6) Other Price Discrimination: a) Suppose that MS Office contains only two softw

Question

6) Other Price Discrimination:

a) Suppose that MS Office contains only two software packages (MS Word and MS Excel). Provide an example to illustrate how selling the two programs separately for $100 each and as a bundle for $150 can be a profit maximizing strategy for Microsoft.
b) Suppose that the marginal cost of producing a paperback book is $1 while the marginal cost of producing a hardback book is $1.25. Paperback books retail at a price of $25, while hardback books retail at a price of $40. Do these statistics suggest price discrimination? Form a hypothesis regarding the type of price discrimination?

Explanation / Answer

a) Microsoft has only two programs in their MS office package they will certainly earn more profit if they sell it in a bundle that separately.

In this case, let's assume if the Microsoft is selling 100 MS word software but only 50 MS Excel software. Then in that case, if they are selling them separately there total revenue will be only (100 x 100) 100,000 and 50,000 from both the software. So they can sell them in a bundle maybe at a price of $150 and earn a revenue of (150 x 150) 22,500 which is significantly higher than the earlier profit.

In a bundle, the person is forced to buy the other product even if they didn't want to and create a demand for that too. This increases the revenue earned by the selling company. The consumer has to buy Excel even if they only want Word and vice versa this combines the demand for the product and profit, whereas if they were sold individually people will only give a revenue $100 instead of $150.

b) No, the case given above is not a price discrimination. The seller is selling two different products a paperback book and a hardback book. Price discrimination will only be there if the seller is selling the same good at two different prices. For example the hardback book at a price to one group and the same hardback book at a different price to the other group.

Let's take an example to understand this better. Let's assume the seller has a monopoly in the area. He is selling the book at a price of $10 to one group of the students and he knows that this is the tests time so the demand elasticity of the book for the other group of students is higher so he sells the same book to other groups of students at $15. Here the product is same but the price is different leading to price discrimination.

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