Tie-in sales
Tie-in sales
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What about tie-in sales?
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“like” bundling but proportions vary
allows the monopolist to make supernormal profits on the
tied good
different users charged different effective prices depending
upon usage
facilitates price discrimination by making buyers reveal their
demands
Tie-in sales 2
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Suppose that a firm offers a specialized product – a
camera – that uses highly specialized film cartridges
Then it has effectively tied the sales of film
cartridges to the purchase of the camera
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this is actually what has happened with computer printers
and ink cartridges
How should it price the camera and film?
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suppose also that there are two types of consumer, highdemand and low-demand, with one-thousand of each type
high demand P = 16 – Qh; low demand P = 12 - Ql
the company does not know which type is which
Tie-in sales 3
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Film is produced competitively at $2 per picture
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so film is priced at $2 per picture
Suppose that the company leases its cameras
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if priced so that all consumers lease then we can ignore
production costs of the camera
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these are fixed at 2000c
Now consider the lease terms
Tie-in sales: an example 2
$
$16
Recall that the
High-Demand
Low-Demand
film sells at $2
a Consumers
ConsumersSo the firm can set
Profit
is $50 from each
per
picture
lease charge of $50
and
Demand: P = 16 - Qto each type of low-demand
Demand: P = 12
- Qhighdemand consumer. Total
consumer: it cannot
$
profit
is $100,000
Consumer surplus
Consumer
surplus
discriminate
for high-demand
for low-demand
$12
$98
consumers is
$98
consumers
Low-demand
is $50
High-demand
consumers take 10
consumers take 14
pictures
pictures
$50
$2
$2
14 16
Quantity
10 12
Quantity
Tie-in sales example 3
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This is okay but there may be room for improvement
Redesign the camera to tie the camera and the film
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technological change that makes the camera work only
with the firm’s film cartridge
Suppose that the firm can produce film at a cost of
$2 per picture
Implement a tying strategy that makes it impossible
to use the camera without this film
Tie-in sales: an example 2
High-Demand Aggregate profitLow-Demand
is
now the camera at
Lease
Consumers
Consumers
$48,000 + $56,000
= Profit is $32
Profit
is $32 plus
$32.
Tying increases
the Demand:
$104,000
$24Demand:
in film Pprofits
=
plus
= 16 - Q
P =$16
12 -in
Q film
Each high-demand
firm’s profit
$56
profits
= $48
Consumer
surplus
consumer will lease
$
$
the camera at $32
High-demand
$12
consumers take 12
pictures
$16
$32
$4
$2
for low-demand
consumers
Low-demand
is $32
consumers take 8
pictures
$32
$4
$2
$24
12
Quantity
16
$16
8
12
Quantity
Tie-in sales example 3
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Why does tying increase profits?
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high-demand consumers are offered a quantity discount
under both the original and the tied lease arrangement
but tying solves the identification and arbitrage problems
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film exploits its monopoly in film supply
high-demand consumers are revealed by their film purchases
quantity discount is then used to increase profit
arbitrage is not an issue: both types of consumers pay the
same lease and the same unit price for film
Tie-in sales example 4
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Can the firm do even better?
Redesign the camera so that the film cartridge is
integral
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offer two types of integrated camera/film package: high
capacity and low capacity
what capacities?
This is similar to second-degree price discrimination
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design two cameras with socially efficient capacities: 10
picture and 14 picture
lease these as integrated packages
Aggregate
profit is now
Tie-in sales: an example
2
$50,000 + $58,000 =
$108,000
Low-Demand
Consumers
High-Demand
Consumers
$
$16
12
High-demand
Demand:consumers
P = 16 - Q get $40
Demand: P = 12 - Q
Low-demand
consumerSo
surplus
high-demand
consumers will pay
by leasingconsumers
the 10- can$ be
up to $70 to lease
picurecharged
camera $86 to lease
the 10-picure
$12
the 14-picture
camera
camera
$40
$70
$2
$70
$16
10 14 16
Quantity
$2
10 12
Quantity