## (solution) Demand for final output from the incumbent integrated firm is P = 64 − Q . Demand for final

Demand for final output from the incumbent integrated firm is P = 64 − Q . Demand for final output produced by the entrant is P = 64 − Q − r where r is the reduction in the willingness to pay of consumers due to the inferior quality of access provided to the entrant. Production of the final good requires 1 unit of network access that has marginal cost of 4 and 1 unit of other stuff that also has a cost of 4 for both the incumbent and the entrant. The regulator requires that the integrated firm sell units of network access to all final-goods producers for the price w . Assume the following timing: (i) the network supplier sets the access price and then (ii) the final-good duopolists take the access price as given and competition between them is Cournot. Show that regardless of the transfer price, when the integrated firm competes in the final-good market it behaves as if its marginal cost is 8, not w + 4. Suppose that the integrated firm can change r at no cost. Determine the relationship between w and r such that the incumbent firm is able to monopolize the final-goods market. Suppose that w = 4. How much would the monopolist be willing to pay to set r such that it monopolizes the market for the final good?

Solution details:

STATUS

QUALITY

Approved

Sep 13, 2020

EXPERT

Tutor