Economics HW question

2. Vertical Integration and Vertical Mergers The sandwich market is perfectly competitive. It takes both labor and a \"secret sauce\" to make a sandwich. The sauce is produced and sold by a monopolist. Suppose that the upstream monopolist merges with a sandwich shop, and refuses to sell the secret sauce to any other sandwich seller. The rival sandwich sellers all exit the market. To help put the deal through, the monopolist had to hire investment bankers and lawyers, but at great cost. a. If sandwich production required the use of labor and sauce in xed proportions, would the merger make nancial sense? b. Given that you know that the merger actually happened, what could be some reasons why it made nancial sense? Be specic, and use diagrams or equations as needed. 0. Is it possible that this particular merger solved a double-markup