Final answer:
Under vertical integration of a manufacturer and retailer, wholesale and retail prices are essentially one and the same for internal accounting, making option C, which states that wholesale and retail prices will be equal, the correct answer.
Step-by-step explanation:
When examining a single manufacturer selling to a single retailer, especially in a vertical integration scenario, it is important to understand how wholesale and retail prices as well as output are affected. Under vertical integration, the manufacturer and retailer operate as a single unit, thus eliminating the typical market exchange between independent producers and retailers. This synergy typically leads to efficiencies and cost savings.
Vertical integration affects pricing by essentially removing the traditional wholesale market. Since the manufacturer and retailer are combined, there is no traditional wholesale price that is distinct from the retail price. The internally 'transferred' products do not incur typical market transaction costs, meaning that what might be considered a 'wholesale' price within the integrated entity is simply an accounting figure rather than a market-determined price.
Therefore, option C, which states that wholesale and retail prices will be equal due to vertical integration, is the correct answer. This is because the transfer price (the internal price for transactions within the vertically integrated entity) is not set to earn a profit but rather for accounting purposes. The retail price is still subject to market conditions and consumer demand, aiming to maximize profit for the entire entity.
Comparing vertically integrated firms with non-integrated scenarios, an independent manufacturer would set the wholesale price (P) equal to the marginal cost (MC), and in a monopolistic or oligopolistic market, prices would vary depending on whether firms are colluding or competing intensely. Collusive firms artificially restrict quantity to elevate prices and profits, whereas rigorous competition tends to reduce prices and profits as firms undercut each other. Vertical integration eliminates such strategic interplay between independent firms by aligning the interests of the manufacturing and retailing operations.