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Q. Two retail rms compete in costs in a downstream market in which base demand as well as is given by Pr = 1-Q. The rms can provide service is 2 f0; 1g in order to augment demand as well as (e.g., they can Clarify all the features of the good for sale). However, such service is non-appropriable in that it cannot be conditioned on a customer making a purchase. As a result, service is in effect a public good. Specifically, Assume that if the rms offer service levels of s1 2 f0; 1g as well as s2 2 f0; 1g, demand as well as is Pr = 1 + max (s1; s2) - Q. Assume further that if rms charge the same cost, customers will randomly choose to buy at a rm that provided service (if both provide service or if neither provide service the market is split evenly). The cost of providing service is c(s) =:1 if s = 1; 0 if s = 0: The only other cost that the retailers have is the wholesale cost Pw for the good. Assume that this cost is set by an upstream wholesaler with monopoly pricing power.
1. If the wholesaler can only set the wholesale cost Pw as well as then simply sells to the retailers whatever they demand as well as, what is the equilibrium wholesale cost, Pw, the equilibrium level of service provision s1; s2 as well as the equilibrium retail cost Pr?
2. Assume that the wholesaler can impose retail cost maintenance that commits the downstream retailers to charge a minimum cost P min. Given this option, what is the equilibrium minimum cost P min, the equilibrium wholesale cost, Pw, the equilibrium level of service provision s1; s2 as well as the equilibrium retail cost Pr?
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