Question

The table below shows four consumers willingnesses to pay for phone service subscription and broadband internet service subscription. Each consumer demands at most one subscription for phone service and at most one subscription for internet service (the willingness to pay for any further units is zero). There are no complemen- tarities in consumption, le, a consumer's willingness to pay for both services is just the sum of his willingness to pay for phone service and his willingness to pay for in- ternet service. Both services are supplied by the same monopolist. Assume that the monopolist's costs are zero.

Consumer	WTP (Phone)	WTP(Internet)
A	$15	$30
B	$25	$25
C	$30	$25
D	$35	$20

1. Suppose the monopolist sells phone service and internet service separately. It must charge a constant per-unit price in each market (ie.. it cannot discriminate among consumers). What will be the equilibrium prices and quantities of phone service and internet service? What will be the monopolist's profits?

2.Now suppose the monopolist can sell bundles consisting of both phone and internet service. It must still charge a constant price per bundle (i.e., cannot discriminate among consumers). What will be the equilibrium price and quan tity of bundles sold? What will be the monopolist's profits? Will the monopolist find it profitable to offer the bundles instead of phone service and internet ser vice separately?

3)Now assume instead that the phone service monopolist is selling monthly talk time to consumers. The monopolist's costs are zero. For simplicity assume there are only two consumers (you can think of these as two groups). Consumer 1 is willing to pay $7 for the first block of 60 minutes. $5 for the second block of 60 minutes. and S3 for the third block of 60 minutes Consumer 2 is willing to pay $5 for the first 60 minutes. $3 for the second, and $1 for the third. Neither consumer demands more than three blocks (180 minutes)

A)Suppose the monopolist can tell the consumers apart, can prevent arbitrage, and can offer each consumer a fixed package for a foed tee. What are the packages that the monopolist will offer to the two consumers? State quantities (numbers of talk time blocks) and prices. What will be the monopolist's profit?

B)Continue to assume that the monopolist can tell the consumers apart and can prevent arbitrage, but now suppose that it can no longer offer fixed packages or charge access fees. Instead, the monopolist must charge a constant price per talk time block for each consumer (however, different prices may be charged to the two consumers). What prices will the monopolist charge? What will be the monopolist's profit?

Answer 1

1) The price set by the monopolist in the phone service market would be $25 as then 3 consumers will be willing to purchase the phone service and the profit of the monopolist in this market would be $75. Any price lower or higher than this would reduce the monopolist's profit.

The price set by the monopolist in internet service market would be $20 as then all 4 consumers will be willing to purchase the internet service and the profit of the monopolist in this market would be $80. Any price higher than this would reduce the monopolist's profit.

2)

Consumer	Phone service	Internet service	Bundle
A	15	30	45
B	25	25	50
C	30	25	55
D	35	20	55

To extract the maximum profit from the consumers the monopolist should set the bundle price at $45. As any price higher than that won't fetch the monopolist max. profit. Thus, price = 45, quantity = 4, and profit = 180. The monopolist is better off with bundling as in the first case the combined profit was 155 which is less than 180.

3) A) Since there is no marginal cost for the monopolist and he can price discriminate among consumers, he should sell consumer 1 the accumulated willingness to pay per block and similarly for consumer 2.

Block	Consumer 1	Consumer 2
1st 60 min	7	5
2nd 60 min	5	3
3rd 60 min	3	1
180 min	15	9

Thus, he should offer 180 min to both consumer 1 and 2 at price 15 and 9 respectively. His profit would be $24.

B) Now since the monopolist can charge constant price/ block from the consumers. He will earn max. profit if he charges 5/ block from consumer 1 and 3/ block from consumer 2. Then consumer 1 will purchase 120 min of phone service at price 5/ 60 min and consumer 2 will also purchase 120 min of phone service at price 3/ 60 min. The profit of monopolist, in this case, will be 10 + 6 = $16.