A monopolist produces two goods, good 1 and 2. consumer in this market have reservation price r1 and r2. Each consumer, then, can be represented by a point on the following graph. For example, consumer A would reservation price r1a and r2 for the two goods. This is depicted below with some points representing consumers B – F.
- (a) Suppose that the monopolist sells the two goods separately (i.e., follows the separate pricing strategy) at price p1 and p2 such that (r1a < p1 < r1c) and (r2c < p2 < r2b) . Illustrate these two prices on the reservation price graph(i.e., illustrate all the prices for good 1 that equal p1 and all the reservation prices for good 2 that equal p2). Illustrate which consumers buy which goods at these two prices.
- (b) Suppose that the monopolist sells the goods only as a bundle (or follows the pure bundling strategy) at price pB. Illustrate this price on the reservation price graph. (i.e., Illustrate all reservation prices for which r1 +r2 = PB). Illustrate which consumers buy which goods at this price.
- (c) Suppose the monopolist sells the goods under a mixed pricing strategy, so that products are available separately at prices p1 and p2 as well as in a bundle. Illustrate the three prices on a reservation price graph. Illustrate which consumers buy which goods at these price.
- (d) Using your graphs, illustrate why mixed bundling may be a desirable policy.
Page 4 of 4