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consider two independent firms, bu1 and bu2, which initially transact with each other through spot market transactions in a competitive market. in a typical year, bu1 incurs total costs of $2 million in producing goods that bu2 buys. bu2 would be willing to pay $7.5 million for these goods. the two businesses then decide to enter into an exclusive long-term contract. due to lower sales and marketing expenses, the total costs incurred by bu1 under the long-term contract fall to $1.5 million. the better product quality resulting from closer cooperation between the two businesses increases the amount bu2 is willing to pay to $9 million. what is the synergy created by the exclusive long-term contract?
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