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Separately-priced-items strategy

Problem 1.  The manager of Joe's Menswear has noticed that over the past two holiday seasons their usual sales strategy of marking down prices has not been yielding the boost in revenues that it once did.  JM sell men's suits, dress shirts, and leather shoes. There are three types of customers that typically come to JM. One type (A) comes to JM mainly for their suits, while another (B) likes their unique selection of shirts and ties. The third group (C) comes to the store looking for JM's imported, hand crafted leather shoes and belts.  Fifty percent of the customers are type A, 25% are type B and 20% are type C. JM regularly prices their merchandise at customer type B's reservation prices.

The following table provides the reservation price ($) for each type of customer -

 

Suits

Shirts

Shoes

Type A

550

175

221

Type B

400

220

245

Type C

360

245

275

Type D

350

230

295
  1. If JM were to price each item separately, then what would be the revenue maximizing price for each item? How much revenue would be earned from 100 customers?
  2. Devise a pure bundling strategy that maximizes revenue for JM and show if your bundling strategy is better than a separately-priced-items strategy.
  3. Will a mixed bundling strategy (with a suit/shirt combo) and with shoes priced separately give higher revenues? If yes, then demonstrate numerically. If no, demonstrate numerically.
  4. What practical obstacles may prevent JM from using a pure bundling strategy? What obstacles may prevent the use of a mixed bundling strategy?

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