Question

A monopolist sells to two consumers. Consumer 1 is willing to pay $2.50 for an espresso and $1.50 for a biscotti. Consumer 2 is willing to pay $3.00 for an espresso and $1 for a biscotti. Does bundling an espresso with a biscotti increase the monopolist's revenues, relative to selling the two goods separately?

Yes.
No.

Answer 1

Bundling an espresso with a biscotti can increase the monopolist's revenues because they can charge a bundle price that is attractive to both consumers, leading to higher overall revenue compared to selling the items separately.

Step-by-step explanation:

Yes, bundling an espresso with a biscotti can increase the monopolist's revenues, relative to selling the two goods separately. If the monopolist sells the espresso and biscotti separately, they could charge Consumer 1 $2.50 for the espresso and $1.50 for the biscotti, and charge Consumer 2 $3.00 for the espresso and $1 for the biscotti.

This would result in a total revenue of $8.00. However, if the monopolist bundles the items, they could charge a single price for the bundle that is lower than the combined willingness to pay of each consumer for both items but higher than their willingness to pay for either single item.

Considering the consumer willingness to pay, the monopolist could bundle the espresso and biscotti for, say, $3.50 each bundle. Both consumers would purchase the bundle as it costs less than the total amount they are willing to pay independently for each item, leading to a total revenue of $7.00 for each, and thus $14.00 overall, which is higher than selling each item separately.