Assume that a local telecommunications company sells high speed internet access
ID: 1211442 • Letter: A
Question
Assume that a local telecommunications company sells high speed internet access and cable television. The company's only two customers are Taylor and Tim. Taylor is willing to pay $50 per month for high speed internet access and $50 per month for cable television. Tim is willing to pay only $20 per month for high spec internet access, but is willing to pay $70 per month for cable television. Assume that the telecommunications company can provide each of these products at zero marginal cost. How much additional profit can the telecommunications company cam by switching to the use of a tying strategy to price high speed internet access and cable television rather than pricing these goods separately?Explanation / Answer
Profit before tying them togather
price for high speed internet = 50
Profit from high speed internet = P*Q = 50*1 = 50 (as at a price of 50, onlyTaylor will be willing to take the services.)
Price of cable television = $50
Profit from cable television = P*Q = 50*2 = $100
Total Profit before tying = 100 + 50 = $150
After tying both services togather
Price of the package = $90
Profit from package = P*Q = 90*2 = $180
Additional Profit = pROFIT after tying - profit before tying = 180 - 150 = $30
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