Page 543 - Microeconomics, Fourth Edition

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12.5 TYING (TIE-IN SALES) 517
(by $99) when the customer buys only the monitor instead of the bundle. And the cus-
tomer is better off buying only the monitor, earning a consumer surplus of $1 (equal
to her willingness to pay for a monitor, $800, less the price of the monitor, $799). So
$799.
the firm should set P m
Similarly, customer 4 is only willing to pay $200 for a monitor, which is less than
the marginal cost of the monitor. It will therefore not be profitable for the firm to sell
a monitor to customer 4. Customer 4 will be happier purchasing only the computer
at $1,499 (earning $1 of consumer surplus) instead of the bundle at $1,700 (earning a
surplus of zero). The sale of the computer separately to customer 4 generates a profit
of $499 for the firm, in contrast to the $400 profit it would have earned if customer
4 had bought the bundle. The firm should set P $1,499.
c
Finally, customers 2 and 3 have negatively correlated demands. Further, the
amounts that they are willing to pay for each component exceed the marginal cost.
The firm would therefore like to sell them a bundle. It should offer a package with a
computer and a monitor at P $1,700.
b
In sum, with mixed bundling, customer 4 buys the computer separately, customer
1 takes the monitor alone, and customers 2 and 3 buy the bundle. Total profit is
$1,798. The profit is higher with mixed bundling than it would be with no bundling
($1,200) or selling only a bundle ($1,600).

APPLICA TION 12.7
Bundling Cable offer 100 channels for a fixed price rather than allow-

ing the customer to pick and choose her favorite
Cable television companies such as Comcast offer a channels, paying lower a la carte prices for each? The
variety of bundled packages of their products. For ex- answer lies in the economics of bundling.
ample, in Chicago a customer can subscribe to the Consider a simple example where there are two
basic Digital Starter package for about $25 per consumers, Kathryn and Mike, and two channels, the
month. This package provides only local television sta- Food Network and Travel Channel. Kathryn’s favorite
tions, children’s programs and weather stations. For channel is the Food Network, while Mike’s is the
$45, the Digital Preferred option adds over 100 televi- Travel Channel. Kathryn gets $30 worth of utility per
sion channels and 45 music-only channels. The Digital month from the Food Network, but only $5 from the
Preferred Plus package adds about 50 more channels, Travel Channel. Mike gets $30 utility from the Travel
including the premium channels HBO and Starz, for Channel but only $5 from the Food Network. The
$99. Finally, Digital Premier adds all premium chan- maximum revenue that Comcast could get for each
nels, a sports entertainment package, and 50 more channel (without bundling) would be to charge $30
channels, for $115. Any of these packages can also be for each channel and provide a single channel to
combined with Internet access, telephone service, or each customer. However, if they bundle the channels
both (all using the same cable into the home). In prac- together, they can charge $35 to both customers for
tice, Comcast actually offers choices with mixed bun- a package of both channels. As long as the marginal
dles, allowing customers to choose among not only cost of providing a second channel to a customer is
collections of cable channels, but also packages that lower than $5 (and Comcast’s marginal cost of adding
include digital voice service and high-speed Internet one channel for a customer is probably very low for
service. many channels), then bundling will be more prof-
A common complaint about the cable packages is itable for Comcast. For example, if the marginal cost
that most customers regularly view only a small frac- is zero in the example, then Comcast’s profit will in-
tion of the channels provided. Why would Comcast crease by $10 by bundling the stations as a package.