What types of consumers have less elastic demand for groceries?‒Generally, the smaller the proportion of income spent on an item, the less elastic the demand—wealthier consumers have less elastic demand.‒Wealthier consumers also value time, are less likely to search around for low prices or coupons.
Bundling10.5Bundlingis a pricing strategy in which a firm sells two or more products together at a single price.When to Use It:Bundling1.The firm has market power and can prevent resale2.The firm sells a second product, and consumers’ demand for that product is negatively correlatedwith their demand for the first product.
Bundling10.5Examples of BundlingCable and satellite television providers•In general, there is little flexibility in choosing a menu of channels from the cable company.•Cable companies have resisted attempts to decouple channels. Why?
Bundling10.5Consider two consumers, Madison and Dakota, who are looking to subscribe to a cable service with two channels, ESPN and the History Channel.•First, consider positively correlated demand. (As demand for one channel increases across consumers, demand for the other increases as well.)•Without bundling, the company can charge a maximum of $9 for ESPN and $1 for the History Channel, for a total of $20 in revenue, if they want both Madison and Dakota to subscribe.•With bundling, they can charge a maximum of $10 for the bundle and get both customers.•No benefit to bundling with positive correlation.
Bundling10.5Now consider the same market, but with negatively correlated demand.•Once again, without bundling, the company can charge a maximum of $9 for ESPN and $1 for the History Channel, for a total of $20 in revenue, if they want both Madison and Dakota to subscribe.•However, with bundling, they can charge a maximum of $10.50 for the bundle and keep both consumers, increasing total revenue to $21 for the two consumers.
Bundling10.5Mixed Bundling Pure bundling is a type in which the firm offers products only as a bundle.Alternatively, in mixed bundling the firm offers consumers the choice of buying two or more products separately or as a bundle.•Example: Value meals at fast-food restaurants
In-text figure it outFit Club is a health club that offers two types of equipment: weight machines and a swimming pool. There are three customers, Abdul, Betty, and Chris. The table shows their willingness to pay for the different products. Each product has a constant marginal cost of $20 per month per user. Each customer is considering monthly access to each type of equipment.Answer the following questions:a.What price will Fit Club charge for each product if it wants each customer to purchase a membership to each product? Calculate the producer surplus if it offers separate access to the weight room and pool at these prices.