Vertical merger affect profit and consumer welfare

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Reference no: EM13772342

Suppose that a manufacturer is a monopolist in selling some product to a number of competitive retailers at wholesale price w. The manufacturer has marginal cost of $10 per unit. Each retailer pays w to the manufacturer and charges p for each unit it sells to the consumers. The demand that retailers face in final product market is given by Q = 110 ? p.

a. What is the market equilibrium retail price p? What is the profit-maximization wholesale price w for the manufacturer to set? How many units of products will the retailer sell and what will the profit be? Calculate the consumer surplus.

b. Consider a proposed vertical merger between the manufacturer and one of the retailers. Derive the post-merger market outcomes, i.e. retail price, quantity, profit and consumer surplus.

c. Compare your answers in (a) and (b). How will the vertical merger affect profit and consumer welfare?

Reference no: EM13772342

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