Question

Suppose you are the manager of a small, local diner. You have been studying the sales data of your restaurant over the past year. You have managed to identify two groups of            consumers who frequent your establishment and have cross-referenced their orders with historical data. You have jotted down the following notes to yourself:

                       

	Hamburger	French Fries
Group 1 Maximum Valuation	$3.00	$1.00
Group 2 Maximum Valuation	$2.50	$2.00

Currently, you sell your products a la carte (separately on the menu). However, you are wondering whether or not bundling hamburgers and French fries together might increase your total revenues. (Note: You cannot price discriminate in this situation.)

a) If the a la carte price for a hamburger is currently $3.00 and the a la carte price of fries is $2.00, how much revenue would you make (assume one typical consumer from each group)? Calculate and show. (5 points)

b) What bundle price could you set (if any) where the typical consumer from both groups would purchase the package? Is there a bundle price where this can occur that would make         revenues higher than selling each product separately using the prices in part a)? Why or why not? Given the correct answer here, should you bundle the two products versus      selling them separately? (5 points)

Answer 1

a)

If la carte price of hamburger is currently $3.00, only group 1 will purchase it at this price, as its price is equal to its maximum value for group 1 . Current hamburger price is higher than the maximum value of hamburger for group 2, they will not buy hamburger at this price.

Revenue from selling hamburger=TR_H=Price*quantity sold=3*1=$3

If la carte price of fries is currently $2.00, only group 2 will purchase it at this price, as its price is equal to its maximum value for group 2. Current price is higher than the maximum value of fries for group 1, they will not buy fries at this price.

Revenue from selling fries=TR_F=Price*quantity sold=2*1=$2

Total Revenue=TRH+TR_F=3+2=$5

b)

Let us consider the bundle price be $4 ($3+$1)

A typical consumer from each group will buy it as bundle price is lower or equal to the combined value for each group.

Total Revenue from bundle price of $4=Price*Quantity=4*2=$8

Let us consider the bundle price be $4.50 ($2.50+$2)

A typical consumer from group 2 will buy it as bundle price is equal to the combined value for group 2. Group 1 will not buy it as its bundle price is higher than the combined value for them.

Total Revenue from bundle price of $4.50=Price*Quantity=4.50-*1=$4.50

We observe that bundle price of $4 gives higher revenues. It is even higher than the in case of a single price mentioned in part (a).

We can get higher revenues in case of bundle pricing in this case.