Question: In the following table, we consider how Alex, Tyler, and Monique would fare under à la carte pricing and under bundling for cable TV when there are two channels: Lifetime and the Food Network. Alex and Tyler like to watch Project Runway so they each place a higher value on Lifetime than on the Food Network. Monique is practicing to be an Iron Chef in her second life so she places a higher value on the Food Network than on Lifetime.
a. If the channels are priced individually, the most profitable prices for the cable operator turn out to be 10 for Lifetime and 7 for the Food Network. At these prices, who buys what channel and how much profit is there?
b. Let's just check to see if these prices really are profit-maximizing. What would profit be if the cable company raised Lifetime to a price of 11 and Food Network to a price of 8?
c. At the profit-maximizing prices, how much total consumer surplus would there be for the three of them? (Recall that consumer surplus is just each customer's willingness to pay minus the amount each person actually paid.)
d. Now consider what happens under bundling: Customers get a take-it-or-leaveit offer of both channels or nothing at all. The profit-maximizing bundle price turns out to be 12, and at that price, Alex, Tyler, and Monique all subscribe. How much consumer surplus is there at this price? How much profit? And, most important, what would profit equal if the cable company raised the price to 13 instead?