Pricing with market power review questions

12. Look again at Figure 11.17. Suppose that the marginal costs c
1
 and c
2
 were zero. Show 
that in this case, pure bundling and not mixed bundling, is the most profitable pricing 
strategy. What price should be charged for the bundle? What will the firm’s profit be? 
Figure 11.17 in the text is reproduced as Figure 11.12 here. With marginal costs both 
equal to zero, the firm wants to sell as many units as possible to maximize profit. Here, 
revenue maximization is the same as profit maximization. The firm should set the 
bundle price at $100, since this is the sum of the reservation prices for all consumers. At 
this price all customers purchase the bundle, and the firm’s revenues are $400. This 
revenue is greater than setting P
1
= P
2
= $89.95 and setting P
B
= $100 with the mixed 
bundling strategy. With mixed bundling, the firm sells one unit of Product 1, one unit 
of Product 2, and two bundles. Total revenue is $379.90, which is less than $400.
Since marginal cost is zero, and demands are negatively correlated, pure bundling is 
the best strategy. 
P
2
P
1
20
100
10
20
30
40
50
60
70
80
90
100
110
40
60
80
120
A
B
C
D
Figure 11.12 

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Chapter 11: Pricing with Market Power 
178
13. Some years ago, an article appeared in The New York Times about IBM’s pricing policy. 
The previous day IBM had announced major price cuts on most of its small and medium-
sized computers. The article said: 
 
“IBM probably has no choice but to cut prices periodically to get its