2.

4 Multiproduct Monopoly
Matilde Machado
Slides available from:

http://www.eco.uc3m.es/OI-I-MEI/
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2.4 Multiproduct Monopoly

The firm is a monopoly in all markets where it operates

i=1,.n goods sold by the monopolist
p=(p1,.pn) prices charged for each good (uniform)
q=(q1,.qn) quantities sold of each good
qi=Di(p) = demand of good i Note that what is
important here is that demand for good i may
depend on the full price vector not only of pi
C(q1,qn)= Cost function, depends on the quantities
produced of all goods. Note, quantities here
may not be added because the monopolist is
producing different goods.

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2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

Examples:
Example 1: Launching Prices e.g.: imagnio by
Telefnica, CNN plus (initial prices very cheap),
ING 1st deposit; cable TV (some extra channels
at very low prices).
Example 2: Learning-by-doing
Example 3: New Product lines Kmart, gas stations
at certain supermarkets.
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2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

A special case (theory)

Suppose demands are independent i.e. they

only depend on their own price pi: qi=Di(pi).

Separability in the Cost function :

C(q1,.qn)=C1(q1)+Cn(qn)
In this case the monopolists maximization problem
may be written as n separate problems since the
n markets are independent.
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2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

A special case(cont.)
n

Max
= D ( p ) p C ( D ( p ))
{
}
p1 ,... pn

i =1

i =1

FOC:
= 0 for i = 1,..., n
pi
Di ( pi ) + Di( pi ) pi =Ci( Di ( pi )) Di( pi )

pi Ci( Di ( pi )) 1
=
i
pi
Lerner Index

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That is, the optimal pricing

strategy is to have a higher
margin in those markets in which
demand is less elastic. This is
the same result obtained in thirddegree price discrimination,
except that here the goods are
different while in third-degree
price discrimination we were
dealing with the same good

2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

More General case w.l.o.g. assume n=2

Max
= D (p , p )p + D (p , p )p
{
}
1

C ( D1 ( p1 , p2 ), D2 ( p1 , p2 ))

p1 , p2

FOC:

D ( p)
D ( p)

C () D1 C () D2
= 0 D1 ( p ) + 1
+
p1 + 2
p2 =
p1
p1
p1
D1 p1
D2 p1
D ( p)
D ( p)

C () D1 C () D2
= 0 D2 ( p ) + 2
+
p2 + 1
p1 =
p2
p2
p2
D1 p2
D2 p2

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2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

Assume additive costs
C (q1 , q2 ) = C1 (q1 ) + C2 (q2 )

Hence, the first FOC simplifies to:

D1 ( p ) +

D1 ( p )
D ( p )
D
D
p1 + 2
p2 = C1() 1 + C2 () 2
p1
p1
p1
p1

D1 ( p ) +

D D ( p )
D p
D1 ( p )
p1 1 + 2
p2 2 1 =
D1
D2 p1
p1
p1
= C1()

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D1 D1 p1
D D p

+ C2 () 2 2 1
p1 D1 p1
p1 D2 p1

2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

D1 ( p ) +

D1 ( p ) p1
D ( p) p1
p
D1 + 2
D2 2 =
p1 D1
p1 D2
p1
11

12

= C1()

D1 p1 D1
D p D
+ C2 () 2 1 2
p1 D1 p1
p1 D2 p1
11

12

The first FOC simplifies further to:

D1 ( p) 11 D1 12 D2

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p2
D
D
= C1()11 1 C2 ()12 2
p1
p1
p1

2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

D1 ( p ) 11 D1 12 D2

p2
D
D
= C1()11 1 C2 ()12 2
p1
p1
p1

Multiply both sides by p1/D1:

p1 p111 p2

D2
D
12 = C1()11 C2 ()12 2
D1
D1

( p1 C1() ) 11 = p1 + p2
( p1 C1() ) = p1

11

D2
D
12 C2 () 2 12
D1
D1

( p2 C2 () )

D2
1
12
11
D1

p1 C1() 1 ( p2 C2 () ) 12 D2
=

11
p1
p111 D1

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2.4. Multiproduct Monopoly

2.4 Multiproduct Monopoly

Case 1: Independent goods 12=0,

p1 C1() 1
=
p1
11

Case 2: Substitutes:
D2
D p
> 0 12 < 0 because 12 = 2 1 < 0
p1
p1 D2
N
+

p1 C1() 1 ( p2 C2 () ) 12 D2
1
=

>
p1
p111 D1
11
11

 

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2.4. Multiproduct Monopoly

The monopolists
margin is higher
than with
independent goods
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2.4 Multiproduct Monopoly

Case 2 (cont.): intuition:
p1 D2 gives incentives to the monopolist to
p2
When maximizing the joint profit, the monopolist
internalizes the effects that the sale of one
good has on the demand of the others. In the
case of 2 substitute goods this implies that
the monopolist should increase the prices of
both goods relative to a situation where he
treated the two goods separately.
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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

Case 3: Complements
p1 D2 (because D1 ) then we may guess
that the price of good 1 is lower than in the
case in which the monopolist would treat the
two goods independently. D2 < 0 > 0
p1

12

p1 C1() 1 ( p2 C2 () ) 12 D2
1
=

<
p1
p111 D1
11
11

 

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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

Case 3 (cont.): Complements
p1 D2 (and so does D1 ) therefore this gives
incentives to the monopolist to p2
Note: If there is strong complementarity between the two
goods the monopolist sells, it may be optimal for the
monopolist to sell one of the goods, say good 1,
below its marginal cost in order to increase the
demand for good 2.
Example: Price of the mobile phone with and without
contract with the company
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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

Example 1: Launching prices, inter-temporal
production and imperfect information:

The Monopoly produces a single good

The good is sold in 2 consecutive periods

The first periods demand is D1(p1) and costs

C1(q1)
For example,

Period 2: q2=D2(p2,p1) and C2(q2)

because when
there are more

p1
D1
consumers in
D2
period 1, there is
< 0 (complements)
D2 then
more information
p1

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2.4. Multiproduct Monopoly

about the product

in period 2.
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2.4 Multiproduct Monopoly

Example1: (cont.):
D1

Note: p = 0
2
The profit of the monopolist is:

Max { p D ( p ) C ( D ( p )) + p D ( p , p ) C ( D ( p , p ))}
1

p1 , p2

D1
= 0 the problem in the 2nd period is standard:
p2
p C2 (.) 1

FOC:
=0 2
= monopoly price in period 2
p2
2
p2
p C1(.) 1
D2
(lower launching prices)
since
<
< 0 (complements) 12 > 0 1
p1
1
p1
given that by definition

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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

Example 1: (cont.):
Conclusion: The monopolist sacrifices some short-term
profits for higher long-term profits. Ex: launching
prices of CNN+, cable TV.

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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

Example 2: Learning by Doing it is similar to a Multi-

product Monopolist with independent demands but

interdependent costs, i.e. costs decrease with quantity:
Monopolist produces a single good in two consecutive
periods
Demand in period t is qt=Dt(pt) (independent across
periods)
C1(q1) 1st period cost function
C2(q1,q2) second period cost function
C 2
C 2
< 0;
>0
q1
q 2

The higher the amount produced in the

1st period, the lower are the costs in the
second period
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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

C2

q1

q2
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2.4. Multiproduct Monopoly

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2.4 Multiproduct Monopoly

Example 2: (cont.): Monopolist maximizes:

Max { p D ( p ) C ( D ( p )) + p D ( p ) C ( D ( p ), D ( p ))}
1

p1 , p2

Again because period 2 does not have an effect in period 1's, the problem is standard:
C2

FOC:
= 0 D2 ( p2 ) + p2 D2 ( p2 ) =
D2 ( p2 ) MR2 = MC2
p2
D2

C
C2
= 0 D1 ( p1 ) + p1 D1( p1 ) = 1 D1( p1 ) +
D1( p1 )
p1
D1
D 

N1

p ()
C2
p1 + 1 q1 = MC1 +
MR1 < MC1
q1
D
N1

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2.4. Multiproduct Monopoly

q*1 is larger
than the
static
optimal
quantity.
Short-run
profits are
sacrificed.19

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