Suppose that a hospital monopolizes the local market for heart surgery, charging $10,000 per procedure. The hospital does 1,000 heart surgeries annually, and the cost of heart surgery is $5,000 per procedure. The hospital is a duopolist in the market for cataract surgery. The hospital and its competitor both perform 2,000 cataract procedures annually, charge $2,000 per procedure, and have costs of $1,000 per procedure. The hospital plans to go to insurers and offer a bundled price. It will discount the price of heart surgery below $10,000 and hold the price of cataracts at $2,000, provided that it is given exclusivity in the cataract market. What price for heart surgery must the hospital charge to insure that its competitor cannot profitably compete in the cataract market? (Assume that the hospital would match its rival’s price in the cataract market if the rival were to respond to this bundling arrangement by cutting its cataract price.)
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