Here is the problem:
To illustrate the double marginalization problem, let’s assume that a manufacturer, m, and a retailer, r, use linear pricing
Inverse demand: p = 10 - q
Marginal cost of the manufacturer: c = 2
Marginal cost of the retailer: w
The timing of decisions
m sells to r at a wholesale price w
r sells to end-consumers at a price p
This game needs to be solved backward starting with the maximization problem of r
Here is where I'm stuck:
Profit(retailer) =
now I need to take the derivative of profit with respect to qantity so I can maximize profit:
That's as far as I got before the prof started going to fast and lost me. I know that I'm supposed to now find the profit of the manufacturer; which would be the demand multiplied by margin. So, would that be:
Profit(manufacturer) = since that would be demand (which I previously found times his margin)?
If that's true, then should I take the derivative of that? I don't know what to do... please help! Thanks