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Question: What is worse for consumers than a Monopolist? Two monopolists. Vertical Markets: An analysis.

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Single Monopolist As usual, p=12-q and mc=4. Monopolist profits are (12-q)q-4q=(8-q)q Monopolist produces q=4 and the price is p=12- 4=8. Monopolist profit is 16. Another way of looking at it is Monopolys profits=revenue – costs. Choice should set marginal revenue=marginal costs

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Two Monopolists:Supplier and Retailer. Supplier has marginal costs of 4 and charges price p s to Retailer. Retailer buys q from the supplier at price p s and (charges consumers price p c that would clear the market). Retailer faces demand curve of q=12- p c. Profit of Retailer is (12- q- p s )q Profit of Supplier is q(p s - 4)

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Two monopolists Profit of Retailer is (12- q- p s )q –Retailer sets price q= (12- p s )/2 Profit of Supplier is (p s - 4)q Sub. in for q yields (p s - 4)(12- p s )/2 Supplier sets p s =8 Retailer sets q=2, so p c = (12-q)=10 Price to consumers is higher than a single monopolist (10 vs. 8)! Quantity is less as well (2 vs. 4)!

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Solutions. Allow the Supplier to buy the Retailer. Allow the Supplier to charge a franchise fee (as with McDonalds). –Supplier charges p s =mc=4. –Supplier charges franchise fee F=16 –What does retailer charge and what are his profits before paying F? –Same as monopolist: p c =8 (q=4), profits 16. –He must pay the franchise fee F. This leaves him w/ no profits. –Supplier gets all the profits. Retailer is barely in business.

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Homework A monopoly has marginal cost of 5 and faces a demand of q=20-p. What price should he charge to maximize profits? Let us say it is a vertical market of two firms: supplier and retailer. What would the price would the supplier charge the retailer? What would be the price charged to the end consumer? If the supplier charged a franchise fee in addition to wholesale price, what would they be? Extra: Solve the above problem for the general case of marginal cost of c facing demand of q=A-p where (A>c).

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Monopolist can maximize profit by first finding the appropriate quantity of output, then determining the highest possible price it can charge To maximize.

Monopolist can maximize profit by first finding the appropriate quantity of output, then determining the highest possible price it can charge To maximize.

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