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. Also, assume that there is one consumer of each type. However, rs have the following valuations 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?