Reference no: EM132129874

Question: Consider a manufacturer that sells its product to a retailer who resale it to final consumers. The two firms do not have any production costs. The market has 100 consumers of type A and 80 consumers of type B. Each consumer would like to buy at most one unit. A consumer of type A is willing to pay up to 70 and a consumer of type B is willing to pay up to 50. The manufacturer has the bargaining power to offer a contract to the retailer. The retailer has an alternative profit of 1000 and will agree to the manufacturer's contract as long as the retailer can earn at least 1000.

(a) Suppose that the manufacturer can only charge a wholesale price (price perunit), w. The retailer decides whether to accept or reject the manufacturer's offer, and then the retailer decides on the price to final consumers. What is the wholesale price that the manufacturer offers? What are the price, quantity and the profits of the manufacturer and the retailer?

(b) Suppose now that the manufacturer can charge two-part tariff that includes a wholesale price, w, and a fixed fee, T. The retailer decides whether to accept or reject the manufacturer's offer, and then the retailer decides on the price to final consumers. What are the wholesale price and fixed fees that the manufacturer offers? What are the price, quantity and the profits of the manufacturer and the retailer?

(c) Suppose that the market has only consumers of type A (100 consumers that are willing to pay up to 70). The retailer can invest a fixed cost of F = 800 (in customers' service or advertising), that convinces an additional B consumers (80 consumers with willingness to pay of 50) to enter the market. Suppose that in the first stage, the manufacturer offers a two-part tariff that includes a wholesale price, w, and a fixed fee, T. The manufacturer can also impose a minimum price restriction (RPM). The manufacturer will use minimum RPM only if there is no alternative way to maximize the manufacturer's profit. In the second stage, the retailer decides whether to accept the contract. If the retailer accepts the contract, the retailer chooses whether to invest in bringing the B consumers into the market, and then chooses a quantity. If the retailer rejects the contract, the retailer earns the alternative profit of 1000. What are the wholesale price and fixed fees that the manufacturer offers? Does the manufacturer impose RPM? Does the retailer invest in attracting the B consumers? What are the price, quantity and the profits of the manufacturer and the retailer?