Solved: A cable TV company offers in addition to its basic

A cable TV company offers in addition to its basic

A cable TV company offers, in addition to its basic service, two products: a sports channel
(product 1) and a movie channel (product 2). Subscribers to the basic service can subscribe to
these additional services individually at the monthly prices P1 and P2, respectively, or they can
buy the two as a bundle for the price PB, where PB ? P1 ? P2. They can also forego the
additional services and simply buy the basic service. The company’s marginal cost for these
additional services is zero. Through market research, the cable company has estimated the
reservation prices for these two services for a representative group of consumers in the
company’s service area. These reservation prices are plotted (as x’s) in Figure 11.21, as are
the prices P1, P2, and PB that the cable company is currently charging. The graph is divided
into regions, I, II, III, and IV.

a. Which products, if any, will be purchased by the consumers in region I? In region II? In region
III? In region IV? Explain briefly.

b. Note that as drawn in the figure, the reservation prices for the sports channel and the movie
channel are negatively correlated. Why would you, or why would you not, expect consumers’
reservation prices for cable TV channels to be negatively correlated?

c. The company’s vice president has said: “Because the marginal cost of providing an
additional channel is zero, mixed bundling offers no advantage over pure bundling. Our profits
would be just as high if we offered the sports channel and the movie channel together as a
bundle, and only as a bundle.” Do you agree or disagree? Explain why.

d. Suppose the cable company continues to use mixed bundling to sell these two services.
Based on the distribution of reservation prices shown in Figure 11.21, do you think the cable
company should alter any of the prices it is now charging? If so, how?

A cable TV company offers in addition to its basic

ANSWER
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