All of the following are true if both the upstream and downstream firm have market power except which one?
A)This situation is referred to as double marginalization.
B)Both the upstream firm and the downstream firm set a price that exceeds their respective marginal costs.
C)If the two firms were to merge, the combined firm would earn the same profit than if they did not merge.
D)This situation is referred to as a successive monopoly.

Question

Quizplus · Accepted Answer

Double marginalization refers to the phenomenon where both the upstream and downstream firms, having market power, add their own markup above their marginal costs, leading to higher prices for consumers. If these firms were to merge, the combined entity could potentially reduce the overall markup (since it would be setting a single markup instead of each firm adding its own), potentially leading to lower prices and higher total profits compared to when they operate separately. This makes option C incorrect as it suggests that merging would not change the profit situation, which overlooks the potential efficiency gains and profit increase from eliminating the double markup.

All of the Following Are True If Both the Upstream