Tie-in sales

Tie-in sales „

What about tie-in sales? ‰ ‰



“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 „


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 ‰


this is actually what has happened with computer printers and ink cartridges

How should it price the camera and film? ‰

‰ ‰

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 „

Film is produced competitively at $2 per picture ‰


so film is priced at $2 per picture

Suppose that the company leases its cameras ‰

if priced so that all consumers lease then we can ignore production costs of the camera „


these are fixed at 2000c

Now consider the lease terms

Tie-in sales: an example 2

$ $16

Recall Recallthat thatthe the High-Demand Low-Demand film sells at film at$2 $2can So the aaConsumers Sosells thefirm firm canset set Consumers Profit Profitisis$50 $50from fromeach each per picture per picture lease leasecharge chargeof of$50 $50 low-demand and highlow-demand and highDemand: P = 16 Q Demand: P = 12 Q Demand: P = 12 Q Demand: P = 16 - Q to each type of to each type of demand demandconsumer. consumer. Total Total consumer: it cannot consumer: it$cannotprofit isis$100,000 profit $100,000 Consumer surplus Consumer surplus Consumer surplus Consumer surplus discriminate discriminate for for forhigh-demand high-demand forlow-demand low-demand $12


consumers $98 consumers isis$50 Low-demand consumersis is $98 consumers $50 High-demand Low-demand High-demand consumers consumers consumerstake take10 10 consumerstake take14 14 pictures pictures pictures pictures $50


$2 14 16 Quantity

10 12 Quantity

Tie-in sales example 3 „ „

This is okay but there may be room for improvement Redesign the camera to tie the camera and the film ‰



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 now Lease camera at Aggregate profitis is nowthe Lease the camera at Consumers Consumers $48,000 ++$56,000 == Profit Profit $32. isis$32 $48,000 $56,000 Profitisis$32 $32plus plus Tying $32. Profit $32 increasesthe the Tying increases $104,000 $24 in =Q= firm’s profit plus Pprofits ==16 --Q Demand: PP=$16 12 -in QQfilm $104,000 $24Demand: infilm film profits plus $16 in film Demand: = 12 Demand: P 16 Each high-demand firm’s profit Each high-demand $56 profits ==$48 Consumer surplus $56 profits $48 consumer will lease Consumer surplus $ consumer will lease $ the thecamera cameraatat$32 $32 High-demand $12 High-demand consumers consumerstake take12 12 pictures pictures


$32 $4 $2

for forlow-demand low-demand consumers isis$32 Low-demand consumers $32 Low-demand consumers consumerstake take88 pictures pictures

$32 $4 $2

$24 12 Quantity


$16 8 12 Quantity

Tie-in sales example 3 „

Why does tying increase profits? ‰


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 „ „ „ „

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 „ „

Can the firm do even better? Redesign the camera so that the film cartridge is integral ‰



offer two types of integrated camera/film package: high capacity and low capacity what capacities?

This is similar to second-degree price discrimination ‰


design two cameras with socially efficient capacities: 10 picture and 14 picture lease these as integrated packages

Aggregate profit Aggregate profitisisnow now Tie-in sales: an example 2 $50,000 + $58,000 = $50,000 + $58,000 = $108,000 Low-Demand $108,000 Consumers

High-Demand Consumers

$ $16 12

High-demand High-demand Demand: P = Demand: PP==12 Demand:Low-demand 12--QQ Demand:consumers P =16 16--QQget consumers get$40 $40 Low-demand consumer surplus consumerSo surplus high-demand consumers So high-demand consumerswill willpay pay $ by leasing the 10by leasing the 10- can consumers up consumers canbe be uptoto$70 $70totolease lease picure camera picurecharged camera$86 lease the charged $86toto lease the10-picure 10-picure $12 the camera the14-picture 14-picture camera camera camera $40

$70 $2

$70 $16 10 14 16 Quantity

$2 10 12 Quantity