2. Tying and bundling are two pricing schemes that are used by a multi-product monopoly to...

 

Transcribed Image Text:

2. Tying and bundling are two pricing schemes that are used by a multi-product monopoly to extract consumer surplus (price discriminate). a) What are the distinguishing features of the 2 pricing methods and the product characteristics best suited to each method. (6 points) b) Tying is generally practiced by a leasing monopoly. Dupplicators Inc.is a monopoly that leases/rents out 'smart copiers to businesses. It has 2 types of consumers: The high demand type (h) use 1500 boxes of paper and the low demand types (1) use 400 boxes of paper over the lifetime of the lease. The firm has no way of identifying consumers. It knows the demand curves for copies of each type: P = 1500 - Qh and P = 400-Q1. Assume MC of production is 0. 1500 100 980,000 400 1400 1500 Oh 300 400 Currently it leases out the machines + a servicing warranty at 80,000 for a 5-year period. Nh= 10 = number of high demand consumers and NL = 10 = number of low demand consumers. Qh Consumer surplus WTP 100 45,000 high demand consumer The firm now decides to change its pricing policy. It now issues the following conditional warranty: the servicing warranty is valid only for consumers who use the specialized paper sold by Dupplicators Inc at a price of $100 per box." At a price of $100 per box, for a Q1 = 1400 boxes = 980,000 = 45,000+ 140,000 = 185,000 low demand consumer Q1 = 300 boxes = 45,000 = 45,000 + 30,000 = 75,000 The maximum willingness to pay for the 'copier + warranty of the low type is now 45,000 for a 5-year period. Suppose the monopoly charges for the copier and paper separately. It charges the same lease rate of 45,000 for the copier to both types. (1) Explain precisely how this pricing policy is discriminatory. Given the policy of separate charges for the 'copier + warranty and for paper, the monopoly's total profit is now 2,600,000 with 10 consumers of each type. If the monopoly charges a price higher than 45,000 for the copier to the high demand types they will pretend to be the low types. The firm loses consumer surplus equal to 935,000 = 980,000 -45,000 per high type. The firm can do better by resorting to a single charge for the "copier + warranty and paper. (11) Compute the profit maximizing charge for "copier + warranty' and paper 2. Tying and bundling are two pricing schemes that are used by a multi-product monopoly to extract consumer surplus (price discriminate). a) What are the distinguishing features of the 2 pricing methods and the product characteristics best suited to each method. (6 points) b) Tying is generally practiced by a leasing monopoly. Dupplicators Inc.is a monopoly that leases/rents out 'smart copiers to businesses. It has 2 types of consumers: The high demand type (h) use 1500 boxes of paper and the low demand types (1) use 400 boxes of paper over the lifetime of the lease. The firm has no way of identifying consumers. It knows the demand curves for copies of each type: P = 1500 - Qh and P = 400-Q1. Assume MC of production is 0. 1500 100 980,000 400 1400 1500 Oh 300 400 Currently it leases out the machines + a servicing warranty at 80,000 for a 5-year period. Nh= 10 = number of high demand consumers and NL = 10 = number of low demand consumers. Qh Consumer surplus WTP 100 45,000 high demand consumer The firm now decides to change its pricing policy. It now issues the following conditional warranty: the servicing warranty is valid only for consumers who use the specialized paper sold by Dupplicators Inc at a price of $100 per box." At a price of $100 per box, for a Q1 = 1400 boxes = 980,000 = 45,000+ 140,000 = 185,000 low demand consumer Q1 = 300 boxes = 45,000 = 45,000 + 30,000 = 75,000 The maximum willingness to pay for the 'copier + warranty of the low type is now 45,000 for a 5-year period. Suppose the monopoly charges for the copier and paper separately. It charges the same lease rate of 45,000 for the copier to both types. (1) Explain precisely how this pricing policy is discriminatory. Given the policy of separate charges for the 'copier + warranty and for paper, the monopoly's total profit is now 2,600,000 with 10 consumers of each type. If the monopoly charges a price higher than 45,000 for the copier to the high demand types they will pretend to be the low types. The firm loses consumer surplus equal to 935,000 = 980,000 -45,000 per high type. The firm can do better by resorting to a single charge for the "copier + warranty and paper. (11) Compute the profit maximizing charge for "copier + warranty' and paper

Answer rating: 100% (QA)

a What are the distinguishing features of the 2 pricing methods and the product characteristics best ... View the full answer