Cable consumers have the following reservation prices for channels: type news sp
ID: 1117620 • Letter: C
Question
Cable consumers have the following reservation prices for channels:
type
news
sports
movies
A
25
15
10
B
15
30
10
C
10
25
35
D
15
10
5
Suppose there is one consumer of each type, and costs are zero.
If the cable firm charges individual prices for news, sports, and movies, what are the optimal prices? What are the total profits?
Suppose now the firm charges a single bundle price for all three services. What is that optimal bundle price? What is profit? Which is the preferable strategy (individual v. bundle pricing)?
type
news
sports
movies
A
25
15
10
B
15
30
10
C
10
25
35
D
15
10
5
Explanation / Answer
If the cable form has to charge a single price for each of the 3 channels, then in the profit maximizing price for news channel will be 15 because this will fetch a profit of 45 as A B and D will purchase it. The price for sports channel should be 25 because in that case two consumers will purchase it so the profit will be 50. The price for movies should be 35 because then only one consumer will purchase it and the profit will be 35. Overall the total profit is 130.
The bundled price acceptable to A is 50, to B it is 55, to C it is 70 and to D, it is 30. Now out of these four reservation bundled prices, a price of 50 will give a profit of 150 because three consumers will purchase it. A price of 55 will give a profit of 110 because two consumers will purchase. A price of 70 will give only a profit of 70 as only one consumer will purchase it. Hence the optimal bundle price is 50 and the profit is 150. Since bundled price gives a higher profit it should be a preferable strategy.