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Question
- Bundling with correlated values
- Merger with horizontally differentiated products
Solution
Q . 1 Bundling with correlated value
- Cost of product A and B for a monopolist is zero.
- Consumer valuation of product A = VA,
- Consumer valuation of product B = VB
- On buying both products together gross utility = VA+VB
- Assume VA and VB are negatively correlated as VB = = VA -1
(a) Price of product a and B in monopolistic market = PA and PB
Demand for products A and B will be =
Let the demand function for two products as follows-
QA = Intercept – b (slope) PA
QB= Intercept – b (slope) PB
(b ) in a monopolistic market optimal price is when, Marginal cost (MC) =Marginal revenue (MR)
Revenue R = Q*P
MR = MC, therefore optimal price equation will be as follows –
MR will have slope double of the demand curve.
MC = total cost = zero, as given in equation.
MR = 2Q
MR (A) = Intercept – 2b PA
MR( b ) = Intercept – 2b PB
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