Question

Bubba’s Burger Shack is the only cafeteria in a minimum-security prison; it sells burgers and fries. There are four different types of customers with the following willingness-to-pay or reservation prices for the two products:

Fries Burgers
Type I   $3.60   $0.30
Type II   $2.00   $2.00
Type III   $1.60   $2.40
Type IV   $0.10   $3.80
The cost of making an order of fries is constant at $0.80 and the cost of producing a burger is also constant at $1.20.

(a) Calculate Bubba’s profits if the Burger Shack follows a standard pricing policy and prices burgers and fries separately.

(b) Calculate Bubba’s profits if the Burger Shack follows a pure bundling strategy and sells burgers and fries together as a combo meal.

(c) Calculate Bubba’s profits if the Burger Shack follows a mixed bundling strategy, i.e. it sells burgers and fries as combo meal and burgers and fries separately.

Answer 1

a) If the priciing would have been standard the Bubba would have chosen to price Burger at $2 or $2.4 cost which would have given highest profit assuming equal customers for each category and we would have catered to TypeII,III and IV with profit of 2-1.2=0.8 per customer per category hence 0.8*3=2.4 total for a customer across three category, now for fries also we would price at 1.6 or $2 with $1.6 catering to Type I,II and III and profit of 1.6-0.8=0.8 per customer per category hence 0.8*3=2.4 for a customer across all three category

b) In case of pure bundling the bundled price would be $3.9 across the categories with cost of 1.2+0.8=$2 per bundle and profit of $1.9 per bundle at this price the bundle would be under willingness to pay for each category with a profit of $1.9*4 =7.6 per customer across categories.

c) In case of mixed bundling the bundle price would be $4 to cater Type II and III whereas individual price would be $3.8 for Burger to cater type IV willingness for burger and $3.6 for fries to cater type I willingness for fries thereby gain on bundle is 4-2=2 per person per category or 2*2=$4 for per person in each category whereas from Type I profit for sale of fries =3.6-0.8=$2.8 and from Type IV profit from sale of burger=3.8-1.2=$2.6 Hence,Total profit from mixed bundling=4+2.8+2.6=$9.4 for a customer across each category which is higher than both other pricing strategies before.