At a student cafe, there are equal numbers of two types of customers with the fo

Question

At a student cafe, there are equal numbers of two types of customers with the following values. The cafe owner cannot distinguish between the two types of students because many students without early classes arrie early anyway (i.e., she cannot price discriminate).

coffee: (Students with Early Classes) 70  (Students without Early Classes) 60

banana:  (Students with Early Classes) 50 (Students without Early Classes) 100

The MC of coffee is 10. The MC of a banana is 40. Is bundling more profitable than selling separately? if so, what price should be charged for the bundle?

Explanation / Answer

When price discrimination is not possible and if two conditions are met, bundling multiple goods and charging a single price for the bundle can be more profitable than charging individual prices for multiple goods.

The two conditions for profitable bundling are,

(1) consumers must have different demand prices for each of the goods in the bundle

(2) the demand prices for the multiple products must be negatively correlated across consumer types.

Lets say we charge 50% mark up above the marginal cost.

Strategy One (low value customers): 15 (coffee) + 40 (bananas) = 55

Strategy Two (high value customers: 10 (coffee) + 60 (bananas) = 70

Strategy two is more profitable, which is why 70 should be charged for the bundle.

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