On day 6, went the through the standard 2 period durables good problem, carefully working out the demand curve in each period. Did this to emphasize later how this problem is just like the problem of a multi-product monopolist with substitutes. Then, onto a discussion of JC Penny. In retrospect, not the best of examples. Doubt they shop at JC Penny, or follow the business section of the paper. One student gave a good summary of events as background to rest of class. Textbooks would have been better.
Subsequently, multi-product monopolist; substitute and complement. Emphasized this meant each product could not be priced in isolation of the other. Now the puzzle. Why would a seller introduce a substitute to itself? Recalling discussion of durables good monopolist, this seems like lunacy. A bright spark suggested that the substitute product might appeal to a segment that one is not currently selling to. Yes, but wouldn’t that cannibalize sales from existing product? Time for a model! Before getting to model, formally introduced price discrimination.
Day 7, talked briefly about homework and role of mathematics in economic analysis. Recalled the question of regulating the monopolist. Lowering price benefits consumers but harms seller. Do the benefits of customers exceed harm done to seller? Blah, blah cannot settle the issue. Need a model and have to analyze it to come to a conclusion. While we represent the world (or at least a part of it) mathematically, it does not follow that every mathematical object corresponds to something in reality. Made this point by pointing them to the homework question with demand curve having a constant elasticity of 1. Profit maximizing price is infinity, which is clearly silly. Differentiating and setting to zero is not a substitute for thinking.
Went on to focus on versioning and bundling. Versioning provides natural setting to talk about cannibalization and catering to new segment. Went through a model to show how the competing forces play out. Then to bundling.
Discussion of reasons to bundle that do not involve price discrimination. Then a model and its analysis. Motivated it by asking whether they would prefer to have ala carte programming from cable providers. In the model, unbundling results in higher prices which surprises them and was a good note to end on.