Question

The following table describes the willingness to pay by customers for the services of a telecommunications company. To keep things simple, you can assume that there is just one customer of each type and the firm cannot tell which customer type an individual person is. You can also assume that even if a person gets no consumer surplus, they will still buy the product.

The marginal cost to the firm of supplying each type of service is zero; all costs are fixed costs!

Customer Type	Voice Service	Data Service	Total Willingness to Pay
A	$9	$1.50	$10.50
B	$8	$5	$13
C	$4.50	$8.50	$13
D	$2.50	$9	$11.50

(a) [1] If the firm was going to set an individual price for each type of service, what would those prices be? Briefly explain your answer.

(b) [1] If the services were sold as a pure bundle, what would be the best price for that bundle? (Briefly explain.) Would selling the services as a pure bundle be more profitable than pricing them individually (as in part a)? Briefly explain.

(c) [2] Would mixed bundling be better than the pure bundle option? To explain, you will have to figure out what prices would be charged in that case and what the results would be.

Answer 1

A. The firm should set prices where the total revenue is highest.

For example, in case of voice service, if the firm keeps the price at 2.40, all 4 customers will buy it since it is within the willingness to pay of all of them. So, total revenue=2.5*4=10. If it keeps the price at 4.5, 3 will buy. Total revenue=4.5*3=13.5. If it keeps price at 8, 2 will buy. Total revenue=8*2=16. If it keeps price at 9, only 1 will buy and revenue will be 9.

So, for voice service the price should be 8 since that provides the maximum revenue at 16.

Similarly, for data service, price should be 8.5, cause total revenue would be highest then at 8.5*2=17.

B. In pure bundling the company must bundle the services together. The willingness to pay would be the sum of willingness to pay for each product. For example, willingness to pay for customer A would be 9+1.5=10.5

Willing to pay-

For A=10.5
For B=13
For C=13
For D=11.5

Here the best strategy would be to keep price at 10.5, as that would give maximum revenue of 10.5*4=42.

Since 42>33 (16+17, as shown in part A), the profit would be higher in case of pure bundling.

C. Mixed bundling is where we sell bundle to some customers and individual products to others, aiming for maximum revenue.

The optimal strategy here would be to offer B and C bundles at 13. Revenue from B and C=26.

Then offer voice service at 9, only A would buy. Revenue=9.

Then offer data service at 9, only D would buy. Revenue=9.

Total revenue in mixed bundling=26+9+9=44.

Since 44>42, mixed bundling is better option.