Economics
posted by Leonardo Yang .
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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