7. Your firm produces two products, Good 1 and Good 2. zero marginal cost. You f

Question

7. Your firm produces two products, Good 1 and Good 2. zero marginal cost. You face four consumers (or groups of consumers) with following maximum prices they are willing to pay for each of the goods. Both products are produced at Good 2 800 700 500 100 Consumer Good 1 100 400 600 800 Consider three alternative pricing strategies: i) selling the goods separately; (ii) pure bundling; iii) mixed bundling. For each strategy, determine the optimal prices to be charged and the resulting profits. Which strategy is best? Show your work (15 points)

Explanation / Answer

a) Separate selling

A price of 400 for good 1 and 500 for good 2 can generate a profit of 400x3 + 500x3 = 2700. Similarly, a price of 600 for good 1 and 500 for good 2 can generate a profit of 600x2 + 500x3 = 2700. Hence when selling separately, good can be priced at 400 or 600 but good 2 should be priced at 500

b) Pure bunding

There are two choices for pure bundle price (800 + 100 =900) and (600 + 500 = 1100). A bundle price of 900 has all four consumer so profit is 3600 while a bundle price of 1100 has only 2 consumers so profit is 2200. Hence profit maximizing bundled price is 900. The maximum profits are 3600

c) Mixed bundling

A bundled price of 1100 and a separately purchase price of 800 of any good will generate maximum profit. In that case, A and D will not buy the bundle but A will purchase good 2 and D will purchase good 1. Hence total profit will be 1100 x 2 + 800 +800 = 3800

We see that the best strategy is mixed bundling with maximum profits.

Related Questions

Navigate

• Browse (All)
• Browse 7
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.