Question: A clever strategy firms with market power often use to extract consumer surplus is bundling. This involves selling two or more goods together. A good example to think about concerns season tickets to the symphony. Suppose, for the sake of argument, that the symphony plays three concerts in the season, one which is all Beethoven, one all Handel, and one modern music concert, featuring the work of Penderecki. Imagine that there are a number of consumers who might purchase tickets to these concerts. In particular, imagine that there are two seats that can be sold, and four consumers who might purchase them. (I think this defines what economists call a highly simplified model.) Consumer 1 would pay $15 to hear Beethoven, $8 to hear Handel, and $0 to hear the modern music concert. Consumer 2 would pay $8 to hear Beethoven, $3 to hear Handel, and $6 to hear the modern music concert. Consumer 3 would pay $5 to hear Beethoven, $9 to hear Handel, and $12 to hear the modern music concert. Consumer 4 would pay $3 to hear Beethoven, $3 to hear Handel, and $3 to hear the modern music concert.
a. If we charge a different price for each individual concert, how much would we charge for Beethoven? Handel? The modern music concert? What would be our profit in this case?
b. If instead, we sold a season ticket to all three concerts, what would be the (profit maximizing) price? What would be the profit in that case?
c. Can you think of even a more profitable bundling strategy?
Now, suppose that instead of the pricing strategies described above, we offer the following three subscriptions: One for the Beethoven and Handel concerts, one for Beethoven and modern music, and one for Handel and modern music. For the Beethoven and Handel subscription we charge $21.95, for the Handel and modern music subscription we charge $17.95, and for the Beethoven and modern music subscription we chare $13.99. (I'm designing prices so that there are no ties in any consumer's preferences.) Each consumer will wish to purchase the subscription that offers him the highest surplus. Please answer the following questions:
d. Which consumers will wish to purchase which subscriptions (if any)?
e. Will this pricing scheme cause two seats to each concert to be sold?
f. What will be the revenues generated by this scheme?
In your answer assume that there is no possibility that a consumer (or independent entrepreneur) could buy a series, unbundle it, and sell off the pieces.
g. Why is the assumption above important?