Question

Scammers Inc. has developed a new Immune Booster drink (IB) as well as a “cure” for Covid-19 based on Colloidal Silver (CS). As the product manager for the firm, you are responsible for setting the pricing policy for the new products. You are considering a bundled package that includes both products, and you assume the marginal cost of production is zero for planning purposes. You have identified four basic types of customers who may buy these new products, and their reservation prices for the two new products are provided in the following table:

Type	Immune Booster (IB)	Colloidal Silver (CS)
A	$5	$18
B	$8	$11
C	$10	$9
D	$14	$3

1. Suppose you sell the two products separately, and each buyer is expected to purchase one unit of the product per week. Which prices for IB and CS maximize weekly revenue? What is the weekly revenue equal to?

2. If you offer the two products under a pure bundling strategy, what is the revenue maximizing bundle price? What is the weekly sales revenue from the pure bundling scheme?

3. What are your firm’s profits if you charge $19 for a bundle containing one unit of IB and one unit of CS but also sell the products separately at a price of $14 for IB and $18 for CS?

Answer 1

If price of IB is set at $5, all of them will buy. Hence, revenue = $5x4 = $20
If price of IB is set at $8, all but A will buy. Hence, revenue = $8x3 = $24
If price of IB is set at $10, only C and D will buy. Hence, revenue = $10x2 = $20
If price of IB is set at $14, only D will buy. Hence, revenue = $14x1 = $14
Therefore, if revenue to be maximized for IB, the price should be set at $8.

If price of CS is set at $3, all of them will buy. Hence, revenue = $3x4 = $12
If price of CS is set at $9, all but D will buy. Hence, revenue = $9x3 = $27
If price of CS is set at $11, only A and B will buy. Hence, revenue = $11x2 = $22
If price of CS is set at $18, only A will buy. Hence, revenue = $18x1 = $18
Therefore, if revenue to be maximized for CS, the price should be set at $9.

So, if IB and CS to be sold separately, the price of IB should be $8 and the price of CS should be $9. So, total revenue (maximized) would be $24 + $27 = $51
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Pure Bundle

Total willingness to pay by A = $5+$18 = $23.
Total willingness to pay by B = $8+$11 = $19.
Total willingness to pay by C = $10+$9 = $19.
Total willingness to pay by D = $14+$3 = $17.
If bundle price is set at $17, all will buy. Hence, revenue = $17*4 = $68.
If bundle price is set at $19, all but D will buy. Hence, revenue = $19*3 = $57.
If bundle price is set at $23, only A will buy. Hence, revenue = $23*1 = $23.
Hence, with pure bundle price, revenue is maximized if the bundle price is set at $17. Hence, the maximized profit = $68.

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Mixed Bundle

If bundle price is set at $19, all but D will buy. Hence, revenue = $19*3 = $57.
Since the price of IB and CS are set at $14 and $18 respectively, D will buy only IB.
Hence, total revenue = $57+$14=$71.

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Conclusion: Out of the above three pricing strategies, mixed bundle will generate the maximum revenue and hence this strategy should be followed.