Tiein sales Tiein sales n What about tiein

Tie-in sales

Tie-in sales n What about tie-in sales? q q “like” bundling but proportions vary allows the monopolist to make supernormal profits on the tied good different users charged different effective prices depending upon usage facilitates price discrimination by making buyers reveal their demands

Tie-in sales 2 n n Suppose that a firm offers a specialized product – a camera – that uses highly specialized film cartridges Then it has effectively tied the sales of film cartridges to the purchase of the camera q n this is actually what has happened with computer printers and ink cartridges How should it price the camera and film? q q q suppose also that there are two types of consumer, highdemand low-demand, with one-thousand of each type high demand P = 16 – Qh; low demand P = 12 - Ql the company does not know which type is which

Tie-in sales 3 n Film is produced competitively at $2 per picture q n so film is priced at $2 per picture Suppose that the company leases its cameras q if priced so that all consumers lease then we can ignore production costs of the camera n n these are fixed at 2000 c Now consider the lease terms

Tie-in sales: an example 2 $ $16 Recall that the High-Demand Low-Demand film sells at $2 set a Consumers. So the firm can. Profit is $50 from each low per picture lease charge of-demand $50 and Demand: P = 16 - Qto each type of Demand: P =high-demand 12 - Q consumer. Total profit is consumer: it cannot $ $100, 000 Consumer surplus discriminate for high-demand for low-demand $12 $98 consumers is $98 consumers Low-demand is $50 High-demand consumers take 10 consumers take 14 pictures $50 $2 $2 Quantity 14 16 10 12 Quantity

Tie-in sales example 3 n n This is okay but there may be room for improvement Redesign the camera to tie the camera and the film q n n technological change that makes the camera work only with the firm’s film cartridge Suppose that the firm can produce film at a cost of $2 per picture Implement a tying strategy that makes it impossible to use the camera without this film

Tie-in sales: an example 2 High-Demand Aggregate profit. Low-Demand is now the camera at Lease Consumers $48, 000 + $56, 000 = Profit is $32 plus $32. Tying increases the Demand: $104, 000 $24 Demand: in film Pprofits = plus = 16 - Q P =$16 12 -in Q film Each high-demand firm’s profit $56 profits = $48 Consumer surplus consumer will lease $ $ the camera at $32 High-demand $12 consumers take 12 pictures $16 $32 $4 $2 for low-demand consumers Low-demand is $32 consumers take 8 pictures $32 $4 $2 $24 12 Quantity 16 $16 8 12 Quantity

Tie-in sales example 3 n Why does tying increase profits? q q high-demand consumers are offered a quantity discount under both the original and the tied lease arrangement but tying solves the identification and arbitrage problems n n film exploits monopoly in film supply high-demand consumers are revealed by their film purchases quantity discount is then used to increase profit arbitrage is not an issue: both types of consumers pay the same lease and the same unit price for film

Tie-in sales example 4 n n Can the firm do even better? Redesign the camera so that the film cartridge is integral q q n offer two types of integrated camera/film package: high capacity and low capacity what capacities? This is similar to second-degree price discrimination q q design two cameras with socially efficient capacities: 10 picture and 14 picture lease these as integrated packages

Tie-in sales: an example 2 High-Demand Consumers $ $16 12 Aggregate profit is now $50, 000 + $58, 000 = $108, 000 Low-Demand Consumers High-demand Demand: consumers P = 16 - Q get $40 Demand: P = 12 - Q Low-demand consumer surplus by So high-demand consumers will pay $ leasing consumers the 10 can be up to $70 to lease picurecharged camera $86 to lease the 10 -picure $12 the 14 -picture camera $40 $70 $2 $16 10 14 16 Quantity $2 $70 10 12 Quantity