1. Managerial Economics-Charles W. Upton Retailing Basics

2. The Basics of Retailing $18 Suppose the wholesaler sets a wholesale price of $18. The good must still be retailed.

3. Retailing Basics The Basics of Retailing MC=18 + MSC $18

4. Retailing Basics The Basics of Retailing AC = $18 +ASC MC=18 + MSC $18

5. Retailing Basics The Basics of Retailing AC = $18 +ASC MC=18 + MSC $18 $25

6. Retailing Basics The Basics of Retailing AC = $18 +ASC MC=18 + MSC $18 $25 Retail competition drives the retailing cost to its minimum, say $7 so the retail price is $25

7. Retailing Basics The Basics of Retailing $18 $25 10,000 If demand were 900,000 units, there would be 90 retailers

8. Retailing Basics The Basics of Retailing $18 $25 10,000 If demand were 900,000 units, there would be 90 retailers OK, but how does the manufacturer set his price?

9. Retailing Basics The Inverse Demand Function P R = R(Q) P W = R(Q) – 7

10. Retailing Basics The Inverse Demand Function P R = R(Q) P W = R(Q) – 7 If the retailer’s function is solely distribution, the manufacturer wants the gap between P R and P W as small as possible

11. Retailing Basics Equilibrium DRDR DWDW P Q The difference between the wholesale and retail demand functions is the distribution cost

12. Retailing Basics Determining the Wholesale Price DRDR DWDW P Q MR W MC PWPW Q*

13. Retailing Basics Determining the Retail Price DRDR DWDW P Q MR W MC PWPW Q* PRPR

14. Retailing Basics End ©2004 Charles W. Upton