Pricing with market power review questions

c. 
What factors determine whether leasing or selling is preferable for a company like 
IBM? Explain briefly. 
There are at least three factors that could determine whether leasing or selling is 
preferable for IBM. The first factor is the amount of consumer surplus that IBM could 
extract if the computer were leased and a two-part tariff scheme were applied. The 
second factor is the relative discount rates on cash flows: if IBM has a higher discount 
rate than its customers, it might prefer to sell; if IBM has a lower discount rate than its 
customers, it might prefer to lease. A third factor is the vulnerability of IBM’s 
competitors. Selling computers would force customers to make more of a financial 
commitment to one company over the rest, while with a leasing arrangement the 
customers have more flexibility. Thus, if IBM feels it has the requisite market power, 
it should prefer to sell computers instead of lease them. 
14. You are selling two goods, 1 and 2, to a market consisting of three consumers with 
reservation prices as follows: 
Reservation Price ($) 
Consumer 
For 1 
For 2 
A 
20 
100 
B 
60 
60 
C 
100 
20 

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Chapter 11: Pricing with Market Power 
179
The unit cost of each product is $30. 
a. 
Compute the optimal prices and profits for (i) selling the goods separately, (ii) pure 
bundling, and (iii) mixed bundling. 
The prices and profits for each strategy are 
Price 1 
Price 2 
Bundled 
Price 
Profit 
Sell Separately 
$100.00 
$100.00 
___ 
$140.00 
Pure Bundling 
___ 
___ 
$120.00 
$180.00 
Mixed Bundling 
$99.95 
$99.95 
$120.00 
$199.90 
You can try other prices to confirm that these are the best. For example, if you 
charge $60 for good 1 and $60 for good 2 then B and C will buy good 1 and A and B 
will buy good 2. Since marginal cost for each unit is $30, profit for each unit is $60-
$30=$30 for a total of $120.