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Lecture 10: Bundling, Tying and/or Price Discrimination
Francis O’Toole
Department of Economics
Trinity College Dublin
December 2011
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Vertical Restraints: Spectrum
Unconditional Sale Independent Ownership Vertical Integration(Linear Pricing) (Restraints on Pricing/Distribution) Resale Price Maintenance/Vertical Price Fixing Exclusive Distribution/Territory Exclusive Purchasing/Dealing
Tying, Bundling and/or Price Discrimination
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Illustrative Example: Third-Degree Price Discrimination
• Central Issue: Effect on Welfare
• Indicators
1. Change in Total Output?
2. Allocation of Output Among Different Consumers?
• Importance of Correct Counterfactual (e.g. doctor and island story)
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Tying and/or Bundling
• Definition• Motivations? (Careful)• Avoiding Price Controls• Protecting The Tying Product’s Reputation (i.e.
quality control)• Extension of Monopoly Power (Leverage)• Foreclosure (Producers of the Tied Product)• Pricing Tactic (Price Discrimination)
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Tying: Leverage (Extension of Monopoly)
• Vertical Merger/Integration & Extensions of Monopoly Power?
Fixed Proportions Technology: No
Variable Proportions Technology: Yes? (P↑ in general)
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Tying (Pricing Tactic) Example: Maximum Values to Theatres
Movie A Movie B
FoxTheatre
$100 $70
YorkTheatre
$60 $80
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Tying (Pricing Tactic): ExamplePhotocopiers and Paper
• Central Issue: Effect on Welfare
• Importance of Correct Counterfactual
No Discrimination v. Discrimination
• Welfare Indicators
1. Change in Total Output?
2. Allocation of Output Among Different Consumers?