Double

Marginaliza/on
Assume there is an upstream rm, the
manufacturer of the product, and a downstream
rm that sells the product in a retail outlet.
Assume retailers have no costs, just buy the
product and then resell it costlessly.
Also assume that the marginal cost of
manufacturing the product is constant, c.
Consumer demand for the product is P = a - bQ.

Double Marginaliza/on, cont

If the manufacturer and retailer were an
integrated company, the rm would set
MR=MC to maximize prot:
a-2bq = c or q = (a-c)/2b
Price = a - b*(a-c)/2b = (a+c)/2
Prot = [ (a+c)/2 - c ]*(a-c)/2b = (a-c)2/4b

a





(a+c)/2






c

Monopoly Solu*on

MR
(a-c)/2b

Demand

Double Marginaliza/on, cont

If the manufacturer and retailer are separate
companies:
Assume that the price the retailer pays the
manufacturer is r.
To maximize prot, the retailer sets r = MR:
a-2bq = r or q = (a-r)/2b
Price = a - b(a-r)/2b = (a+r)/2
Prot = [ (a+r)/2 - r ]*(a-r)/2b = (a-r)2/4b

Double Marginaliza/on, cont

Thus the retailers demand for the
manufacturers product is q = (a-r)/2b.
The inverse demand curve for the
manufacturer is thus r = a-2bq.
Note that this is the same as the retailers
marginal revenue curve.

So the manufacturers MR curve = a -

4bq.

Double Marginaliza/on, cont

SeVng MR=MC:
a - 4bq = c, or q = (a-c)/4b
Price = a - 2b (a-c)/4b = (a+c)/2
(Be sure to use the manufacturers demand curve
to get price, not the consumers demand curve)

Prot = [(a+c)/2 - c]*(a-c)4b = (a-c)2/8b

The retailer pays (a+c)2 and sells (a-c)/4b at

P = a-b*(a-c)/4b = (3a+c)/4.

Double Marginaliza*on
a


(3a+c)/4


(a+c)/2





c

MR for
manufacturer

MR for retailer
(a-c)/2b

Demand

Double Marginaliza/on, cont

Double Marginaliza/on: both rms mark
the price up above their own costs.
Both cosumers and rms are be[er o if
the two rms act in concert to maximize
joint prots.

Double Marginaliza*on
a


(3a+c)/4


(a+c)/2





c

MR for
manufacturer

MR for retailer
(a-c)/2b

Demand