Question

Suppose that a monopoly has developed software programs X and Y and is now facing the task to

set the price for these software programs. Suppose that the marginal cost of these software programs

is 0, but the cost of development of these software programs has been 50000 euros. The market

research shows that there are two types of clients:

* 50 type A clients, who are willing to pay maximum 1500 euros for software program X and

maximum 2000 euros for software program Y.

* 50 type B clients, who are willing to pay maximum 2500 euros for software program X and

maximum 1200 euros for software program Y.

Would it be more profitable for the monopoly to sell these software programs separately or as a

bundle (let’s assume that price discrimination is not possible)? Justify your answer and provide

calculations for proof.

Answer 1

They can be sold either individually or as a bundle but the individual price cannot exceed the minimum between the two types of the customers is willing to pay. In other words, the possible pricing alternatives are:

X at 1500 or lower

Y at 1200 or lower

Bundle at 2700 or lower

	Max. Price they will pay for
Customer Type	X	Y
A	1500	2000
B	2500	1200
Max the firm can charge if both the customers need to be sold to	1500	1200
Number of units sold	100	100	Total
Revenue	150000	120000	270000
	Perceived Price
	X	Y
If sold as a bundle, say, for 2700 per bundle
For customer A	1500	1200	They will buy
For customer B (their perceived price for X would be what they know A is paying)	1500	1200	They will buy
If sold as a bundle, say, for 2800 per bundle
For customer A	1500	1300	They will not buy, since they believe Y should be priced at 1200 which is the fair price for B
For customer B (their perceived price for X would be what they know A is paying)	1500	1300	They will not buy since Y's price is higher than what they want to pay