ecos3005ps6 - INDUSTRIAL ORGANISATION - Problem set 6 -...

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INDUSTRIAL ORGANISATION - Problem set 6 - Practice Semester 2, 2010 1 Problem set 6 - Practice 1. Suppose that a monopoly manufacturer (the “Upstream firm”) of a product relies on a monopoly distributor (the “Downstream firm”) to sell the product. The demand for the final product is given by Q = D ( P ) = 100 - P . The upstream firm has a constant marginal cost of 20. The downstream firm faces constant marginal costs of storage and distribution of 10. The firms face no fixed costs. The two firms play a two stage game. First, the upstream firm chooses a price for the wholesale product, P U . Then, the downstream firm chooses a price for the final product, P D . The downstream firm must pay the upstream firm P U for every unit of the product sold. Total sales to final consumers depend on the downstream price, Q = D ( P D ) . (a) Find the downstream monopolist’s reaction function as a function of the price of the upstream monopolist, P D = R D ( P U ) . (Hint: Think of the monopoly problem where the monopolist has marginal cost of
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ecos3005ps6 - INDUSTRIAL ORGANISATION - Problem set 6 -...

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