A producer of photocopiers derives profits from two sources: the immediate profit it makes on each copier sold and the additional profit it gains from servicing its copiers and selling toner and other supplies. The firm estimates that its additional profit from service and supplies is about $300 over the life of each copier sold.
There is disagreement in management about the implication of this tie-in profit. One group argues that this extra profit (though significant for the firm’s bottom line) should have no effect on the firm’s optimal output and price. A second group argues that the firm should maximize total profit by lowering price to sell additional units (even though this reduces its profit margin at the point of sale). Which view (if either) is correct?