1. Demand for final output from the incumbent integrated firm is P = 64 - Q. Demand for final output produced by the entrant is P = 64 - Q - r where r is the reduction in the willingness to pay of consumers due to the inferior quality of access provided to the entrant. Production of the
final good requires 1 unit of network access that has marginal cost of 4 and 1 unit of other stuff that also has a cost of 4 for both the incumbent and the entrant. The regulator requires that the integrated firm sell units of network access to all final-goods producers for the price w. Assume the following timing: (i) the network supplier sets the access price and then (ii) the final-good duopolists take the access price as given and competition between them is Cournot.
(a) Show that regardless of the transfer price, when the integrated firm competes in the final-good market it behaves as if its marginal cost is 8, not w + 4.
(b) Suppose that the integrated firm can change r at no cost. Determine the relationship between w and r such that the incumbent firm is able to monopolize the final-goods market.
(c) Suppose that w = 4. How much would the monopolist be willing to pay to set r such that it monopolizes the market for the final good?