Industrial organization and regulation Assignment 2
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# Industrial organization and regulation Assignment 2

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### Question

1. Bundling with correlated values
2. 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