Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 20

A large firm has two divisions: an upstream division that is a monopoly supplier of an input whose only market is the downstream division that produces the final output. To produce one unit of the final output, the downstream division requires one unit of the input. If the inverse demand for the final output is P = 1,000 ? 80 Q would the company's value be maximized by paying upstream and downstream divisional managers a percentage of their divisional profits? Explain.