Let RA1, RA2, RA3, RA4 be the reservation price for consumer A for each of the goods 1, 2, 3, and 4 and that for Large French fries and medium soft drink be RAF, RAS. Similarly, let RB1, RB2, RB3, RB4 be the reservation price for consumer B for each of the goods 1, 2, 3, and 4 and that for Large French fries and medium soft drink be RBF, RBS. Consumers will buy a good if the reservation price exceeds the price of the individual good. Similarly, consumers will buy a bundle if the reservation price exceeds the price of the bundle. Suppose that the reservation prices of consumer A for each product are –
RA1 = 2.8, RA2 =0.90, RA3=1.2, RA4=2 and RAF=1.4, RAS=1.05.
Then, for each bundle, his reservation price would be as follows –
C1 = RAF+ RAS + RA1 = 1.4 + 1.05 + 2.8 = 5.25
C2 = RAF+ RAS + RA2 = 1.4 + 1.05 + 0.95 = 3.35
C1 = RAF+ RAS + RA3 = 1.4 + 1.05 + 1.2 = 3.65
C1 = RAF+ RAS + RA4 = 1.4 + 1.05 + 2 = 4.45
Thus we see that based on reservation price, the value of each bundle to consumer varies. In the above example, the consumer A will never buy C2 since the price of the bundle is greater than his combined reservation price.
2. In the case of mixed bundling, the consumers are not forced to choose a particular bundle or quantity. They have their freedom of choice. However, the firm here is able to capture much of the consumer surplus. The more negative correlation between the demand for each good, more the consumer surplus a firm is able to extract. It is price discrimination as it enables the producer to charge more to consumers who value the goods more. Indirect price discrimination is practised through customer choices by giving them offers, unlike direct price discrimination that is based on individual buyer. So, this is indirect price discrimination.
3. Bundling is a profitable venture as the strategy enables them to extract consumer surplus for consumers. It also helps to increase the sales by clubbing together a relatively high value good with a relatively less valuable one. It allows the firm to discriminate between consumers based on their willingness to pay. The most effective mixed bundle design would be the one where the reservation price of an additional product to a bundle is greater than the difference between the price of the bundle and buying the items separately.
Question 4- McDonald is famous for the Extra Value Meal, a form of mixed bundling with a leader c...