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Question 1 (50 marks).
Consider an industry with one manufacturer M and two retail firms R1 and R2. The
manufacturer produces a homogenous good at a marginal cost of 20. The retailer buys the
product from the manufacturer and sells to the final consumers. Downstream demand in
the industry is given by
D(p) = 260 – p
where p is the final retail price p.
(a) [8 marks] As a benchmark, suppose M and R1 are vertically integrated and stop supplying
R2. Which price does the merged company charge to consumers? What are industry
profits and consumer surplus?
For the remaining subquestions assume that all firms are independent.
(b) [8 marks] Assume the retailers compete in prices downstream and the manufacturer
supplies the good at a price w to both retailers. What is the downstream price equilibrium?
Give the demand for the manufacturer’s product. Calculate the manufacturer’s
optimal price w and his profits.
(c) [8 marks] Compare with the vertical integration outcome in (a). Does the manufacturer
have an incentive to foreclose one of the retailers and exclusively sell through just one retailer?
Explain in not more than 80 words.
(d) [8 marks] Assume now the retailers compete in quantities downstream. The manufacturer
sells the good at w to both retailers. Calculate the downstream Nash equilibrium.
(e) [10 marks] Derive the demand for the manufacturer’s product as a function of w. Calculate
his optimal wholesale price and profits at this price.
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ECON 3440 – Competition Policy and RegulationSemester 1, 2019Assignment 2This assignment is due on Friday, May 31 at 2pm. Please submit electronically on Black-board. You can use hand-written and scanned scripts.Question 1 (50 marks).Consider an industry with one manufacturer M and two retail ?rms R1 and R2. Themanufacturer produces a homogenous good at a marginal cost of 20. The retailer buys theproduct from the manufacturer and sells to the ?nal consumers. Downstream demand inthe industry is given byD(p) = 260