06E:141 INDUSTRY ANALYSIS: BROOK

Unit

12
Multi-Product Firms
Multi-Product Monopolist
How much output should a monopolist produce and what price should they charge if the
monopolist is selling more than one product in order for the firm to maximize it’s profits?
Well let’s take the simplest case and look at a multi-product monopolist. Before we get
started, let’s suppose that the monopolist is only producing two goods (although the results
generalize for more than two products) and for now that the demand for these two goods
are unrelated. By this I mean that changes in the price of one of the goods does not affect
the quantity demanded for the other good. We will explore the related goods case later on.
Also, let’s use our familiar linear inverse demand specification and let’s suppose that the
monopolist sets the price of each good uniformly. Finally, let’s suppose there are no cost
synergies (i.e. the cost of producing one good does not affect the cost of producing the
other good) for now.

Independent Goods with No Cost Synergies

Given that the firm is a monopolist in each separate product market and that there are no
cost synergies, the profit maximizing output and price are the same as under the uniform
pricing monopolist. Thus the monopolist’s optimal decision is the same for each product as
it was for only one product. Thus if the inverse demand is given by Pi ai bi Qi , where
i={1,2} and the cost function is given by C ( qi ) ei qi f i , then the optimal amount of
a1 e1 a 2 e2
output for the monopolist to produce is q1 * and q 2 * . The profit
2b1 2b2
a1 e1 a2 e2
maximizing price for each good of: P1 * and P2 * .
2 2

Independent Goods with Cost Synergies

With cost synergies where the firm’s costs differ by producing both goods together as opposed to
producing each good separately, output and pricing decision are affected by the extent of the cost
synergies. So given: C (q1 , q 2 ) d1 q12 d 2 q 22 e1 q1 e2 q 2 f1 f 2 ec q1 q 2 , where ec <0
then the monopolist’s profit maximizing equation for independent goods and cost synergies looks

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06E:141 INDUSTRY ANALYSIS: BROOK

like: (a1 b1 q1 )q1 (a 2 b2 q 2 )q 2 d1 q12 d 2 q 22 e1 q1 e2 q 2 f1 f 2 ec q1 q 2 .

Skipping the algebra, the profit maximizing outputs of q1 and q2 are:
2(b2 d 2 )( a1 e1 ) ec (a 2 e2 ) 2(b1 d1 )( a 2 e2 ) ec (a1 e1 )
q1* 2
and q 2* . Thus
4(b1 d1 )(b2 d 2 ) ec 4(b1 d1 )(b2 d 2 ) ec2
with cost synergies, the optimal quantities for each good are more complex given the overlap in
costs for each product. The greater the amount of cost synergies (i.e. the more negative ec is), the
greater the optimal amount of output for each good.

So in sum, a uniform pricing monopolist producing independent goods without cost synergies
results in the optimal amount of output exactly like under the single product uniform pricing
monopolist. If the additional characteristic of cost synergies is included, the optimal amount of
output is more complicated by the synergies and the greater the cost synergies in producing the
two goods the greater the profit maximizing amount of output for each good.

Substitute Goods with no Cost Synergies

Suppose the monopolist produces two goods and these two goods are economically related,
such as consumers view the two goods as substitutes or complements. Here I will go over
the substitute good case, and the next sub-section will briefly look at the complement goods
case. First, let’s use the linear demand equation for each product: q1 a1 b1 p1 g1 p 2 and
q 2 a 2 b2 p 2 g 2 p1 . Here notice that a new term is included in the demand equation.
The parameter g is the degree that consumers view a change in the price of one product on
the demand for the other product. As g gets to zero the more consumers view each product
as more differentiated. A substitute goods monopolist profit equation is:
(q1 , q 2 ) p1 [a1 b1 p1 g1 p 2 ] p 2 [a 2 b2 p 2 g 2 p1 ] e1 [a1 b1 p1 g 1 p 2 ] e 2 [a 2 b2 p 2 g 2 p1 ]
and aftersome tedious algebra the equilibrium price for good one is:
2b2 (a1 b1 e1 e 2 g 2 ) ( g 1 g 2 )( a 2 b2 e 2 e1 g 1 )
p1* and the equilibrium price for good
4b1b2 ( g 1 g 2 ) 2
2b1 (a 2 b2 e 2 e1 g 1 ) ( g 1 g 2 )( a1 b1 e1 e 2 g 2 )
two is: p 2* . Notice as consumers view
4b1b2 ( g 1 g 2 ) 2
each substitute good as being more different (i.e. less of a substitute), that the equilibrium
price increases.

We notice that changes in the price of good i={1,2} has three effects: first – increases in the
price of good i leads to increases in the firm’s profits due to greater additional revenue due
to the higher price; second – an increase in the price of good i leads to decreases in profits
from lower quantity of good j; and third – an increase in the price of good i increases the
demand for good j.

Although not always a monopolist, think about how a Hollywood firm studio determines the
price to sell to the movie theater for a movie viewed at the theater versus a DVD or think
about a pharmaceutical producing both a brand name drug and a generic for the same
illness.

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Complement Goods with no Cost Synergies

If the uniform pricing multi-product monopolist produces complementary goods such as a

sports team selling tickets (seats) and concessions, or a satellite radio firm selling radio
subscriptions and radio players, the firm must take into account the previous three effects
when setting its optimal price. Again, using a the linear demand equation for each product:
q1 a1 b1 p1 g1 p 2 and q 2 a 2 b2 p 2 g 2 p1 , and skipping the math, the optimal prices
2b2 (a1 b1e1 ) g 1 (a 2 b2 e2 )
for both goods are: p1 * and
4b1b2 g 1 g 2
2b1 (a 2 b2 e2 ) g 2 ( a1 b1e1 )
p2 * . Here note that as consumers view the two
4b1b2 g1 g 2
complementary goods as being more differentiated from each other, that the optimal
response by the monopolist is to lower the equilibrium price as opposed to the substitute
goods case.