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 serv- ices 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 forgo the additional services and simply buy the basic serv- ice. 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 chan- nel is zero, mixed bundling offers no advantage over pure bundling. Our profits would be just (iii) mixed bundling.
d. Which strategy would be most profitable? Why?