(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 446

CHAPTER 11 • Pricing with Market Power 421 r2 II I Consumers buy only good Consumers buy both goods F IGURE 11.13 CONSUMPTION DECISIONS WHEN PRODUCTS ARE SOLD SEPARATELY P2 III The reservation prices of consumers in region I exceed the prices P1 and P2 for the two goods, so these consumers buy both goods Consumers in regions II and IV buy only one of the goods, and consumers in region III buy neither good IV Consumers buy neither good Consumers buy only good P1 r1 the vertical axis is r2, which is the reservation price for good The figure shows the reservation prices for three consumers Consumer A is willing to pay up to $3.25 for good and up to $6 for good 2; consumer B is willing to pay up to $8.25 for good and up to $3.25 for good 2; and consumer C is willing to pay up to $10 for each of the goods In general, the reservation prices for any number of consumers can be plotted this way Suppose that there are many consumers and that the products are sold separately, at prices P1 and P2, respectively Figure 11.13 shows how consumers can be divided into groups Consumers in region I of the graph have reservation prices that are above the prices being charged for each of the goods, so they will buy both goods Consumers in region II have a reservation price for good that is above P2, but a reservation price for good that is below P1; they will buy only good Similarly, consumers in region IV will buy only good Finally, consumers in region III have reservation prices below the prices charged for each of the goods, and so will buy neither Now suppose the goods are sold only as a bundle, for a total price of PB We can then divide the graph into two regions, as in Figure 11.14 Any given r2 I Consumers buy bundle PB F IGURE 11.14 CONSUMPTION DECISIONS WHEN PRODUCTS ARE BUNDLED r2 = PB – r1 Consumers compare the sum of their reservation prices r1 + r2, with the price of the bundle PB They buy the bundle only if r1 + r2 is at least as large as PB II Consumers not buy bundle PB r1