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Lecture 10: Bundling, Tying and/or Price Discrimination

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

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Lecture 10: Bundling, Tying and/or Price Discrimination

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  1. Lecture 10: Bundling, Tying and/or Price Discrimination Francis O’Toole Department of Economics Trinity College Dublin December 2011

  2. 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

  3. 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)

  4. 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)

  5. Tying: Leverage (Extension of Monopoly) • Vertical Merger/Integration & Extensions of Monopoly Power? Fixed Proportions Technology: No Variable Proportions Technology: Yes? (P↑ in general)

  6. Tying (Pricing Tactic) Example: Maximum Values to Theatres

  7. 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?

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