Virginia Tech FIN FIN 5084 A computer company A makes a device that is stocked by a retailer. Both firms act as monopolists to maximize their profits. Assume that the retail…

Virginia Tech FIN FIN 5084 A computer company A makes a device that is stocked by a retailer. Both firms act as monopolists to maximize their profits. Assume that the retail…

A computer company A makes a device that is stocked by a retailer.

Both firms act as monopolists to maximize their profits. Assume that the retail demand from consumers is given by P=1000-Q. Computer Company A has constant marginal costs of $100 for making the device. The retailer also has marginal costs comprised of $100 in labor costs + the cost of purchasing its products from the manufacturer. If Computer company A sets a producer price (= $ PA) for the retailer, which the retailer takes as given, what is the retailer’s marginal cost curve? the marginal cost for retailer is $100 + PA.

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• Solve for the profit maximizing solution of Q and P and mark up for Best Buy.
• Solve Computer company A’s prices and quantity, mark up. What is the relation to the Lerner index for this market?
• Does it make sense for company A to try and sell direct to consumer (i.e., the company tries to create it’s own retail network. How would demonstrate this?

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