Suppose that Comcast is trying to decide how to price two channels (NESN, WGBH)

Question

Suppose that Comcast is trying to decide how to price two channels (NESN, WGBH) which it wishes to sell to four consumers (Charlie, Deval, Mitt, and Paul), whose willingness to pay for each channel are listed below. Comcast incurs a marginal cost of $1 for selling an additional channel to a consumer. Suppose Comcast sells each channel individually. What are the optimal prices who purchases which channel? Suppose Comcast sells the channels only as bundle. What is the optimal bundle price and who purchases it? Suppose Comcast engages in a mixed bundling strategy. What is the optimal prices and who purchases what?

Explanation / Answer

(a)

In order to maximize profit, the firm will set the minimum price the consumer is willing to pay as optimal price. This is given by $3 for NESN and $4 for WGBH. At thse prices every consumer will buy both the channels.

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(b)

The reservation price for bundle for each consumer is given in the table below

The firm will set the bndling price to $20. This way each consumer will buy the budled channel. This will increase the profit of the firm.

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(c)

In case of mixed bundle, the firm will set the price for NESN to $16 and that of WGBH to $18. The budle price to $25. This way the consumer D and M will buy the bundle as the individual price is greater than the reservation price of D and M. C will buy NESN and P will buy WGBH.

NESN+WGBH C 20 D 25 M 25 P 21

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