Practice Class 4 Bundling and Tying

INDUSTRIAL ORGANIZATION Economics Department, Universidad Carlos III de Madrid

1.

Key Questions
1. Give examples of types of bundling and tying that are applied at supermarkets, for instance Mercadona (Spanish leader, representing 20 % of the supermarketsmarket). Can these practices yield an increase in turnover? 2. Oz Shy, in chapter 14 of his book Industrial Organization: theory and applications (1996), states the following: when a monopolist performs bundling, he can extract all the consumer s surplus, so that his prots will be equal to those which he could obtain by performing rst-degree price discrimination. Do you agree with this statement? Why? 3. Give examples of pure tying. Can you easily buy a computer with no operating system, and then install one of your choice that works well? What about a printer without toner? [Interesting fact: why does the rst toner last so little? Give an economic interpretation] 4. In order to perform pure tying, can both products be sold by dierent monopolists or oligopolists? Give examples from the real world. In some of these examples, include three or more dierent products, by the same and by dierent suppliers. 5. Under which conditions does tying not give any additional prot with respect to no tying? 6. If suppliers perform bundling, do their prots change if their customers do arbitrage? What about the case in which suppliers perform tying and their customers 1

Organizacin Industrial UC3M do arbitrage? Give examples from the real world. 7. What does it mean to apply mixed tying ?

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Problems
1. The following table contains valuations for goods X and Y . Suppose that the marginal cost of producing X is 1, and this is equal to the marginal cost of producing Y. Product X Consumer type 1 Consumer type 2 Consumer type 3 4 3 0 Product Y 3 3 4

a ) Find the optimal monopoly price in case of pure tying. b ) Find the optimal monopoly price in case of mixed tying. Which among strategies a) and b) gives higher prots to the monopolist? Product X Consumer 1 Consumer 2 Consumer 3 4 3 0 Product Y 3 3 4 Product X+Y 7 6 4

2. A rm is the monopolist in a market formed by 100 consumers; each of these consumers has inverse demand function equal to P = 15 5Q. Marginal production cost is constant and equal to 5. a ) Compute the price and the prots under a single price. b ) Can the monopolist increase his prots by applying bundling? If yes, what is the optimal size of the bundle?

Organizacin Industrial UC3M

3. HP sells two products: printers and toner cartridges. There are three consumers in the market. Consumer 1 needs to print very often, so that he values highly both goods, while Consumer 2 needs to print less frequently so that he values less both goods, and Consumer 3 already has a printer, so that he only values toner cartridges, although he values them highly because he already spent money on the printer. Next table contains valuations by all consumers: Printer Consumer 1 Consumer 2 Consumer 3 8 6 0 Toner 4 3 8

For simplicity, the marginal cost of producing both goods is equal to zero. Compute optimal prices and prots of HP, in the following situations: a ) HP sells both goods separately. b ) HP applies pure tying and only sells the goods jointly. What would HP prefer: to sell both goods separately as in a), or to sell them jointly as in b)? c ) HP can also apply mixed tying and sell the goods both separately and jointly. What would be the nal decision of HP? Selling the goods separately, applying pure tying or applying mixed tying? d ) Suppose that only consumer 1 and consumer 2 are in the market. What would be the benet of pure tying with respect to selling the two goods separately?