8.

a) Define Resale Price Maintenance (RPM) and Exclusive dealings (1 + 1 = 2 points)

b) Suppose that the downstream market for widgets is characterized by the inversedemand curve P = 100 Q. Widget retailing is controlled by the monopolist WR Inc., which obtains its widgets from the monopoly wholesaler WW Inc. at a wholesale price WW per widget. WW Inc. obtains the widgets in turn from the monopoly manufacturer WM Ltd. at a manufacturing price of WM per widget. WM Inc. incurs marginal costs of $10 per unit in making widgets. WW and WR each incur marginal costs of $5 in addition to the prices that they have to pay for widgets (assume marginal costs = average costs).

i) What are the equilibrium widget price to consumers, P , and the equilibrium wholesale price WW , and the equilibrium manufacturing price WM ? What is the profit earned by each firm at these prices?

ii) Show that vertical integration by two of these firms, WM and WW, increases profit and benefits to consumers.