Podcast
Questions and Answers
What is the primary reason firms shift from two-part tariffs to tying arrangements?
What is the primary reason firms shift from two-part tariffs to tying arrangements?
- To capture more customers through competitive pricing (correct)
- To reduce competition
- To differentiate their products
- To increase customer retention
In which type of market are tying arrangements most common?
In which type of market are tying arrangements most common?
- Perfectly competitive markets
- Oligopolistic markets
- Markets with limited competition (correct)
- Monopolistically competitive markets
Why do customers tend to maintain their relationship with a firm in a tying arrangement?
Why do customers tend to maintain their relationship with a firm in a tying arrangement?
- Because of the firm's marketing efforts
- Because of the high quality of the durable good
- Because of the low price of the consumable product
- Because switching costs are high (correct)
What is the primary source of profit for a firm in a tying arrangement?
What is the primary source of profit for a firm in a tying arrangement?
Why are one-time customers often unprofitable for a firm?
Why are one-time customers often unprofitable for a firm?
What do firms operating in tying arrangement markets often examine?
What do firms operating in tying arrangement markets often examine?
What is customer lifetime value?
What is customer lifetime value?
Why is retaining customers important in tying arrangements?
Why is retaining customers important in tying arrangements?
What is a necessary condition for a tying arrangement to be subject to legal action?
What is a necessary condition for a tying arrangement to be subject to legal action?
What is the primary goal of a pricing strategy, according to the content?
What is the primary goal of a pricing strategy, according to the content?
What is the term for the price per unit of a product or service in a multipart pricing structure?
What is the term for the price per unit of a product or service in a multipart pricing structure?
In the jazz club example, what determines the total price paid by customers?
In the jazz club example, what determines the total price paid by customers?
What is a characteristic of a tying arrangement, according to the content?
What is a characteristic of a tying arrangement, according to the content?
Why might executives choose not to pursue tying arrangements, according to the content?
Why might executives choose not to pursue tying arrangements, according to the content?
What do customers have the freedom to determine in the jazz club example?
What do customers have the freedom to determine in the jazz club example?
What is the purpose of Exhibit 9-1, according to the content?
What is the purpose of Exhibit 9-1, according to the content?
What is the primary reason firms implement tying arrangements?
What is the primary reason firms implement tying arrangements?
In a two-part tariff, how is the entrance fee typically priced?
In a two-part tariff, how is the entrance fee typically priced?
What is the primary difference between a two-part tariff and a tying arrangement?
What is the primary difference between a two-part tariff and a tying arrangement?
Why do firms tend to use tying arrangements in competitive markets?
Why do firms tend to use tying arrangements in competitive markets?
What is the typical pricing strategy of the consumable product in a tying arrangement?
What is the typical pricing strategy of the consumable product in a tying arrangement?
What is the purpose of pricing the durable product low in a tying arrangement?
What is the purpose of pricing the durable product low in a tying arrangement?
What happens to the profits from the consumable portion of the sale in many tying arrangements?
What happens to the profits from the consumable portion of the sale in many tying arrangements?
Why do customers tend to continue their relationship with a firm in a tying arrangement?
Why do customers tend to continue their relationship with a firm in a tying arrangement?
What is the primary factor influencing customers' product selection in tying arrangements?
What is the primary factor influencing customers' product selection in tying arrangements?
Why do firms in tying arrangements often lower the price of the durable good?
Why do firms in tying arrangements often lower the price of the durable good?
What is a characteristic of firms that use two-part tariffs?
What is a characteristic of firms that use two-part tariffs?
What is an example of a natural monopoly?
What is an example of a natural monopoly?
What is a consequence of tying arrangements in some jurisdictions?
What is a consequence of tying arrangements in some jurisdictions?
What was the outcome of the famous Xerox case involving tying arrangements?
What was the outcome of the famous Xerox case involving tying arrangements?
What was the contractual obligation in the Xerox case?
What was the contractual obligation in the Xerox case?
Why do firms in tying arrangements often sell durable goods at a lower price?
Why do firms in tying arrangements often sell durable goods at a lower price?
What is the likely reason why customers find the $7 per beverage price at the jazz club acceptable?
What is the likely reason why customers find the $7 per beverage price at the jazz club acceptable?
What is the main reason why the jazz club is likely to make most of its profits on beverages?
What is the main reason why the jazz club is likely to make most of its profits on beverages?
What is the shape of the curve that resembles the average price paid per half hour against time?
What is the shape of the curve that resembles the average price paid per half hour against time?
What is the benefit of a multipart price structure in terms of capturing profits?
What is the benefit of a multipart price structure in terms of capturing profits?
What is the relationship between the unit being priced and the true driver of customer benefits in a multipart price structure?
What is the relationship between the unit being priced and the true driver of customer benefits in a multipart price structure?
In which industries are multipart price structures commonly found?
In which industries are multipart price structures commonly found?
What do customers gain from having access to a product in a multipart price structure?
What do customers gain from having access to a product in a multipart price structure?
Why do firms use multipart price structures?
Why do firms use multipart price structures?
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.
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Description
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.
