximize its profits? Be specific as to the wholesale price the firm would charge and the resale price it would set.