BioChem has a patent on a chemical product, that is, used as a key input in producing farm and home agricultural fertilizer. Currently, BioChem produces the product and sells it to companies who manufacture the final products for the farm and home users. BioChem faces the following demand curves from the farm and home market segments:
Farm: P = 300 – 10Q
Home: P = 100 – 5Q
BioChem can produce the product at a constant marginal cost of $1.
1. Calculate the optimal prices that BioChem would like to charge in each market segment to maximize profits.
2. Discuss how vertical integration might be used to accomplish this pricing policy. Be sure to indicate the market into which BioChem should vertically integrate (assume they can integrate only into one). Explain why you chose this market.
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