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

2. Single Monopolist As usual, p=15-q and mc=3. Monopolist profits are (15-q)q-3q=(12-q)q Monopolist produces q=6 and the price is p=15-6=9. Monopolist profit is 36.

3. Two Monopolists:Supplier and Retailer. Supplier has marginal costs of 3 and charges price p s to Retailer. Retailer buys from the supplier at price p s and charges consumers price p c. Retailer faces demand curve of q=15- p c. Profit of Retailer is (15- p c ) (p c - p s ) Profit of Supplier is (15- p c ) (p s - 3)

4. Two monopolists Profit of Retailer is (15- p c ) (p c - p s ) –Retailer sets price p c = (15 + p s )/2 Profit of Supplier is (15- p c (p s ) ) (p s - 3) –Sub. in (15- (15 + p s )/2) (p s - 3)= (7.5- p s /2)(p s - 3) Supplier sets p s =9 Retailer sets p c = (15 + p s )/2=12 Price to consumers is higher than a single monopolist (12 vs. 9)! Quantity is less as well (3 vs. 6)!

5. Solutions. Allow the Supplier to buy the Retailer. Allow the Supplier to charge a franchise fee (as with McDonalds). –Supplier charges p s =mc=3. –Supplier charges franchise fee F=36 –What does retailer charge and what are his profits before paying F? –Same as monopolist: p c =9, profits 36. –Supplier gets all the profits. Retailer is barely in business.