40 Questions
What is the primary reason firms shift from two-part tariffs to tying arrangements?
To capture more customers through competitive pricing
In which type of market are tying arrangements most common?
Markets with limited competition
Why do customers tend to maintain their relationship with a firm in a tying arrangement?
Because switching costs are high
What is the primary source of profit for a firm in a tying arrangement?
The sale of the consumable product
Why are one-time customers often unprofitable for a firm?
Because they do not contribute to repeat business
What do firms operating in tying arrangement markets often examine?
Customer lifetime values
What is customer lifetime value?
The profit generated from a customer over time
Why is retaining customers important in tying arrangements?
To increase customer lifetime value
What is a necessary condition for a tying arrangement to be subject to legal action?
The seller has sufficient power in the market for the tying product.
What is the primary goal of a pricing strategy, according to the content?
To maximize profits while avoiding legal concerns.
What is the term for the price per unit of a product or service in a multipart pricing structure?
Metered price
In the jazz club example, what determines the total price paid by customers?
The number of beverages consumed
What is a characteristic of a tying arrangement, according to the content?
It involves two separate products or services.
Why might executives choose not to pursue tying arrangements, according to the content?
Due to legal concerns.
What do customers have the freedom to determine in the jazz club example?
The total price paid for the evening
What is the purpose of Exhibit 9-1, according to the content?
To illustrate the effect of a multipart price structure.
What is the primary reason firms implement tying arrangements?
To create a long-term relationship with customers and capture profits from repeat purchases
In a two-part tariff, how is the entrance fee typically priced?
Relatively high to contribute a majority of the firm's profits
What is the primary difference between a two-part tariff and a tying arrangement?
The pricing strategy of the durable product
Why do firms tend to use tying arrangements in competitive markets?
To compete with firms that have a monopoly position over their product
What is the typical pricing strategy of the consumable product in a tying arrangement?
Priced relatively high to contribute a majority of the firm's profits
What is the purpose of pricing the durable product low in a tying arrangement?
To solidify a lasting customer-firm relationship
What happens to the profits from the consumable portion of the sale in many tying arrangements?
They are used to subsidize the losses from the durable portion of the sale
Why do customers tend to continue their relationship with a firm in a tying arrangement?
Because they have invested in the durable product and continue to use it
What is the primary factor influencing customers' product selection in tying arrangements?
The price of the durable good
Why do firms in tying arrangements often lower the price of the durable good?
To capture profits through higher-priced tied goods
What is a characteristic of firms that use two-part tariffs?
They have limited competition for customers
What is an example of a natural monopoly?
A utility company
What is a consequence of tying arrangements in some jurisdictions?
They are subject to legal restrictions
What was the outcome of the famous Xerox case involving tying arrangements?
The court ruled that tying arrangements can violate certain antitrust laws
What was the contractual obligation in the Xerox case?
Customers had to purchase all future supplies from Xerox
Why do firms in tying arrangements often sell durable goods at a lower price?
To capture profits through higher-priced tied goods
What is the likely reason why customers find the $7 per beverage price at the jazz club acceptable?
It is relatively in line with the price paid for beverages at comparable high-end establishments
What is the main reason why the jazz club is likely to make most of its profits on beverages?
It is customary for the musicians to take a substantial cut of the entrance fees
What is the shape of the curve that resembles the average price paid per half hour against time?
A demand curve
What is the benefit of a multipart price structure in terms of capturing profits?
It allows firms to shift profits between different parts of the pricing structure
What is the relationship between the unit being priced and the true driver of customer benefits in a multipart price structure?
The unit being priced is closely related to the true driver of customer benefits but not reflective of any metric of costs or delivering significant benefits in and of itself
In which industries are multipart price structures commonly found?
In the utility, enterprise software, publishing, partial ownership, and health care industries, among others
What do customers gain from having access to a product in a multipart price structure?
Utility from having access to the product and further utility from using and interacting with the product
Why do firms use multipart price structures?
To enable them to shift profits between different parts of the pricing structure
Study Notes
Tying Arrangements
- Firms design products to fit each other specifically, making it difficult for customers to use competitor's products, tying the initial sale of the handle to all future sales of blades.
- Tying arrangements are the opposite of two-part tariffs, where the first product is priced low to contribute a small fraction of profits, and the second product is priced high to deliver a majority of profits.
How Tying Arrangements Work
- Firms compete to bring customers into a long-term relationship, where profits are made through repeat purchases.
- Pricing the durable product low in a tying arrangement helps solidify a lasting customer-firm relationship.
- Customers tend to continue their relationship with the firm, and profits are made through selling subsequent consumable products at a high margin.
Customer Lifetime Value
- The customer lifetime value is the profit a firm can anticipate earning from a customer during the span of the relationship.
- Retaining customers is crucial in tying arrangements to generate profits.
Two-Part Tariffs vs. Tying Arrangements
- Two-part tariffs are common in industries where firms have a monopoly position over their product, if not at least limited competition.
- Tying arrangements are common in markets where firms compete with one another to bring customers into a long-term relationship.
Legal Restrictions on Tying Arrangements
- Tying arrangements can violate certain antitrust laws, as seen in the Xerox case, where copier machines were sold with contractual obligations to purchase all future supplies from Xerox.
- Courts have interpreted that tying arrangements are subject to legal action when certain conditions are met.
Multipart Pricing Structures
- Multipart pricing structures enable firms to capture profits from customers, as seen in the jazz club example, where an entrance fee and metered price per beverage are used.
- The multipart price structure mirrors demand heterogeneity in the market, allowing firms to shift profits between different parts of the pricing structure.
Industries Using Multipart Pricing Structures
- Multipart pricing structures are also used in industries such as utility, enterprise software, publishing, partial ownership, and healthcare, among others.
This quiz covers the concept of tying arrangements in microeconomics, where a firm designs products to fit each other specifically, and the profit-capturing perspective. It contrasts tying arrangements with two-part tariffs.
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