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We discussed in class that for multi-product bundling, negative correlation of demand is needed but not...

We discussed in class that for multi-product bundling, negative correlation of demand is needed but not sufficient.

Give an example of a situation where the demand for 2 products is negatively correlated but bundling these 2 into a single product is not a good idea

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Answer #1

Negative correlation of demand is a situation where as the price increases , the quantity demanded decreases. We can take an example of tea and coffee . Each has negative correlation of demand, if the price increases of one consumers demand will fall and they will consume less. Keeping in mind this propoganda, if we take a situation of tea and coffee together where both are beverages in nature , substitute to each other  and have negative correlation in demand . Since people prefer tea over coffee or vice versa but do not drink together at the same time. So bundling tea and coffee together will not be a good idea.

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