Monopoly Pricing & Price discrimination. Refs: SHY chaps 5,13,14.

Durable goods monopoly and the Coase conjecture in R.H. Coase, “Durability and Monopoly”,
Journal of Law and Economics, 15, 1 (April 1972), pp. 143-149. (PDF of paper in Moodle).

Coase illustrated that monopoly power came with perishability of the good such that the
monopoly in one period did not face competition from his own sales in future. In case of
durable (non-perishable) goods on the other hand, future sales and expectation of future prices
would drive prices down if consumers were forward looking and patient.

The intuitive argument is as follows. Let the monopoly own all land in the world with marginal
cost = c, and let there be an infinite number of time periods with no discounting of future
returns. The reason for the monopoly earning supranormal profit is restriction of sales/output
which drives the price up. Let the monopoly have maximized period 1 profit. In the next period,
the monopoly is left with land again and would be willing to lower the price in order to sell the
remaining units. And so on… . In some period in future therefore, the monopoly would be
willing to lower price to the competitive price/its marginal cost to sell all remaining units. If
consumers are patient (do not discount the future) and are forward looking such that they can
foresee this, then no consumer would want to buy land at any price higher than the
competitive price, and there would be no demand at any higher price. That is, the monopoly
would only sell (in any period, including the first) at price equal to the competitive price.

Fig. I from Coase’s paper. (whiteboard)

How can the landowner/monopoly avoid this problem? He could either commit to not lowering
price in subsequent periods, or could lease/rent rather than sell.

A simplified model illustrating the renting/selling contrast in Coase conjecture in a two-period

world (SHY 5.5):

A monopoly produces a product that lasts for two periods, t=1 , 2. Consumers live for the same
two periods. The per period market (inverse) demand curve for the services derived from the
good is given by : p=100−Q . Assume MC=0 .

First, consider the case if the good were not durable but was perishable each period. The
monopoly would like to maximize profit each period.

Find its per period profit maximizing price, and its per period profit at this price.
max π=Q ( 100−Q ) =>FOC: 100−2Q=0 => Qm =50; p m=50 ;
Q

π =2500 each period.

m

But if the good is durable, then consumers who purchase the good in period 1 can continue to
use the good in period 2 as well, having paid the price just once.

That is, in period 1, Q=q1 because period 2 hasn’t occurred yet; but in period 2, Q=q1 +q 2.

Therefore, the second period market demand must subtract the quantity sold in period 1. And
therefore, the price in second period must be lower (also because those who purchase in
second period will use the good only for one period, so they must be charged less).

Second period market demand curve therefore is p2=100−q 1−q 2.

Fig. 5.4 from Shy.

The monopoly’s profit maximization is done using backward induction, to find the subgame
perfect equilibrium (SPE).

In period 2, the monopoly

max π 2=¿ q2 ( 100−q 1−q 2 ) ¿

q2

q1
=> 100−q1=2q 2 => q 2=50− ;
2

q1 q1
p2=100−q 1−50+ =50− ;
2 2
 ( )
2
q1
π 2= 50− .
2

Given that the monopoly sells q 1 in period 1, the buyers with the highest reservation values buy
the good. That is, the reservation value of the marginal buyer (Explain this) in period 1 must be
100−q1. Also this marginal buyer must be indifferent between buying in period 1 (when she
earns utility from the good for 2 periods) and buying in period 2 (in which case she earns only
one period utility); therefore

2 ( 100−q1 )− p 1=100−q1− p2.

q1 q
Using p2=50− ; gives 2 ( 100−q1 )− p 1=100−q1−50+ 1
2 2

3
 150− q1= p 1
2

Rolling back the entire game, the monopoly in period 1 chooses q 1 to

)( )
2

q 1
( 3
max [π 1 + π 2 ]=q1 150− q1 + 50−
2
q1
2

q1
 150−3 q1−50+ =0
2
100∗2
 q 1= =40
5
3
 p1=150− ∗40=90
2
 π 1 +π 2=40∗90+30 2=3600+900=4500 .

Monopoly’s profit is less than what it would be if the good were perishable each period. The
monopoly can however, achieve the same outcome as that in case of perishable good, by
leasing/renting out the good for one period each at rental/lease price of 50 giving out 50 units
each period, thus charging monopoly price for each period’s market demand.

What is the intuition behind why renting out the good solves the monopoly’s dilemma?

(Aside: https://www.nytimes.com/2021/09/10/technology/epic-apple-app-
developers.html : Recent news about pricing/market power of appstore)
Cartel and Multi-plant monopoly: SHY 5.4

A cartel is an agglomeration of sellers with the purpose of fixing market quantities or prices. A
multi-plant monopoly on the other hand is a single owner firm with multiple units of
production.

Examples of cartels are OPEC, DeBeers (throughout the 20th century), etc.

Federation of Quebec Maple syrup producers.

The decision made by a cartel and that made by a multi-plant monopoly is very similar, and can
be understood as follows.

Consider market demand p=a−bQ; N producers in the cartel such that each has the same
2
cost function T C i ( qi ) =F+ c q i ; a , b , F , c >0 .

The objective of the cartel should be to maximize sum of profits of all producers.

[ ]
N N N N
max ∑ π i (qi )= a−b ∑ qi ∑ q i−N F−c ∑ q2i
{ q1 ,q2 , …, qN } i=1 i=1 i=1 i =1

N N
 FO C i : a−b ∑ qi−b ∑ qi −2 c q i=0 ; ∀ i
i=1 i=1

N
 a−2 b ∑ q i=2 c q i ; ∀ i
i=1

 MR=M C i ; ∀ i .
In our example, each producer has the same cost function. Therefore each will have the same
allocation of q i. Therefore, we can use q 1=q 2=q 3=… …=q N =q.

 a−2 bNq=2 cq
a
 q= 2 ( bN +c ) .

Cartel/Multiplant Monopoly diagram (whiteboard).

Unlike our example, in this diagram the plants’ cost curves are different; this is done for better
illustration of how MC curves are aggregated horizontally (on the Q-axis).
 aN
 Q=Nq= 2 ( bN + c ) ;

abN 2 abN +2 ac−abN a ( bN + 2 c )

 p=a− = = .
2 ( bN +c ) 2 ( bN + c ) 2(bN + c)

Locate total Q and this price on above diagram.

( )
2 2 2
2 a ( bN +2 c ) a a ( bN +c )
 π i=π= p q−F−c q = 2
−F−c 2
= 2
−F .
4 ( bN +c ) 4 ( bN + c ) 4 ( bN + c )

Comparative statics:

- Individual quantity decreases as N increases

∂ p [ 2 ( Nb+c ) ab−a ( bN +2 c ) 2 b ] −abc

- = = <0 .
∂N 4 ( bN + c )
2
2 ( bN +c )
2

Therefore, market price also decreases as N increases.

2 2 2 2
∂ π 4 ( bN + c ) a b−a ( bN +c ) 8 b(bN +c) −4 a b( bN +c) −a2 b
- = = = < 0.
∂N 16 ( bN + c )
4
16 ( bN +c )
4
4 ( bN +c )
3

Therefore individual profit also decreases as N increases.

Cartels are not welcoming of larger markets (more sellers), and try to restrict the number. For
example, professional associations try to restrict entry of new candidates by imposing
restrictions on professional qualifications, etc. However a cartel would rather have a firm be
part of it than compete with it.

How does a multi-plant monopoly differ from above?

The optimal decision of how much to produce in each plant remains unchanged as above,
because the same motive of maximizing total profit drives this as well.

However, unlike a cartel, a multi-plant monopoly can choose how many plants to operate. That
is, the choice of N is open to a multi-plant monopoly. It does so, trying to minimize the average
cost per plant, i.e. run each plant at its efficient level.

F
min AT C i ( qi )= +c q i
qi
 −F
 2
+c=0
qi

(c)
1
F
 q i= 2

Because, we said that each operating plant would produce the same q (as their cost functions
are identical), we can equate the optimal q derived from both decisions above as following:

( )
1
F 2 a
=
c 2 ( bN + c )

( )
1
a c
 bN + c= 2
2 F

 N= ( ) − .
1
a c c 2
2b F b

Example: Consider a market with the inverse demand curve given by, p=100−2 Q. A
monopoly sells to the entire market, and has N identical manufacturing units/plants, each with
2
cost function, C i ( qi )=50+ 2 qi .

(a) What quantity would the monopoly produce in each plant, if it were maximizing total
profit?
(b) Using the answer found in (a) above, determine the number of plants the monopoly would
use. And calculate the monopoly’s optimal profit.
Ans.
(a) MR=M C i , ∀ i => 100−4 ∑ qi =4 qi => 100−4 Nq=4 q => q=
25
( i ) N +1
.
50 −50
(b) min AT C i=¿ +2 q i ¿ => 2 + 2=0 => 2 q2i =50 => q i=5.
qi qi
25
 =5 => 5 N=20 => N=4 .
N +1

25
 q= =5; Q=Nq=20; p=100−2 Q=60 ;
5
π i= pq−Ci ( q i )=60∗5−50−2∗25=300−100=200 .
∑ π i =N π i=4∗200=800
i

Price Discrimination
If there are different groups of buyers with different characteristics, such that they have
different willingnesses to pay (WTPs) for the same good, a monopoly may earn a larger profit by
charging them different prices than by having a uniform price.

Necessary conditions:

- Market power
- Identification of different groups of buyers; classification
- Elimination or at least minimization of arbitrage by buyers

The idea in price discrimination is to try to sell to all kinds of buyers without having to
compromise with the same low price for all because one or more kinds/types of buyers has/ve
a low willingness to pay.

Examples of price discrimination:

1. Long lines for discounted tickets.

2. Travel passes versus tickets: Quantity discounts.
3. Store loyalty points/cards: again a form of quantity discount or loyalty discount. Flying
miles.
4. Student rates of software, books, etc.
5. Senior citizen discounts.
6. Coupons redemption.
7. Happy hours/ off season discounts.
8. Airline tickets in different classes.
9. Journals/books/news media subscription: institutional price versus individual price.
10. Online tailored/customized prices

Degrees of price discrimination: assuming arbitrage is controlled/minimized and seller is a

monopoly

- First degree price discrimination: each buyer is charged price equal to her WTP.
- Second degree: offering a menu of contracts/deals such that consumers by choosing
deals, separate themselves into groups with different WTPs.
Eg. Quantity discounts, the above example of tickets versus passes, Cellphone contracts,
Airline classes.
- Third degree: classification or separation of different groups of consumers is tangible,
geographically or otherwise.
Eg. Student discounts, senior citizen discounts, Editions of books meant for sale only in
specified countries, institutional versus individual prices, Different prices of
pharmaceutical drugs in different countries.
A very simple example of how price discrimination may lead to higher profits:

Suppose for a CD of a particular software there are 500 consumers (possibly students) who
have a WTP equal to 300 for a cd each. At the same time there are 300 professionals in the
market whose WTP for a unit each of the cd is 500. The students can verifiably be separated if
the seller so wants.

Suppose also that the seller of the cd is a monopoly such that buyers can only buy from this one
seller. Let the seller’s marginal cost for each unit of the cd be 150.

If the seller were to charge a uniform or single price for the whole market, what is the profit
maximizing price and what is the profit at this price?

Notice in this case that the seller will never want to charge a price smaller than 300. Also if the
seller sets a price larger than 300 then the only price that makes sense is 500. Therefore the
seller will either charge a price of 300 or a price of 500.

In case the price is 300, all the students and the professionals will buy a cd each and the
monopoly’s profit is equal to
500∗( 300−150 )+ 300∗( 300−150 )=800∗( 300−150 )=800∗150=120,000.

In case the price is 500, only the professionals will buy a cd each and the monopoly’s profit is
equal to 300∗( 500−150 )=300∗350=105,000 .

Therefore if the seller were to charge a single price to the whole market, the profit maximizing
price is 300 and the profit at this price is 120,000.

Notice however that if the seller can separate these two types of buyers somehow, then it can
charge them different prices. Which means the seller can charge the professionals a higher
price without losing out the student segment of the market because it need not charge the
students the same price. At the same time the seller can charge the students a lower price
without charging the professionals the same price which would have left money in their pockets.
That is, by separating these two groups of consumers and charging them two different prices, it
can charge each group its WTP and thereby squeeze out all surplus away from them.

If it charges all students a price of 300, it makes 500 sales to students and earns profit
500∗( 300−150 )=75,000. At the same time it charges 500 to all professionals and makes profit
300∗( 500−150 )=105,000. Therefore by charging them different prices, the seller’s total profit
is equal to 180,000 which is much higher than the profit it could make with any single price for
the whole market.

Which degree(s) of price discrimination is this an example of?

What is the intuition of why price discrimination might increase profit?
Third degree price discrimination or Multi-market monopoly:

Fig. 5.3 from Shy (whiteboard)

Horizontal sum (aggregate) of both market demand curves and MR curves.

Notice in the diagram here each market is possibly given a different price.

q1
Let demand in market 1 be p1=50− . And that in market 2 be p2=100−2 q2. Let monopoly’s
2
cost function be C ( Q ) =Q2 ; and because Q=q1 +q 2 , the cost function can be written as
2
C ( q1 +q 2 )=( q 1+ q2 ) .

Monopoly will choose quantities (which in turn determine prices) in each market such that total
profit is maximized.

max π ( q 1 , q 2) =¿ 50−
q1 , q 2
( q1
2 ) 2
q 1+ ( 100−2 q 2 ) q2−( q1 +q 2) ¿

q1 q1
 50− − =2 ( q1 +q 2 ) ; and 100−2 q2−2 q 2=2(q 1+ q2 )
2 2

 M R 1 ( q 1 )=MC ( q 1+ q2 ) =M R2 ( q 2 )

 M R i=MC , ∀ i ; here i denotes different markets/demand segments.

A multi-market monopoly therefore equates the marginal cost of producing the total output to
the marginal revenue in each market. The idea is that if one market gives the monopoly a
higher MR , then it improves profit to shift sales to that market from the other one. Until both
markets give the same MR , which is equal to the MC of producing the marginal unit. This is the
same as using the intersection of the aggregate (horizontal sum) MR curve and the MC curve
to determine total production, and to determine each market’s sales where it horizontally
meets the individual MR curves.

But different quantities in the two markets implies different prices, i.e. price discrimination. On
the diagram, this is identical to tracing the quantities chosen back to the individual demand
curves to determine prices in the two markets.

Solving above FOCs, we have:

50−q1=2q 1+ 2 q2=100−4 q2

 50−3 q1=2 q 2; and 2 q1 =100−6 q 2

6 ( 50−3 q1 )
 2 q1 =100−
2
3
 q 1=50− ( 50−3 q 1 )
2
7
 25= q 1
2
150
50 50−
q
 1 = ; 50−3 q 1 7 350−150 100 .
7 q 2= = = =
2 2 14 7

25 350−25 325 200 700−200 500

Therefore p1=50− = = ; p2=100− = = .
7 7 7 7 7 7

( )
2
325 50 500 100 50+100 16250+ 50000−22500
And π ( q1 , q2 ) = + − = =892.85 .
7 7 7 7 7 49

To examine the level of market power the monopoly has in each of the two markets, when
price discriminating, notice that because the monopoly sets M R 1=M R 2=MC , we have at the
optimum,

( ) (
p1 1−
1
ϵ1
1
)
= p 2 1− =MC
ϵ2

From the first equality, it is clear that a price discriminating monopoly sets a higher price in the
market where the elasticity of demand is lower. This makes intuitive sense, as a more elastic
market implies a larger proportionate response to price, and therefore a smaller quantity sold if
the price is high.

First degree price discrimination:

Each consumer is charged a price equal to her WTP; perfect price discrimination. Notice that
this implies that the monopoly need not restrict output in the market. There is therefore no
deadweight loss. At the same time, CS=0. And the entire social welfare is actually PS.

Diagram (whiteboard).
Examples or approximations: Negotiated deals on second-hand cars, haggling in traditional
bazaars, auctions, etc., customized online pricing based on user data.

Second-degree price discrimination:

Inter-temporal price discrimination, quality based price discrimination, quantity discounts, and
similar other forms in which types of buyers are separated by the different deals/sale
packages/contracts chosen by them from amongst the menu of deals/contracts offered by the
monopoly. The basic idea here is that the seller/monopoly cannot distinguish between the
different buyer types, and must therefore offer them such options from which different buyer
types reveal themselves by choosing the option targeted at them.

Example of Quality-based price discrimination.

Different types of buyers could have different utilities over different levels of quality for the
same base good. Brings to mind Dupuit’s quote on the railways’ pricing of coaches.

"It is not because of a few thousand francs which would have to be spent to put a roof over the
third class carriages or to upholster the third class seats that some company or other has open
carriages with wooden benches... What the company is trying to do is to prevent the
passengers who can pay the second class fare from traveling third class; it hits the poor not
because it wants to hurt them, but to frighten the rich... And it is again for the same reason that
the companies, having proved almost cruel to third class passengers and mean to second class
passengers, become lavish in dealing with first class passengers. Having refused the poor what
is necessary, they give the rich what is superfluous."

Below is a modified version of the model given in Martin; the book example is only with two
types of buyers.

Three types of possible travel comfort (high, medium, and low) with constant marginal costs,
c H > c M >c L. Three types of buyers:

N H buyers who love luxury and have WTPs r H , r 'M ,r L for the three goods.

N M buyers who are unwilling to pay a higher price for luxury but like comfort and legroom and
good service. They have WTPs r M ,r M , r 'L.
N L buyers who only want to travel and don’t want to pay any extra for service or comfort. They
have WTPs r L , r L ,r L for the three goods.

Also note that r H > r 'M > r M >r 'L > r L. And it is assumed that the seller makes larger profits on
higher quality seats: r H −c H > r 'M −c M >r M −c M >r 'L−c L >r L −c L .

If the seller were to sell just one quality-type of seats, he would choose the type that earned
him the largest profit.

If only Low quality sold: (r L −c L )(N H + N M + N L ) OR ( r L −c L ) N M . The second option here does
'

not make sense because if seller sells to N M buyers then selling only M product at r M gives
higher per unit profit as well as larger sales.

If only Medium quality sold: (r M −c M )(N H + N M ) OR ( r 'M −c M ) N H . The second option here
does not make sense, because if the seller had to sell only to N H , he would rather sell H
product at price at r H than M product at r 'M .

If only High quality sold: ( r H −c H ) N H

But the seller can possibly earn a larger profit if he separates these different types of consumers
by the quality-price offers that different types will choose.

Incentive compatibility (IC) and individual rationality (IR) constraints. Explain.

IC constraints makes sure that each type of buyer desires the product/version targeted at its
type rather than that targeted for another buyer type. => each buyer reveals her type truthfully
through her choice.

IR constraints makes sure each buyer type purchases rather than dropping out of the market.

Let the seller sell 3 types of cabin seats. Economy, Business, First: L , M , H .

Obviously p L=r L.

N M buyers need to be left with no incentive to want to purchase the Economy/Low type seats.
Incentive compatibility constraint for the medium type of buyers.
'
r M − p M ≥ r L− p L > 0

 p M ≤ r M −( r 'L − pL ). Therefore set p M =r M −( r 'L − p L ) =r M −( r 'L −r L )

N H buyers need to be left with no incentive to want to purchase either the Economy seats or
the Business/M class seats. Two IC constraints for the high types of buyers.
'
r H − p H ≥ r M − pM > 0 and r H − p H ≥ r L− p L =0

Using p M =r M −( r L − p L ), and p L=r L, both constraints above can be written together as

'

(
p H ≤ r H − r M −(r M −( r L− p L ) )
' '
)
¿ r H −( r M −( r M −r L + p L ) )
' '

¿ r H −( r 'M −r M ) −( r 'L − pL )

¿ r H −( r 'M −r M ) −( r 'L −r L )

The seller would therefore choose the largest of these prices and list

p H =r H −( r 'M −r M ) −( r 'L −r L ) .

The low type buyers get zero CS,

the medium types get total CS equal to ( r M − p M ) N M =( r L−r L ) N M ;

'

while the high types of buyers get total CS equal to ( r H − p H ) N H =( r M −r M + r L −r L ) N H .

' '

Relate to Dupuit’s comment and explain.

PS = N H ( p H −c H ) + N M ( p M −c M ) + N L ( p L −c L )

[ ] [ ]
¿ N H r H −( r M −r M )−( r L−r L ) −c H + N M r M −( r L−r L )−c M + N L [ r L−c L ] .
' ' '

Only if this is greater than the best of one price/one quality profits, will the seller engage in
price discrimination of this sort.

Total welfare = CS+PS = N H ( r H −c H ) + N M ( r M −c M ) + N L (r L −c L ) , which is an improvement over

any of the one-price selling strategies.

In above (as in all second degree price discrimination cases) the seller offers each consumer
multiple contracts/deals, and lets each consumer choose. H (or Q H ) is offered at P H ; M at p M ;
and L at p L. The IC constraints ensure that each type of buyer chooses the quality variant
targeted at her type, and the IR constraints ensure that all three types of buyers participate in
the market.

Which degree of price discrimination is least likely to be challenged in a court of law? Why?

Bundling (second degree price discrimination):

Volume discount is an example of a bundle of multiple units of the same good into a quantity
discount package. But there can be other forms of bundling too. The seller can sometimes
bundle two different (but related) goods to sell in one package and this may be a better
strategy than only selling these goods separately, i.e. it may give the seller a higher profit than it
would get with selling these goods separately.

The terms ‘bundling’ and ‘tying’ are often confused in how they are interpreted and used.
Martin uses bundling to imply packaging different goods together for sale. While Shy uses the
term to imply packaging multiple units of the same good together, for sale. Both are kinds of
second-degree price-discrimination, such that by offering different packages the seller wants to
separate different types of buyers into purchasing different deals such that the maximum
consumer surplus is squeezed out of each consumer type.

A tying arrangement occurs when, through a contractual or technological requirement, a seller

conditions the sale or lease of one product or service on the customer's agreement to take a
second product or service. Martin’s use of the term bundling is closer to the idea of tying.

Volume/quantity discounts:
Consumers often have diminishing marginal utility over the consumption of multiple units of
the same good. The seller can set prices in two different ways to maximize profit (extract
maximum consumer surplus away from consumers) for such consumption.

1. Make bundles of multiple units of the good and price the bundle at the total value a
consumer gets from the number of units in the bundle
2. Set a fixed component of the price (annual fees etc.) and a per unit price such that
together the two squeeze out the entire consumer surplus from purchase, regardless of
the number of units purchased. If x is the number of units purchased and p is the per
unit price and V (x ) is a consumer’s value if x units are purchased, then set A and p to
satisfy the equation:
A+ px=V (x )

Both of these ways of pricing would give consumers a decreasing average price (per unit) such
that if they buy more they get a lower price per unit bought. This is why they get quantity
discounts for purchasing larger volumes.
The second is an example of a two-part tariff/pricing, a form of second degree price
discrimination and quantity discount, such that each consumer pays a fixed fee, and a per unit
price as well. The structure in fact offers a continuum of menu bundles (located on a straight
line, the slope of which is p). Illustrate.

Examples are –

1. rental and unit prices for electricity, phone etc.

2. printers and cartridges
3. entrance fee and per ride charges in amusement parks
4. fixed meter readings and distance charges in cabs/taxis/autos.

Notice that for a seller, the more consumer surplus that can be extracted the higher the profit.
The basic problem in extracting all surplus would be the possibility of losing the customer to
other sellers. That is why, we often talk about price discrimination for a monopoly seller who
does not fear losing customers to other sellers.

Shy’s quantity ‘bundling’

Extract entire consumer surplus from a consumer by selling more units in a package for
consumers with downward sloping individual demand curves.

Example and Figure 14.1 Shy (whiteboard): Q ( p )=4−p ; MC=0.

Alternatives for the monopoly are to sell at monopoly optimum quantity and price and make
π =4 or to sell a package of 4 units priced at 8, extract all consumer surplus and make profit
m

π=8 .

Thus by offering quantity discounts, the monopoly can sell more units to consumers who want
more but whose marginal WTP goes down with more units. While also selling singular units, the
monopoly could also separate the customers who only want single units from those above, and
successfully price discriminate (second degree).

Bundling different goods together:

Suppose a movie theatre, has two movies playing – a horror and an animation (or adventure).
Suppose there are 100 consumers in total and half the customers value the horror at 120 and
the animation at 80 and the other half value the horror at 80 and the animation at 120.
If the seller had to sell each movie separately at a single price each then the tradeoff would be
to charge a high price only to half the consumers or charge a lower price and get more buyers.
The first option gives total revenue (for both movies sold separately) equal to
2∗50∗120=12,000. And the second option would give 2∗100∗80=16,000.

Assuming cost is the same for the theatre, a higher revenue translates to a higher profit.

But what if the seller could bundle both these movies into a package deal and sell them
together. What would be the profit (revenue) maximizing price for the seller in this example?

At a price of 200 for the bundle of both movies, all consumers would buy the bundle and the
total revenue would be 100∗200=20,000 which is greater than both the above revenues.

Making buyers homogeneous despite their differences in values.

Notice that although there is a single price for the bundle for the whole market, there is price
discrimination happening between the buyers for each good that they consume (in the bundle).

Often tying may be misused by sellers to impose its monopoly power over a popular good (for
which consumers have high reservation values) to also sell other goods which are not so
popular and may in fact face considerable competition in the market; eg. Microsoft case of
‘tying’ software alongwith its Windows operating system.