Time Warner could offer the History Channel (H) and Showtime (S) individually or as a bundle...

Time Warner could offer the History Channel (H) and Showtime (S) individually or as a bundle of both.

Suppose the reservation prices of customers 1 and 2 (the highest prices they are willing to pay) are presented in the boxes below.

The cost to Time Warner is $1 per customer for licensing fees.

Preferences

Showtime History Chanel

Customer 1 9 2

Customer 2 3 8

Should Time Warner bundle or sell separately? Your answer needs to include the non-bundled and bundled profits.

Solutions

Expert Solution

Let us first find the best way to bundle. If it sells the bundle of both the channels for a price p, customers 1 and 2 are both willing to pay 9+2=11 and 3+8=11 for the bundle. Thus, the best price time warner could charge is 11. This would lead to both customers buying the bundle and time warner would make the bundle profit of 11+11-1-1=20

Now let us find the best non-bundled prices. Let p1 be the best price for showtime and p2 be the best price for history. A customer buys a channel if and only if its value if greater than the price for that channel. Therefore, given this information, if p1 is 9, only customer 1 buys it and p1 is 3, both customers buy it. Clearly, the best option is p1=9 in which case the profit from showtime is 9-1=8. Similarly, the best price for history would be p2=8 an only customer 2 will purchase it leading to profit of 8-1=7. This leads to the best non-bundled profits of 8+7=15.

Since the profit from bundling is higher than the profits from non-bundling (20>15), Time Warner should bundle and sell the bundle at price 11 instead of selling the channels separately.

Rahul Sunny answered 1 year ago

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