Suppose Time Warner Could Sell Showtime For $9 And History

Suppose Time Warner could sell Showtime for $9, and History

Please analyze whether Time Warner should employ mixed bundling by selling Showtime and the History Channel both separately and as a bundle at $13. Your answer must include the profit calculations with mixed bundling and clearly state assumptions regarding market share. Consider the given reservation prices for two customers: Customer 1 values Showtime at $9 and the History Channel at $2; Customer 2 values Showtime at $3 and the History Channel at $8. The licensing cost per customer is $1. Evaluate the profits under unbundled and bundled scenarios and justify your analysis based on predicted customer choices and market behaviors.

Paper For Above instruction

The decision of whether to adopt mixed bundling strategies hinges on understanding consumer valuation, potential market share, and profit maximization. Based on the provided reservation prices, Time Warner faces the challenge of determining whether selling Showtime and the History Channel separately, or in a bundled offer, yields higher profits. This analysis involves calculating the profits under various scenarios, making assumptions about customer preferences, and understanding how these influence revenue and cost structures.

In the unbundled scenario, Showtime and the History Channel are sold separately at their respective reservation prices of $9 and $8, assuming each customer purchases only if their valuation exceeds the price. For Customer 1: valuation for Showtime is $9, so they will purchase at $9, yielding a gross revenue of $9 minus a $1 licensing fee, and similarly for the History Channel: valuation is $2, which suggests the customer would not purchase it if priced at $8. Conversely, Customer 2 values the History Channel at $8 and would buy it at $8, but their valuation for Showtime is only $3, which is below $9, so they would not buy Showtime separately. Thus, in the separate selling scenario, only Customer 1 might buy Showtime, and Customer 2 might buy the History Channel, each contributing profits after deducting licensing costs.

Under a bundling strategy, offering both channels together at a bundle price of $13, considers the combined valuations. Customer 1's total valuation for both channels is $9 + $2 = $11, which is below $13, so they would not buy the bundle. Customer 2's total valuation for both is $3 + $8 = $11, also below $13, so neither customer would purchase the bundle. This indicates that bundling at $13 would likely result in no sales, leading to zero profit. Alternatively, if the bundle price were set lower than $11, it could potentially sell to either customer who values the combined package above that price.

Calculating profits explicitly involves estimating the number of customers who will purchase at given prices and deducting licensing fees. For example, selling Showtime separately at $9 would generate a profit of ($9 - $1) for Customer 1, but zero from Customer 2 since they do not value that channel enough to buy it. For the History Channel at $8, only Customer 2 would purchase, generating a profit of ($8 - $1). When comparing total revenues and costs, mixed bundling could increase overall profit if it enables capturing additional consumer surplus or incentivizes more customers to buy both channels at a combined price that exceeds their combined valuations.

In conclusion, whether to implement mixed bundling depends on customer valuation distributions and strategic pricing. Given the information, selling channels separately at their reservation prices seems optimal, as bundling at $13 doesn't attract any buyers with the given valuations. However, if Time Warner adjusts bundle prices or targets different market segments, bundling could become profitable. Thus, understanding detailed consumer preferences and willingness to pay is vital for making these strategic decisions, and employing price discrimination through bundling or unbundling can maximize revenue and profit.

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