Annual demand curve for particular product

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Reference no: EM132234421

Disney owns the rights to market products (e.g., children’s clothing) that are based on their much beloved children characters (e.g., Mickey Mouse). The company prefers not to get involved in the production and marketing details of these products since there is a large pool of firms that can perform such standardized, low-margin activities. The purpose of this problem is to explore the implications contracting between a monopolist of intellectual property and firm that is awarded a franchise to produce goods based on that intellectual property.

Suppose that the annual demand curve for a particular product using Disney characters (children’s pajamas) is known to be given by the equation, Q = 100 – P, where Q is units per year and P is the price per unit. A typical contractor can produce the product with a marginal cost equal to $10 per unit (independent of the volume of output produced) and an avoidable fixed cost of $1,000 per year. There are many contractors with this cost structure. All of them agree about what demand is going to be and know the cost structure of each other. The company licenses contractors by imposing an annual licensing fee L that does not depend on the amount of output the contractor produces.

a. Suppose that Disney solicits bids for this product, under the rule that the contractor with the highest bid L wins the contract. The winner gets the exclusive rights to produce and sell the product. What licensing fee would Disney expect to get?

b. Suppose, instead, that Disney considered awarding contracts to two contractors who would compete with each other. (You might, to be concrete, imagine that the competition between contractors would be Cournot quantity competition, but this assumption is not crucial to the story). As before, the set of potential contractors have identical marginal and fixed costs. Is it likely that Disney will do better under this arrangement than under the arrangement in part (a)?

Reference no: EM132234421

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