Posted by **Leonardo Yang** on Monday, November 12, 2012 at 11:24pm.

You are the manager of a firm that sells CD players and DVD players. You work in Buffalo,

New York and this is the middle of winter. So the people that live within walking distance are

the only customers you might get, and there are no other stores nearby. (FedEx and UPS can't get

through the snow either, so don't think about these customers shopping online). You know that

there are three different types of consumers who value your two products differently, but you are

unable to identify these consumers individually at the time of the sale. Assume that the firm’s

costs are zero (for simplicity). Also, assume that there is one consumer of each type. However,

the three types of consumers have the following valuations (reservation prices) for the two

products:

Consumer Type DVD Player CD Player

A $200 $500

B $700 $200

C $520 $0

a) If the firm sells the products separately, what price should it charge? How much profit will it

earn?

b) If the firm sells the two products as a bundle, what price should it charge? How much profit

will it earn? Does bundling make sense here?

c) Finally, suppose that the firm offers its consumers a choice. They can either buy the DVD

player by itself for a certain price or they can buy the bundle at a different price. What price

should the firm set for the DVD player by itself? For the bundle? What profit will the firm earn

using this strategy?

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