Question

Question 5 In your own words, describe the connection between vertical integration and maximum resale price fixing. Feel free to provide any graphs to help your explanation. For full credit, you should be able to show that you understand the parallels between the two without relying heavily on the language of the book or my lecture slides.

Answer 1

Vertical integration is when a company accompany more than one part in manufacturing a product. There is a complete process:

Rawmaterial partsmanufacturing pacakging assembling Retail customer

Whenever these all process are completed by a single firm, there is vertical integration.

Maximum resale price fixing also known as vertical price fixing refers to an aggrement in which an enterprise decide the prices of the product at which it is to be sold in the market. It is like imposing price floor that it cannot be sold below than this is the market. It is the deal through which enterprise directly manage the price of their product.

We can see that vertical integration and maximum resale price fixing can be compared if we assume there is monopoly market. We analyze a monopoly supplier incentive for VI and maximum resale price. In monopoly market, vertical integration can raise its prices and the resale price fixing model can stop its retailers in increasing its prices and restricting output. In monopoly model either vertical integration or maximum resale price fixing can raise total output and economic welfare. Maximum resale price is equal to vertical integration since both have same price level.