Demand for final output is P = 64 − Q . 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. There is a monopolist supplier of network access, but the integrated supplier competes as a duopolist in the provision of the final good. Suppose that there is vertical integration, but no competition downstream. What is the profit- maximizing price and output for the integrated firm? Suppose that a regulator requires the vertically integrated firm to provide network access to the entrant, but does not regulate the price of access, except that it requires all users of network access to be charged the same price. 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. Find the profit-maximizing access price and the equilibrium in the final-good market. [ Hint: The rate of change of y with respect to x when y = ax 2 is dy / dx = 2 ax and the rate of change of y = g ( x ) + h ( x ) is dy / dx = dg ( x )/ dx + dh ( x )/ dx .] Find the welfare-maximizing access price. How does it compare to the marginal cost of access? Explain your result! Why might this result not generalize? What cost is missing?
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