What is tying and how is this a form of price discrimination? An example of a tied good is an HP printer and the HP ink you need for that printer. The printer (the
What is tying and how is this a form of price discrimination? An example of a tied good is an HP printer and the HP ink you need for that printer. The printer (the base good) is often relatively cheap whereas the ink (the variable good) has a high markup, and eventually costs you far more than what you paid for the printer. Other examples include cell phones and data plans or the Kindle Fire and the accompanying books or music you purchase from Amazon. The base good is sold close to marginal cost, and the variable good is sold at above marginal cost. Why do companies tie their goods? Tied goods make it easy to price discriminate in a way that increases output and social welfare. Does tying increase or decrease social welfare? What is the difference between bundling and tying? We discuss these questions and others in this video.
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Does tying require that the base good is considerably more expensive than the variable good for it to be an effective form of price discrimination? I can see that in the circumstance that it is, such as printers, the cost for the producer is similar for a customer who wants a printer and lots of ink and a customer who wants a printer but only a little ink, but if the costs were different, it wouldn't really be price discrimination as the higher price would reflect the higher cost of production rather than the consumers greater willingness to pay, but this wasn't stated and I may be wrong so I thought I would ask.
Tying does not require that the base good be more expensive (expensive in the sense of "sold at a higher price than the variable good"). Sometimes telephone companies give the phone for free if you buy a larger plan. Nor do they need to be more costly to produce that the variable good. But you are right to say that if the costs of production for the base good differed, then we would not be talking about discrimination. We would simply talk about more of the same good given to someone rather than to someone else, or perhaps a different good altogether. I'm imagining I'm a guard or a bouncer at the entrance of a club. There is a base cost - you pay me to sit outside, and a variable cost, I charge you for every incident that occurs at the entrance. The base cost for me may differ if the patron who buys my service lives in North Dakota or in Hawaii. It's colder in North Dakota so I will charge you more simply because the cost of staying outside the entrance to the club is more costly.