Lecture 10: Bundling, Tying and/or Price Discrimination

Francis O’Toole

Department of Economics

Trinity College Dublin

December 2011

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

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)

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)

Tying: Leverage (Extension of Monopoly)

• Vertical Merger/Integration & Extensions of Monopoly Power?

Fixed Proportions Technology: No

Variable Proportions Technology: Yes? (P↑ in general)

Tying (Pricing Tactic) Example: Maximum Values to Theatres

Movie A Movie B

FoxTheatre

$100 $70

YorkTheatre

$60 $80

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?