Question

A firm sells two products, A and B. There are two customers: Ernie with a valuation (means, a reservation price) of 25 for good A, and 40 for good B; and Bert, with a valuation of 10 for good A and 35 for good B. (a) Will the firm want to bundle both products, instead of selling them separately? Argue why or why not. (b) Can the firm do better by selling goods in a bundle, plus one of them separately?

Answer 1

A) Bundling is not profitable because the bundled price (10 + 35 = 45) is earning a profit of 45 + 45 = 90 when both consumers purchase the bundle. A separate pricing of A at 25 and B at 35 results in a profit of 25 + 35*2 = 95. Hence separate pricing is a better option.

B) A new scheme where the bundle price is increased to 65 (total valuation of A, 25 + 40) and separately any product at a price of 35 will encourage Ernie to buy the bundle (as this is affordable to her) at 65 and encourage Bert to buy only B (as A is out of his willingness to pay) at 35. This implies a payoff of 65 + 35 = 100 which is maximum under the given conditions.