You are the manager of a local sporting goods store which specializes in selling

Question

You are the manager of a local sporting goods store which specializes in selling skis and ski bindings. The community in which your store is located consists of two different types of skiers: advanced and intermediate. From experience, you know that different skiers value skis and bindings differently. Advanced skiers value skis at $40 and ski bindings at $27 while intermediate skiers value skis at $30 and ski bindings at $40. Given the possibility that you can sell skis and ski bindings either separately, as a bundle or both (i.e. mixed bundle), answer the following. For simplicity assume zero costs.

A. What is the optimal pricing strategy if you sell each item separately? Show your calculations.                                                                                                                             (2+5 points)

B. What is the optimal pricing strategy if you sell skis and ski bindings as a pure bundle. Show your calculations?                                                                                              (2+5 points)

C. What is the optimal pricing strategy if you adopt a mixed bundle policy? Show your calculations

Explanation / Answer

Note - Only point A is answered at the concept level

A. The optimal pricing strategy for profit maximization can be calculated using the concept of price elasticity of demand (denoted as e).

The profit maximization price can be calcuated using the formula

Price = Marginal Cost x (e / (1 + e))

In the given problem the price elasticty for skis is 30-40 = -10 and that for ski bindings is 27-40 = -13

For skis the Price would be Marginal Cost x (-10)/(-9) = Marginal Cost x 1.11

Similarly for ski bindings it would be Marginal Cost x (-13/-12) = Marginal Cost x 1.08

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