8. Is bundling profitable?
Suppose that Frances is the owner of the only nonmotorized water sports rental shop on a small lake in Michigan. At Frances's shop, customers can rent a variety of items such as canoes, paddle boats, tubes, and windsurfers. Assume that the marginal cost of renting out any of these items is $5 per item. Moreover, there are only two types of customers-college students and retired people-and there are equal numbers of each type of customer. The following table shows the willingness to pay of both customer types for rowboats and kayaks.
Item Willingness to Pay
(Dollars) (Dollars)
College Students Retired People
Rowboats 25 30
Kayaks 6 10
If Frances rents out rowboats and kayaks separately, the best she can do is to charge \$ for a rowboat rental and \$ for a kayak rental.
At these prices, her total profit is \$ from a market consisting of one of each type of customer.
Now, suppose that Frances will allow customers only to purchase a rental bundle for rowboats and kayaks, with no option of renting either item individually. In this case, the bundle price that maximizes her profit is \$ , which yields a total profit of \$
Given the valuations in the previous table, it profitable for Frances to bundle her water sport equipment. This is due, in part, to the fact that the valuations of both consumer types are correlated.
