Question

10. Questionable business practices according to antitrust agencies

Complete the following table by indicating whether each of the scenarios describes the concept of tying, resale price maintenance, or predatory pricing.

 

 Scenario

 TalkieTime is a firm that produces smartphones. Suppose TalkieTime sells its smartphones to retail stores for $209 each and requires those retailers to charge customers at least $229 for each smartphone.

 Heat-Em-Up is the only firm producing grills. It costs $410 to produce a grill, and Heat-Em-Up sells each grill for $1,000. After Well Done, a new firm with the same costs as Heat-Em-Up, enters the market for grills, Heat-Em-Up starts selling its grills for a price of $330.

 Book Bound sells a wide variety of books to retail bookstores. Book Bound recently published two new books: a popular mystery novel and a much less popular history book. Book Bound requires bookstores to buy 15 copies of the history book for every 140 copies of the mystery novel ordered.

 

True or False: The only reason for Talkie Time to require retailers to sell smartphones at a certain price is to reduce competition and extend its market power to the retail market. Therefore, this practice is always economically inefficient. 

Answer 1

A predatory pricing is the pricing strategy where in the firm charges a price less than its marginal cost. This is done to wipe out competition.

Under a resale price maintenance, the manufaturers asks its retailers to maintain a minimum or maximum price.

Under a tying contract, the manufactuer makes it mandatory for its distributors to buy one product along with another.

FALSE- In bundling, two related goods are priced such that the price of bundled goods will be less than price of individual goods

Answer 2

Scenario 1 - Resale Price Maintenance

Explanation: Resale price maintenance occurs when a manufacturer agrees with a distributor on the price at which a product will be resold.

Scenario 2: Predatory Pricing

Explanation: Predatory pricing is setting a low price to drive competitors out of business with the intention of setting a monopoly price when the competition has gone

Scenario 3: Tying

Explanation: A tying arrangement is an agreement to sell one product only if the buyer agrees to also buy another different product.

Talkie Time to require retailers to sell smartphones at a certain price is not only reason to reduce competition and extend its market power to the retail market, other reasons are included. Thus it's economically efficient.

Hence, the given statement is false.