You are a monopolist in the production of A and B, both of which have zero margi

Question

You are a monopolist in the production of A and B, both of which have zero marginal cost. There are two types of consumers out there, I and II. Their tastes are as follows.

                                                        Type I      Type II
Willingness to pay for A                       8000        X
Willingness to pay for B                       4000        Y
Willingness to pay for A&B 12000

a. Choose X and Y so that pure bundling is more profitable than independent pricing. Prove your answer.

b. Choose X and Y so that independent pricing is more profitable than pure bundling. Prove your answer.

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Explanation / Answer

a) X = 9000, Y = 3500, Willingness to pay for both: 12500 Bundled Price: 12000 for both, Profit: 12000*2 = 24000 Independent pricing: Good A = 8000 (lower of both) Good B = 3500, Profit: 23000 In this case, where the preference of Good A and Good B is negatively correlated, Bundling is more profitable. (Which means one type of consumer prefers one good relatively more than another. In this case, Consumer I prefer good B to good A relative to Consumer II) b) X = 20000, Y = 3000 Bundled Price, 12000 for both, Profit: 12000*2 = 24000 Independent Pricing: Good A = 20000, Good B = 3000, Profit: 26000 In this case, the Consumer II prefers Good A so much more than Consumer I that the firm is better selling good A at $20,000 and good B for $3000

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