Suppose Comcast Is Trying To Decide How To Price Two Ch

Suppose That Comcast Is Trying To Decide How To Price Two Channels Ne

Suppose that Comcast is trying to decide how to price two channels (NESN, WGBH) which it wishes to sell to four consumers (Charlie, Deval, Mitt, and Paul), whose willingness to pay for each channel are listed below. Comcast incurs a marginal cost of $1 for selling an additional channel to a consumer. NESN WGBH Charlie 16 4 Deval 10 15 Mitt 14 9 Paul 3 18

(a) Suppose Comcast sells each channel individually. What are the optimal prices and who purchases which channel?

(b) Suppose Comcast sells the channels only as a bundle. What is the optimal bundle price and who purchases it?

(c) Suppose Comcast engages in a mixed bundling strategy. What are the optimal prices and who purchases what?

Paper For Above instruction

In markets for digital channels, network providers like Comcast face strategic decisions regarding pricing structures for multiple channels. These decisions include whether to sell channels individually, bundle them, or employ a mixed strategy. Analyzing each scenario requires understanding consumers' willingness to pay (WTP) and cost considerations. This paper explores the optimal pricing strategies that maximize revenue for Comcast when selling two channels—NESN and WGBH—to four consumers—Charlie, Deval, Mitt, and Paul—based on their respective valuations. The analysis proceeds through three parts: individual sales, full bundling, and mixed bundling.

Part A: Selling Channels Individually

When selling channels separately, Comcast sets a price for each channel that maximizes profit, considering consumers' valuations and the marginal cost of $1 per sale. The goal is to determine the profit-maximizing prices where consumers with valuations above these prices will purchase the channels.

For NESN:

  • Charlie values at 16 > P, Deval 10 > P, Mitt 14 > P, Paul 3 > P

For WGBH:

  • Charlie 4, Deval 15, Mitt 9, Paul 18

To find the optimal prices, we analyze the consumers' willingness to pay and identify the price point where the number of buyers maximizes profit:

  • For NESN, potential prices are considered between the highest valuation (Charlie: 16) and the lowest among buyers above cost, looking for the price that yields the highest revenue.
  • Similarly for WGBH.

Set NESN price at P_N, and WGBH at P_W. For each channel, the number of buyers at or above that price is counted, then multiplied by the price minus marginal cost (which is $1) to compute profit.

Maximizing this, the optimal prices are determined to be:

  • NESN at $10, where Charlie and Mitt purchase as their valuations are above $10, generating a profit of ($10 - $1) * 2 = $18.
  • WGBH at $15, where Deval and Paul purchase, with profit ($15 - $1) * 2 = $28.

Thus, the optimal prices are $10 for NESN and $15 for WGBH, with Charlie and Mitt buying NESN, and Deval and Paul buying WGBH.

Part B: Selling Channels as a Bundle

Under a full bundling strategy, Comcast offers both channels together at a single price. Consumers will purchase the bundle if their combined valuation exceeds this price.

The total valuations for each consumer:

  • Charlie: 16 + 4 = 20
  • Deval: 10 + 15 = 25
  • Mitt: 14 + 9 = 23
  • Paul: 3 + 18 = 21

Subtracting the marginal cost for two channels ($2), the consumer's net valuation is their total valuation minus $2. To maximize revenue, the bundle price is set at the highest price that the most consumers are willing to pay—that is, at or below the valuation of the consumer with the lowest total valuation among those who still choose to buy the bundle.

Choosing a bundle price at $21, just below Paul's valuation of 21, ensures all four consumers will buy, since their valuations are at or above this price and total net valuation exceeds cost. The profit in this case is ($21 - $2) * 4 = $76. Alternatively, setting a higher price at $23 would exclude Charlie, who values the bundle at 20 and thus would not buy. Revenue would decrease accordingly. Therefore, the optimal bundle price is $21, and all four consumers purchase.

Part C: Mixed Bundling Strategy

With mixed bundling, Comcast offers both channels separately and as a bundle, setting prices to maximize revenue. Consumers decide whether to buy channels individually or as a bundle based on their valuations.

Optimal individual prices are as in Part A: $10 for NESN and $15 for WGBH, with Charlie and Mitt buying NESN, and Deval and Paul buying WGBH.

For bundle pricing, as in Part B, the optimal bundle price is $21, with all consumers purchasing the bundle, given their combined valuations.

The strategic considerations involve setting the individual prices slightly below the valuations of potential buyers to attract their purchases, and setting a bundled price that captures consumer surplus from those who value both channels highly.

In this scenario, the best mixed bundling strategy is to offer channels individually at prices $10 and $15, respectively, and offer the bundle at $21, attracting all consumers who value both enough. Alternative configurations, such as higher individual prices or bundle prices, would result in fewer total sales and reduced revenue.

Overall, this strategy allows Comcast to segment the market effectively, capturing consumer surplus from different valuation profiles, and optimizing profit accordingly.

Conclusion

In conclusion, market strategies significantly influence revenue outcomes when selling multiple channels. Selling channels individually with prices set near consumer valuations maximizes profit per sale, while full bundling captures higher total consumer surplus but may exclude some buyers. Mixed bundling combines the benefits of both, allowing for market segmentation and maximizing revenue by tailoring prices for different consumer preferences. The choice of strategy depends on market structure, consumer valuations, and competitive dynamics, making comprehensive analysis essential for optimal decision-making in digital content distribution.

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