Question

1 Bundling Suppose that a firm sells two different goods, A and B to two different potential customers (ie, consumer 1 and consumer 2). The firm has a marginal cost of zero dollars per unit of each good. Each customer buys at most one unit of either good. depending on whether the price exceeds or is less than the consumer's valuation. The table below show the maximum willingness to pay for each consumer and good Maximum Willingness to Pay Product Product Both Products 1.1 (10 points) What would be the optimal prices charged by the firm (.e., PA and Ps) and the total revenue raised by the firm if it offered the two products separately (.e., uniform pricing)? Explain 1.2 (10 points) What would be the optimal price of a (pure) bundle and the total revenue raised by a bundling strategy? Explain. 1.3 (10 points) Comparing the total revenue raised by the firm under the two options (i.e., questions 1.1 and 1.2), is it bundling a more profitable strategy than marketing the two products separately? Explain why or why not

Q1.1-1.3

Answer 1

1 The following table shows the and each goods. maximum willingness to pay for each consumers Consumer 1 Product Al Product B/ Both Products $8.4 $18.9 $27.3 1 22 $32 Consumer 2 K1.1.) As it is given that the firm has no marginal cost of production and each Consumer buys atmost one unit of either good, are will maximize profit (1) by maximizing revenue (TR). For product A, if & q as changed B , the set of possible price Combinations, (PA ,PB) = {(8.4,18.4), (8.4,23), (9, 18.9), (9,23)} Now, as each consumer consumes atmost one unit of any of the goods, Then the revenue would be maximized when PA - 8.4 and P2=23 , here, consumer I will buy product A and consumer 2 will buy product B and Timax / TR max = $(8.4+23) - $31.4. I And, optimal prices, PA = $8.4 and P2 = $23. (1.2) Now, in case of pure bundling consumer l's willingness to pay is $27.3 and consumer 2's cuillingness to pay is $32. Now, if we set the price the bundle is $32, then only consumer 2 will consume the bundle, and then the T1/TR is only $32. But, if we set the price of the bundle is $27.3 , then both consumers will consume the bundle, and then Imax / TR max is $(27.3 82). - Optimal price of the bundee is $27.3. - $54.6 P.T.O

? Hence, the total profit earned by the bundling strategy is $54. 62 Cwhich is higher than the strategy of marketing teso products separately, which yields profit of $31.4. Hence, by bundling strategy the firm earns $ (54.6-31-4)= $23.2 profits extra. Hence, bundling Strategy is more profitable and he should go for I Hope, it is cleaned to you, my friend?