Course

Tying

Instructor: Tyler Cowen, George Mason University

Tying : A form of price discrimination in which a good is sold only on the coindition that the consumer also buy another good, or agrees not to buy that other good

Tying: A form of price discrimination in which a good is sold only on the coindition that the consumer also buy another good, or agrees not to buy that other good from a separate supplier. An example is printers and ink: using the printer's design, a printer's supplier can dictate who the supplier of the printer's ink must be. This is from the video “Tying” in the Principles of Microeconomics course.

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Transcript

Tying is a form of price discrimination where one good, called the base good, is tied to a second good, called the variable good. Let's consider some examples: printers and ink. Here, printers are the base good. You buy one printer - it's tied to a second good. You must buy the ink from the same company to be able to use it in that printer. The ink - you could buy a little bit or you could buy a lot. The more pictures you want to print, the more ink you have to buy. One printer plus the variable amount of the second good, the ink.


What's another example? Well, cell phones plus a service plan based on data. The cell phone is the base good. The service plan based on data, well, that comes in variable amounts. Some people use a little bit of data and other people consume a lot of data. Here's another example - the Kindle Fire plus services from Amazon. You buy the Kindle Fire and then you rent or purchase books or magazines or other services from Amazon. The Kindle Fire is the base good. The second good are the services, the music, and so on. Those can be bought in variable amounts. Some people buy a little bit, other people buy a lot.


What's the economics here? A clue to what is going on can be found by noticing that the base good is typically pretty cheap. That is - the printer, the cell phone, the Kindle Fire - while the tied good is generally priced at well above marginal cost. Think about HP printers. You can buy a color printer for $70, but one set of ink refills might cost you $50. Just a few ink refills and you've already spent more on the ink than on the printer itself. The ink, by the way, doesn't cost that much to produce. It's just that the markup on the ink is pretty high. Note also that to print on HP printers, you must use HP ink. HP, in fact, puts the printer head in the ink cartridge and they have a patent on the printer head. That means only HP can sell the printer head, which means in turn that only HP can sell HP ink cartridges.


Again, what's going on? Think about the good, which is being bought and sold, as the ability to print color photos. Some people have a high willingness to pay for this good - other people a lower willingness to pay. Ideally, what the monopolist wants to do is to charge everyone his or her willingness to pay – a different price for different persons to march them down the demand curve just as we saw with our discussion of perfect price discrimination. Remarkably, tying can help the producer approach this profit maximizing ideal. Suppose that the people with a high willingness to pay are the people who want to print a lot of color photos. That's a pretty reasonable assumption.


In this case, since price is greater than marginal cost for the ink, the people who have a high willingness to pay are being charged much more than the people with the lower willingness to pay. Indeed, the price is different depending on exactly how many photos you print. Tying is a pretty flexible way of charging different prices to different people.

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