As described in the Application “Pricing iTunes,”

Shiller and Waldfogel (2011) estimated that if iTunes used two-part pricing charging an annual access fee and a low price per song, it would raise its profit by about 30% relative to what it would earn using uniform pricing or variable pricing. Assume that iTunes uses two-part pricing and assume that the marginal cost of an additional download is zero. How should iTunes set its profit-maximizing price per song if all consumers are identical? Illustrate profit-maximizing two-part pricing in a diagram for the identical consumer case. Explain why the actual profit-maximizing price per song is positive.

6. Tie-In Sales