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Thread: Competition: Price-bundling, tying...

  1. #1

    Smile Competition: Price-bundling, tying...

    Hello everyone,
    I would be very happy if anyone could help me with this question:

    Let's assume an enterprise which sells two products A and B independently from one another. The marginal cost of production of each product is constant and 10. The enterprise has four types of potential costumers characterized by different reservation prices for each product.
    Product A Product B
    1. 100......30
    2. 80........80
    3. 60........60
    4. 30........100

    1.If the firm decides to sell separately which prices does it have to set for each product? What are the profits and which categories of consumers buy the products?

    2. Let's assume now that the firm uses a mixed strategy of tying. How does this strategy look like? Which price does the firm set for the package of A and B and for the products in separate?

    3. Which are the profits and which categories of consumers buy the two products? Which is the best strategy from the point of view of the firm and which is the best strategy from the point of view of the consumers?

    I would be very happy if someone can help me.

    Have a nice weekend!

  2. #2
    Elite Member
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    Many would be delighted to help. Forum Guidelines suggest that you get to show your work, first.
    "Unique Answers Don't Care How You Find Them." - Many may have said it, but I hear it most from me.

  3. #3
    Quote Originally Posted by tkhunny View Post
    Many would be delighted to help. Forum Guidelines suggest that you get to show your work, first.
    I do know the guidelines. However I have never solved such an exercise and really don't know how to tackle it. So I would be happy to get tips for the general approach or an easy example from the community.

  4. #4
    Elite Member
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    Quote Originally Posted by Leonuss View Post
    2. Let's assume now that the firm uses a mixed strategy of tying.
    "Tying" means what?
    wrapping with string?
    score is equal?
    get drunk (tie one on)?
    I'm just an imagination of your figment !

  5. #5
    Senior Member
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    Quote Originally Posted by Denis View Post
    "Tying" means what?
    wrapping with string?
    score is equal?
    get drunk (tie one on)?
    "Tying" is a term of art in US anti-trust law. It involves refusing to sell one good to a customer unless that same customer simultaneously buys some other good. I don't remember whether it is a crime per se or a crime unless justified by a rule of reason. It is sometimes distinguished from bundling, which is selling multiple goods or services at a combined price that is less than the sum of the prices of the items sold separately.

  6. #6
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    Thanks Jeff. I still understand exactly "nothing"
    I'm just an imagination of your figment !

  7. #7
    Quote Originally Posted by Denis View Post
    Thanks Jeff. I still understand exactly "nothing"
    It basically means that both products are only sold together. The aim hereby is to reach more costumers depending on their willingness to pay.

  8. #8

    Solution proposal

    So I have some solutions. I would be happy if you can check them and correct me. I did it pretty intuitively so if you have an idea for a better way to write the solution for the professor in the end, that would be very helpful.

    1. First I found that the willingness to pay is always higher than the marginal cost, so it is always profitable for the firm to supply all consumers.
    Then I used the different willingness to pay to find the price. By trial and error
    60-3=180 and profit=180-30=150 was the largest.
    So pA=pB=60 is the optimal price for both products. Categories 1,2,3 buy product 1, categories 2,3,4 buy product 2.

    2. The monopoly sells a bundle of the both goods and the two goods separately also.
    Category 1 and 4 have a total big reservation price of 130. So 130 > 2p=120. In order to sell products to all costumers one could set a bundle price of pAB=130.

    3. profit(pA,pB,pAB)=pA*qA-c*qA+pB*qB-c*qB+pAB*qAB-2c*qAB= 60*2-10*2+60*2-10*2+130*2-10*4
    = 100+100+220=440
    The mixed strategy is better for everyone as the firm gets most profits and the consumers all get their products.

  9. #9
    Senior Member
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    I think you left something out, or I am too dim to find it. You have two products, A and B. With respect to each, quantity demanded from the price setting firm differs at different prices; in other words demand has some degree of elasticity. Where does it tell me the relationship between quantity demanded and price? Without that, I do not see how anything can be determined. Furthermore, I do not see how changes in the price of A affect demand for B and vice-versa. Are we supposed to assume that, for the range of prices contemplated, demand for A is independent of the price of B and demand for B is independent of the price of A?

    Furthermore, you have not specified if there are constraints on the tying or bundling offers? In fact, I cannot tell whether we are talking about tying or bundling or both.

    Without that kind of information, I cannot make sense of your explanation. One thing I did notice about your explanation is that there is no estimate of consumers' surplus. I recognize that the concept is debatable, but you seem to have assumed but not disclosed some measure of consumer welfare.
    Last edited by JeffM; 11-06-2017 at 11:07 AM.

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