Consider the case of Yily, a Chinese dairy business that sells organic milk via the Hong store. c = 10 is the unit cost of manufacturing. Through advertising, which costs A(a) = a2, Yily may boost the consumer's desire to spend. Q(p, a) = 20+ap is the ultimate market demand. If Yili and Hongxi were vertically integrated, the ultimate market price would be pV I, resulting in an advertising level of aV I, a vertically integrated quantity of QV I, and a profit of V I. However, Yily and Hongxi are separated in practice. Yili, in particular, may place vertical limitations on Hongxi in order to maximize profit.
1. Assume Yily offers Hongxi a linear price contract with a wholesale price of w per unit of milk. Which of the statements below is NOT correct?
A. To accomplish the vertical integrated profit, Yily will set w = pV I in equilibrium.
B. In equilibrium, Yily and Hongxi's combined profit from selling organic milk is less than V I. C. In equilibrium, Yily has a smaller advertising incentive than the vertically integrated example, i.e. an aV I. D. Yily produces less in equilibrium than the vertically integrated example, i.e. Q QV I.
2. Assume Yily can issue a two-part tariff contract with a unit price and a set payment that Hongxi must pay in advance, T (q) = wq + F. Which of the statements below is TRUE?
A. The agreement permits Yily to achieve the greatest vertical profit by fixing w = c and transferring the vertical benefit from Hongxi to Yily using the fixed payment.
B. Yily's advertising is on par with that of the vertically integrated example, a = aV I. C. Hongxi may benefit more under the contract if the final market price is established at the price level in the event of vertical integration, p = pV I. D. None of the aforementioned.
3. Assume Yily has the ability to enforce RPM in order to influence the ultimate market price. Which of the statements below is TRUE?
A. If Yily wants Hongxi to sell a big volume of merchandise, it could set an organic milk price floor.
B. RPM should be linked with a high level of wholesale pricing w = pV I to persuade Yily to undertake the vertical integrated effort (a = aV I). If w = c. D. is set, the vertical integrated advertising level may be induced by combining RPM and two part tariff. None of the aforementioned.
4. Assume that Hongxi may now increase shopping convenience at a cost of B(b) = b2. These efforts may finally result in Q(p;a,b) = 20+a+bp as the final market demand. bVI represents Hongxi's degree of effort in achieving the highest vertically integrated profit. Which of the following statements is NOT true if Yily sets a linear wholesale price for Hongxi?
A. To obtain a profit margin, Yily will set w > c in equilibrium.
B. In equilibrium, Yily and Hongxi's combined profit from selling organic milk is less than V I. C. In equilibrium, Hong has a lesser incentive to advertise than in the vertical integrated case, i.e. b bV I. D. The ultimate market price will be greater than in the vertical integrated case, i.e.p > pV I.
5. Which of the following statements about vertical restrictions in the event of double-sided effort is NOT True?
A. The wholesale price should be set at a low level to encourage Hongxi to make an effort for shopping convenience.
B. The wholesale price should be established at a high level to entice Yily to put forth effort in promotion.
C. It is impossible to create a contractual term that requires Yily and Hongxi to put in the necessary effort.
D. RPM may be used to obtain an efficient level of effort by setting the final price to p = pV I and the wholesale price to w = c.
