Tying

Instructor: Tyler Cowen, George Mason University

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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Show 1 Answer (Answer provided by Ion Sterpan)
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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.

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