Look again at Figure 11.12 (p. 434), which shows the reservation prices of three consumers for two goods.

Assuming that marginal production cost is zero for both goods, can the producer make the most money by selling the goods separately, by using pure bundling, or by using mixed bundling? What prices should be charged?

• Separate pricing policy:Under this pricing policy, the producer charges separate prices for each good from the consumers based upon their maximum reservation prices. The producer will charge the price based upon the customer’s maximum reservation prices for good. Customer A’s reservation price for Good 1 is higher than Good 2. Customer B’s reservation price for Good 2 is higher than Good 2, and Customer C’s reservation price for both the good is the same.

Thus, under this policy, the producer can earn maximum profit by charging $6 for Good 1 from A, $8.25 for Good 2 from B, and $10 for either of the goods from C. Since the marginal cost is assumed zero, the total profit would be (6+8.25+10) = $22.25

• Pure bundling:Under this pricing policy, the producers sell both the goods as an individual product and charge a combined price for both the goods. If the producer applies this pricing strategy, it will bundle both the goods into a single package. The maximum price the producer can charge is $20 for the package.

At this price, only Customer C would be able to purchase the package. Hence the total profit of the firm will be $20.

• Mixed bundling:When a producer uses both the pricing policy (selling goods separately and pure bundling) to charge different consumers, it comes under a mixed bundling pricing policy. If the producer applies this pricing strategy, they will apply a separate pricing policy for Customer A and Customer B and sell the package of both the goods to Customer C.

Under this policy, the producer will charge $6 for Good 1 from A, $8.25 for Good 2 from B, and a package price of $14.25 from Customer C. The total profit would be the sum of all three, (6+8.25+14.25) = $28.5.

On comparing all the three possible pricing strategies, it is clear that the mixed pricing policy yields the maximum profit. Hence, the producer will earn most of the money by applying mixed pricing policy.

The producer should charge a price equal to the maximum reservation prices of the customers for that good or combination of goods (package). Since the producer applies a mixed pricing strategy, they will apply a ‘separate pricing policy’ on Consumers A and B and bundling price from Consumer C.

Customer A’s reservation price for Good 2 is higher than Good 1, and Customer B’s reservation price for Good 1 is higher than Good 2. Thus, the producer will set the price for Good 1 at $6 and Good 2 at $8.25. In this way, the producer can earn the maximum possible return on both the goods.

The producer will offer a package price for both goods to Customer C. Customer C’s reservation price for each good is $10; they will buy the package of both the goods. The maximum price the producer will charge on the package will be the price sum of both the goods. Thus, Customer C will pay $14.25 (6+8.25) for the package.