Question

A firm produces two products where marginal cost of production for each product is equal to $30.

The table below shows the reservation prices of different types of consumers for each of your product.

Consumer Type	Product 1	Product 2
A	25	100
B	40	80
C	80	40
D	100	25

Consider three alternative pricing strategies (i) only selling the goods individually (ii) only bundling and (iii) providing both as a package and individually. For each strategy, determine the optimal prices to be charged and the resulting profits.

Answer 1

With marginal cost of $30, the optimal prices and profits are:

	Price 1	Price 2	Bundled Price	Profit
Sell Separately	$80.00	$80.00	—	$200.00
Pure Bundling	—	—	$120.00	$240.00
Mixed Bundling	$95	$95	$120.00	$250.90

When selling separately,the producer will price the good at $80 which will result in him being able to sell 4 quantities,his profit = 80x4-30x4 = $200

When Pure bundling the producer will offer both the good together in which case the minimum of two goods reservation price together is at consumers' B and C- 40+80 and 80+140 so the bundled price will be 120 and TR-TC = 120x4-30x4 = $240

When mixed bundling the goods the firms offer the goods at a bundle price of their maximum and minimum reservation price which is 120 and 125 then at the following combination the firm will get a maximum profit - Price of good 1 - 99 and price of good 2-99-bundle price - 120

In this combination bundle price is 120 at which all four can buy the goods so the mixed strategy is not optimal so the firm will keep it separately and charge little below $100 which induces A and D to buy the good.The price can be further lowered to $95 in which case TR=95x2+120x2 = 430 - 6x30 = $250