A manufacturing firm produces all its product in an offshore subsidiary located in a country where labor costs are lower
Posted: Sun May 08, 2022 9:32 am
A manufacturing firm produces all its product in an offshore
subsidiary located in a country where labor costs are lower than in
the home country. The finished product is then shipped back
to the U.S. parent for final packaging and distribution. The
parent compensates the subsidiary at a markup that is three times
the marginal cost of production. Assuming that the final
retail price to buyers is set at the optimal profit-maximizing rate
(i.e., there is no double-marginalization), what are the
consequences for firm profits? Discuss why the firm might
have an incentive to implement this vertical pricing policy.
subsidiary located in a country where labor costs are lower than in
the home country. The finished product is then shipped back
to the U.S. parent for final packaging and distribution. The
parent compensates the subsidiary at a markup that is three times
the marginal cost of production. Assuming that the final
retail price to buyers is set at the optimal profit-maximizing rate
(i.e., there is no double-marginalization), what are the
consequences for firm profits? Discuss why the firm might
have an incentive to implement this vertical pricing policy.