4 Agency vs. wholesale pricing models that are common in the manufacturer-retail

Question

4 Agency vs. wholesale pricing models that are common in the manufacturer-retailer There is one publisher and one retailer We are going to compare two different pricing relationship and are known as agency The inverse demand function for an eBook is given by P-16-Q, where P is the price consumers pay for an eBook and is the quantity they purchase. eBooks are assumed to cost nothing to distribute. and wholesale pricing. Agency pricing: The publisher sets a price eBooks. The publisher gets some share1-s of the profits and the retailer gets share s P and the retailer must charge that price P for Wholesale pricing: The publisher sells eBooks at a price p to the retailer. Then, based on this price p, the retailer chooses a price P to charge consumers (a) What is the price consumers pay under agency pricing? (Hint: Maximizing share (1-s) of the profits is equivalent to maximizing the entire share of profits. Therefore, this problem is your basic monopoly pricing problem with a linear demand function.) (b) What is the price consumers pay under wholesale pricing? (Hint: The game between the publisher and the retailer can be solved by backward induction. First, determine the optimal decision of the retailer as a function of the publisher's price. Then solve for the optimal publisher price. In each case, you have to solve a simple monopoly problem with a linear demand function.) (c) Under which pricing model is consumer price the highest? Why?

Explanation / Answer

The Answer for (a) What is the price consumers pay under agency pricing is:

As per hint, we understand that this is problem with linear demand function under monopoly pricing strategy.

The formula for Price P to maximise the profit is

P = 16- Q where marginal cost is 0.

P = 15

P = (1-S) Price as per Agency

15 = 1- S

S = 16.

So, consumers pay 16 under agency pricing.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.