Cornucopia Media provides cable television service to several cities in the mid-Atlantic region. The firm has access to two new channels that focus on reality television programming, and the marginal cost of providing both new channels is zero

Question

The first channel is Extreme Scottish Sports (ESS) and appeals to younger viewers, and the second channel is Delaware Entertainment and Tourism (DET) and appeals to older viewers. Based on Cornucopia's market research, younger viewers are willing to pay $5 per month for ESS, and their reservation price for DET is $0.50 per month. The same research indicates that older viewers have a reservation price of $1.00 per month for ESS and $4.00 per month for DET. a. Please show how Cornucopia media can increase sales revenue by bundling the two channels rather than selling access to the channels separately. b. The US Congress has recently considered legislation that would allow cable television subscribers to purchase access to separate channels (without bundling). If the law is enacted, what should we expect to happen to sales revenue in cable television markets?

Answer 1

a.
Under separate pricing, Cornucopia would sell access to ESS at $5.00 per month and only subscribe younger viewers. Cornucopia would also sell access to DET at $4.00 per month and only subscribe older viewers. Under pure bundling, Cornucopia could sell the channel package at $5.00 per month, and all viewers would subscribe. Total sales revenue for the firm increases under the bundling scheme.

b.
Based on the results from part a., we expect that total sales revenue from the cable television market to decline if the legislation is enacted by Congress.