Reference no: EM132408692

Suppose monthly demand for Dell computers in the Austin area is P=1440-4Q and the cost of production for Dell is MC=AC=400. Suppose Dell sells computers to a downstream retailer who has an exclusive territory in Austin. Assume the costs of retailing (other than the actual wholesale purchase price) are zero.

a. Calculate the price, quantity, and profit that Dell would realize if it were vertically integrated forward into retailing (assume no changes in demand or costs would occur).

b. If Dell sells computers to a downstream retailer who in turn sells the computers to the final consumer, determine the price, quantity and profits (to both the retailer and Dell) that are realized.

c. Graph the double markup problem from part b. In the graph, label the profit of the retailer "A" and the profit of Dell "B". Shade in the area of profit that would be earned if Dell were vertically integrated forward into retailing (from part a).

d. If a maximum resale price of $960 were imposed, what would be the profit of Dell? Of the retailer?

e. Why do you suppose firms like HP and Sony sell its computers through retailers rather than direct selling to the final consumer as Dell has done?