Classic Programs has purchased distribution rights for two television programs that are ready for syndication. One series, The Detectives, was enormously popular during its prime time run and will command a large rental fee
The second series, Kittie and Alma, was a poor parody of a popular series. Kittie and Alma is not expected to be in demand for syndication. The managers at Classic Programs feel that there are only two legitimate bidders for the two series. One bidder is a large independent television station that is carried across the country by cable TV companies. The other bidder is a youth oriented pay TV network called Kidwork. The independent station and Kidwork are rarely carried by the same cable companies, so that a successful bid by one has almost no impact on the willingness of the other to show the programs. Based upon previous experience, Classic estimates the following reservation prices for each bidder. Bidding is for the right to show the programs on an unlimited basis. Independent Station Kidwork The Detectives 100,000 120,000 Kittie and Alma 15,000 8,000 a. Assuming that Classic's managers set separate prices for the two programs, what is the most profitable pricing strategy? (Because of information that is shared within the industry, different prices for the two bidders are impossible.) How much revenue will be earned? b. Classic's managers are considering bundling the two programs under a single price. Is bundling feasible in this instance? Why or why not? If so, what should the bundled price be? What will total revenue be?
a.
Separate prices must be set at the lower reservation price for each program. The Detectives would be priced at $100,000, Kittie and Alma at $8,000. Total revenue would be $216,000.
b.
Bundling is feasible because of the negative correlation between the firms' reservation prices (i.e., Kidwork has the greater demand for The Detectives, the independent station the greater demand for Kittie and Alma). The bundle price should be set equal to the lower reservation price for the bundled output. The independent station's reservation price is $115,000, Kidwork $128,000. The bundled price would be $115,000, providing total revenues of $230,000.
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