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Assume an industry with one upstream and one downstream monopoly. The upstream monopoly produces Q, which is sold solely to the downstream monopoly. The downstream monopoly faces the inverse demand curve PR = 1 - Q, where PR is the retail price of Q. further assume that the production of Q exhibits constant marginal costs cQ.
g) Assume that the two monopolies merge. What is the output level and price in equilibrium?
h) Determine the output level, wholesale price, and retail price and deadweight loss before any vertical integration takes place. [Hint: solve this problem backwards, start with the downstream firm, taking the price for the upstream monopoly as given. Then solve the problem for the upstream firm using the demand of the downstream firm]
i) Compare the results you obtained in (a) and (b) using a graph. Show the loss in terms of Consumer Surplus and in terms of Deadweight Loss from Double Marginalization.
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