This article from the WSJ is a great example of the effects of (un)bundling.
SUMMARY: A future where television viewers subscribe to each channel they want could make the average cable TV bill-which hovers about $90-seem like a bargain.
CLASSROOM APPLICATION: Instructors can use the article to compare bundling and a la carte pricing. They can present bundling as a means to extract consumer surplus and also possibly as a means to improve economic efficiency (by providing goods should be, but are not, provided under a la carte pricing).
QUESTIONS:
1. (Advanced) Consider a simple case in which two people can subscribe to a cable network, ESPN for example. Person 1 values the network at $10 and person 2 values it at $20. The total cost of providing the network to either one or two people is $25. Is it efficient to provide the network? Suppose a cable company charges each person the same price for the network. What is the minimum price for which the network would be provided? If the network is provided a la carte at this price, would both people subscribe to the network? Suppose the network is bundled with others in a cable package. In doing so, the price of the bundled package would increase by the minimum price needed to provide the network. Is it possible that both people would subscribe to the bundled package? If so, would the shift to bundled networks from a la carte pricing improve economic efficiency?
2. (Advanced) Consider two people. Person 1 values ESPN at $12 per month and Bravo at $5 per month. Person 2 values ESPN at $5 per month and Bravo at $12 per month. Suppose the total cost offering each network is zero. What is the profit-maximizing (i.e., revenue-maximizing) price of the bundled networks? What are the profit-maximizing prices of the a la carte networks? Does the cable company prefer to bundle the networks?
3. (Introductory) "All these things are so much more expensive when you separate them out," said David Bank, an analyst at RBC Capital Markets. "You are going to have to pay more for less choice." Does this statement imply that everyone would be made worse off by the shift from bundled network pricing to a la carte pricing? Is it the case that everyone would be made worse off?
CLASSROOM APPLICATION: Instructors can use the article to compare bundling and a la carte pricing. They can present bundling as a means to extract consumer surplus and also possibly as a means to improve economic efficiency (by providing goods should be, but are not, provided under a la carte pricing).
QUESTIONS:
1. (Advanced) Consider a simple case in which two people can subscribe to a cable network, ESPN for example. Person 1 values the network at $10 and person 2 values it at $20. The total cost of providing the network to either one or two people is $25. Is it efficient to provide the network? Suppose a cable company charges each person the same price for the network. What is the minimum price for which the network would be provided? If the network is provided a la carte at this price, would both people subscribe to the network? Suppose the network is bundled with others in a cable package. In doing so, the price of the bundled package would increase by the minimum price needed to provide the network. Is it possible that both people would subscribe to the bundled package? If so, would the shift to bundled networks from a la carte pricing improve economic efficiency?
2. (Advanced) Consider two people. Person 1 values ESPN at $12 per month and Bravo at $5 per month. Person 2 values ESPN at $5 per month and Bravo at $12 per month. Suppose the total cost offering each network is zero. What is the profit-maximizing (i.e., revenue-maximizing) price of the bundled networks? What are the profit-maximizing prices of the a la carte networks? Does the cable company prefer to bundle the networks?
3. (Introductory) "All these things are so much more expensive when you separate them out," said David Bank, an analyst at RBC Capital Markets. "You are going to have to pay more for less choice." Does this statement imply that everyone would be made worse off by the shift from bundled network pricing to a la carte pricing? Is it the case that everyone would be made worse off?
Reviewed By: James Dearden, Lehigh University
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