- Wholesalers: Use +/- buttons to alter the price per bag of coffee charged to the retailer then press Make Offer to post a price.
- Retailers: After the wholesaler sets a price you know your cost per bag. Use your +/- to buttons to determine how much quantity to order from them at that price. Then, press the Place Order button.
- For the retailer the market price for bags of coffee is determined by their quantity choice.
- All: Once the wholesaler sets a price and the retailer chooses quantity both will receive their profit information.
- Wholesalers: A wholesaler’s per bag profit is the price charged to a retailer minus the cost of production $r - $MC. Their total profit can be found by multiplying per bag profit by the total number of bags sold: Qx($r - $MC)
- Retailers: A retailer’s per bag profit is the price charged to the customer minus the price paid to the wholesaler $P - $r. Their total profit can be found by multiplying per bag profit by the total number of bags sold: Qx($P - $r)
Example 1
The inverse market demand for bags of coffee is given by P = 12 - Q. The marginal cost to the wholesaler for coffee production is MC=$4.
Wholesaler sets a price of r=$7. The retailer then chooses Q. Given a market demand curve of P = 12 - Q if the retailer chooses Q=4 that means the market price is P=$8.
So ultimately profits are:
Retailer: Qx($P - $r) = 4x($8 - $7) = $4
Wholesaler: Qx($r - $MC) = 4x($7-$4) = $12
Example 2
We use the same inverse demand curve P = 12 - Q and marginal cost MC=$4.
Suppose the wholesaler sets a price of r=$5. Then, the retailer chooses Q=6 units at r=$5. Given a market demand curve of P = 12 - Q if the retailer chooses Q=6 that means the market price is P=$6.
So ultimately profits are:
Retailer: Qx($P - $r) = 6x($6 - $5) = $6
Wholesaler: Qx($r - $MC) = 6x($5-$4) = $6
