Question

2. A computer hardware firm sells both laptop computers and printers. It has a large inventory of laptops and printers that it wants to sell, so it has no variable
production cost. Through the magic of focus groups, their pricing team determines that they have an equal number of three types of customers, and that these customers’ reservation prices are shown in the table:

	Laptop	Printer	Bundle
Customer A	$800	$100	$900
Customer B	$1000	$50	$1050
Customer C	$600	$150	$750

a. If the firm were to charge only individual prices (not use the bundle price), what prices should it set for its laptops and printers to maximize profit? Assuming for simplicity that the firm has only one customer of each type, how much does it earn in total?
b. After conducting a costly study, an outside consultant suggests that the company could make more money from its customers if it sold laptops and printers together as a bundle instead of separately. Is the consultant right? Assuming again that the firm has one customer of each type, how much does the firm earn in total from pure bundling?
c. Why does bundling pay or not pay?

Answer 1

A. When the firm charges individual price. That is firm would not be charging bundle price.

In case of laptop when different price is charged.

Profit by charging $ 800 = 800 + 800 = $ 1600

Profit by charging 1,000 = $ 1,000

Profit by charging $ 600 = 3 × 600 =.$ 1,800

In case of printer when different price is charged.

Profit by charging $ 100 = 2 × 100 = $ 200

Profit by charging $ 50 = 3 × 50 = $ 150

Profit by charging $ 150 = $ 150

From above calculations we can see the profit is maximized when the price of laptop is $ 600 and price of printer is $ 100.

Net profit = $ 1,800 + $ 200 = $ 2,000

b. When the firm charges bundle price of $ 900, then demand is 2 bundles.

Profit = 2 × 900 =$ 1800

When the firm charges bundle price of $ 1,050, then quantity demanded is 1 bundle

Profit = $ 1,050

When the price of bundle is set at $ 750 then quantity demanded will be 3 units

Profit =.3 × 750 = $ 2,250

As we can see from above calculation that the profit by charging a bundle price is greater than the individual price. Thus, the consultant is right.

Profit under pure bundling =$ 2,250

c. Bundling generally don't pay, in this case it looks like that bundling is profitable it is so, because the price of Laptop and Printer is positively correlated.