Consider the problem of a big corporation (the principal) buying an intermediate good from a small supplier (the agent), but being unable to specify a level of quality in the contract. Assume that the agent's utility level in each period depends on the price she receives and the quality she provides. Assume that
u=2
The termination function that determines the likelihood that the corporation will renew the contract with its supplier is also the same used in the textbook:
t=1−q
(a) What is the lifetime value of the relationship for the agent? Questions (b) to (e) are shown in pictures below.
Consider The Problem Of A Big Corporation The Principal Buying An Intermediate Good From A Small Supplier The Agent 1 (30.73 KiB) Viewed 22 times
(b) Derive the agent's best response function: q=1 # 4 / p (c) Profit maximization implies that the principal will offer a price satisfying the following condition: /p²: Answer: = 4 (d) What is the price that the principal will offer to the agent? (e) What is the quality level that will be provided by the agent?
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