Question

Adobe creates a wide variety of software. It is considering whether or not to bundle together its photo editing software, Photoshop, with its video editing software, Premiere. The marginal cost of producing each type of software is zero. The table below shows the willingness to pay for each product among photographers and videographers. What are the profits when the two are sold separately and what are the profits when they are bundled together? What must be true for bundling to have higher profits? Is that true here?

Customer Type	Photoshop	Premiere
Photographers	$400	$200
Videographers	$300	$500

Answer 1

Given there are two consumers: Photographers and videographers with different reservation price, we see that if the price of photoshop is fixed at $400, one consumer would buy it, making the total revenue equal to $400. On the other hand, if the price is $300, both consumers would buy, taking the revenue and profit equal to $600. Hence the price of photoshop would be $300.

On the other hand, if the price of the premiere is fixed at $200, two consumers would buy and total revenue as well as profits would be $400. If the price is $500, only one would buy but the profit would be higher than the first case. Hence here the price would be $500.

Total profit= $500+$600=$1100

Now if the seller is bundling the goods, photographer would have the reservation price as $600 and videographer as $800. So if bundle is priced at $800, only one would be bought and if it is priced at $600, 2 bundles would be purchased, making the total revenue as $1200.

Hence the profits in bundling ie $1200 is more than selling the goods separately.

In case of bundling, the seller would have higher profits, because addition of different reservation prices leads to the bundles being close in numbers ie when the goods are sold separately, the reservation price of one good may be higher for one and lower for another and vice versa.

So when these reservation prices are combined, then the values of bundles are such that selling in a bundle increases the profit.

Yes, this is observed in the example above. For photoshop, photographer has a higher value than videographer and vice versa. This difference is balanced in the bundle and hence the seller is able to gain more from selling in the bundle.