Question
In: Economics
3. Initially, Microsoft sold its programs Word and Excel separately. Now, it only sells them as...
3. Initially, Microsoft sold its programs Word and Excel separately. Now, it only sells them as a bundle. Assuming that Microsoft was always trying to maximize profit, what does this change in pricing suggest about how demand for the two products changed over time?
Solutions
Expert Solution
Assuming that Microsoft was always trying to maximize profit, the change in pricing suggests the following about demand for the two products changed over time :
Initially the demand for the two products was more or less equal which is why it did not matter whether the products were sold individually or in bundle. Over the time the demand for one of the two products might have decreased or for one it might have increased. Lets see each scenario one by one
Scenario 1: Suppose demand for word increased so the company in order to make profit thought it would be a great idea to bundle excel with word and increase price so that the effective profits increased.
Scenario 2 : Suppose now there is a better alternative product available for word so demand for it has decreased. Now to make enough profits the company pushed word along with excel and hence bundled them.
In a nutshell, when demands for both products are consistent it would make sense to sell them individually but if demands are inconsistent then bundling is the option for greater profits.
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