Question

The publisher Reed Elsevier uses a mixed-bundling pricing strategy. The publisher sells a university access to a bundle of 930 of its journals for $1.7 million for one year. It also offers the journals separately at individual prices. Because Elsevier offers the journals online (with password access), universities can track how often their students and faculty access journals and then cancel those journals that are seldom read. Suppose that a publisher offers a university only three journals—A, B, and C—at the unbundled, individual annual subscription prices of pA = $1,600, pB = $800, and pC= $1,500. Suppose a university’s willingness to pay for each of the journals is νA = $2,000, vB = $1,100, and vC = $1,400.

a. If the publisher offers the journals only at the individual subscription prices, to which journals does the university subscribe?

b. Given these individual prices, what is the highest price that the university is willing to pay for the three journals bundled together?

c. Now suppose that the publisher offers the same deal to a second university with willingness- to-pay vA = $1,800, vB = $100, and vC = $2,100. With the two universities, calculate the revenue-maximizing individual and bundle prices.

QUESTION C IS VERY CONFUSING FOR ME. THANKS FOR YOUR HELP AND STEP BY STEP EXPLANATION SIR/MADAM.

Answer 1

(a) If the publisher offers the journals only at the individual subscription prices, then PA = $1600, PB = $800 and PC = $1500. On the other hand, the willingness to pay at each of these prices are VA = $2000, VB = $1100 and VC = $1400.

Hence, the university will subscribe journal A (since VA (= $2000) > (PA = $1600)) and journal B (since VB (= $1100) > (PB = $800)). However,, it will not subscrive C because VC (= $1400) < PC (= $1500).

(b) If the three journals are bundled together, the university's maximum willingness to pay would be

VA + VB + VC = $2000 + $1100 + $1400 = $4500.

(c) No bundling: Price of journal A = $1600, since willingness to pay for journal A is more for both the university, both will subscribe => revenue from journal A = $1600 * 2 = $3200

Journal B will be subscribed only by first university at price 800. Hence, revenue from journal B = $800. Similarly, revenue from journal C = $1500 since it will be subscribed by the second university only.

Hence, without bundling, total revenue would be $3200 + $800 + $ 1500 = $5500

Bundling: The maximum subscription fee for 3 journals by university 1 = $4500 as observed in (b) above. Similarly, the maximum subscription fee for 3 journals by university 2 will be $1800 + $100 + $2100 = $4000.

Hence, if the bundle price with three journals together is kept at $4000, both the universities will subscribe the bundles, since their maximum willingness to pay for all journals is greater than the bundle price. Hence, total revenue = $4000 * 2 = $8000.

Therefore, revenue maximizing bundle price would be $4000.