Question

There are two types of products: Refrigerator and range sold by the hardware store. Consumer valuations are entries in the following table.

	Consumer A	Consumer B
Refrigerator	2,300	2,800
Range	1,700	1,200

a) What is the revenue maximizing strategy if the goods were sold separately?

b) Will bundling work? Can it increase revenue?

c) Assume that that the store can practice perfect price discrimination, will the store be able to increase revenue further?

Answer 1

a) If the goods are sold separately, price for the refrigerator will be 2300 and 2 units will be sold. Revenue = 4600 (2300*2 = 4600).
Price for range will be 1200 and 2 units will be sold. Revenue = 2400 (1200*2 = 2400)
Total revenue = 7000 (4600 + 2400 = 7000)

b) Yes, bundling will work. He can bundle both refrigerator and range and sell each bundle for 4000.
Total revenue will be 8000. (4000*2 = 8000)

c) No, perfect price discrimination will not increase the revenue further. If the store parctices perfect price discrimination, Individual A will pay 2300 for the refrigerator and individual B will pay 2800.
Revenue from refrigerator = 5100 (2300+2800 = 5100)

For range, individual A will pay 1700 andd individual B will pay 1200.
Revenue from range = 2900 (1700 + 1200 = 2900)
Total revenue = 8000 (5100+2900 = 8000).
This revenue is same as in (b). So, no further rise in revenue.