Question

In: Economics

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
Next > < Previous

Related Solutions

Demand /yearly = 12,000, S = $16, and H =10% of the Price Offer. Discount Quantity,...
Demand /yearly = 12,000, S = $16, and H =10% of the Price Offer. Discount Quantity, Discount (%), Discount Price (P) 1. 1 to 999, no discount, $5.00 2. 1,000 to 1,999, 4%, $4.80 3. 2,000 and over, 5%, $4.75 (a) Evaluate the number of computers that the store manager should order in each replacement lot. (b) Maximum Inventory (c) Average Inventory (d) The total annual number of order cycles (e) Length of the order cycle (f) Average flow time...
COVID-19 could be one of the largest public health incidents in human history. The last time...
COVID-19 could be one of the largest public health incidents in human history. The last time was the Spanish flu pandemic of 1918, the deadliest in human history, infected an estimated 500 million people worldwide—about one-third of the planet’s population—and killed an estimated 20 million to 50 million victims, including some 675,000 Americans. As of October 5, 2020, more than 35.3 million COVID-19 cases have been reported across 188 countries with more than 1.03 million deaths. In the U.S. more...
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated...
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 500,500 units of product: sales $2,502,500, total costs and expenses $2,602,600, and net loss $100,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,142,140 $1,591,590 $550,550 Selling expenses 250,250 92,092 158,158 Administrative expenses 210,210 68,068 142,142 $2,602,600 $1,751,750 $850,850 Management is considering the...
Oriole Corp.’s sales slumped badly in 2020. For the first time in its history, it operated...
Oriole Corp.’s sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling  555,500 units of product: sales $ 2,777,500, total costs and expenses $ 2,869,875, and net loss $ 92,375. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $ 2,358,815 $ 1,905,365 $ 453,450 Selling expenses 277,750 102,212 175,538 Administrative expenses 233,310 75,548 157,762 Management is...
Sandhill Corp.’s sales slumped badly in 2020. For the first time in its history, it operated...
Sandhill Corp.’s sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 585,500 units of product: sales $2,927,500, total costs and expenses $3,035,440, and net loss $107,940. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,496,780 $1,920,440 $576,340 Selling expenses 292,750 107,732 185,018 Administrative expenses 245,910 79,628 166,282 $3,035,440 $2,107,800 $927,640 Management is considering the...
Blossom Corp.’s sales slumped badly in 2020. For the first time in its history, it operated...
Blossom Corp.’s sales slumped badly in 2020. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 505,500 units of product: sales $2,527,500, total costs and expenses $2,611,625, and net loss $84,125. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,146,565 $1,733,865 $412,700 Selling expenses 252,750 93,012 159,738 Administrative expenses 212,310 68,748 143,562 $2,611,625 $1,895,625 $716,000 Management is considering the...
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated...
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 525,500 units of product: sales $2,627,500, total costs and expenses $2,732,600, and net loss $105,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,249,140 $1,671,090 $578,050 Selling expenses 262,750 96,692 166,058 Administrative expenses 220,710 71,468 149,242 $2,732,600 $1,839,250 $893,350 Management is considering the...
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated...
Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 575,500 units of product: sales $2,877,500, total costs and expenses $2,992,600, and net loss $115,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,463,140 $1,830,090 $633,050 Selling expenses 287,750 105,892 181,858 Administrative expenses 241,710 78,268 163,442 $2,992,600 $2,014,250 $978,350 Management is considering the...
Problem 22-3A Tanek Corp.’s sales slumped badly in 2017. For the first time in its history,...
Problem 22-3A Tanek Corp.’s sales slumped badly in 2017. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 550,500 units of product: sales $2,752,500, total costs and expenses $2,862,600, and net loss $110,100. Costs and expenses consisted of the amounts shown below. Total Variable Fixed Cost of goods sold $2,356,140 $1,750,590 $605,550 Selling expenses 275,250 101,292 173,958 Administrative expenses 231,210 74,868 156,342 $2,862,600 $1,926,750 $935,850 Management is...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT