Joint Product
Pricing
Demand for one product could be greater
than for the other product. Consumers of one product could be more price
elastic than the consumers of the other product. Pricing for joint products
is a little more complex than pricing for a single product. To begin
with there are two demand curves. The characteristics of each demand
curve could be different.
To complicate things further, both products, because they are produced
jointly, share a common marginal cost curve. There are complexities
in the production function also. Their production could be linked in
the sense that they are bi-products (referred to as complements in production),
or they could be linked in the sense that they can be produced by the
same inputs (referred to as substitutes in production). Also, production
of the joint product could be in fixed proportions or in variable proportions.
When setting prices in
a situation as complex as this, microeconomic marginal analysis is helpful.
In a simple case of a single product, price is set at that quantity
demanded where marginal cost exactly equals marginal revenue. This is
exactly what is done when joint products are produced in variable proportions.
If the products are produced
in fixed proportions (example: cow hides and cow steaks), then one of
the products will very likely be produced in quantities different from
the profit maximizing amount considered separately. In fact the profit
maximizing quantity and price of the second half of the joint product,
will be different from the profit maximizing amount considered separately.
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