The practice of bundling necessitates that a firm:
A) have market power, prevent arbitrage, and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
B) have market power and sell two products in which consumers' demand for one product is positively correlated with their demand for the other product.
C) ignore arbitrage and sell two products in which consumers' demand for one product is negatively correlated with their demand for the other product.
D) set price equal to marginal cost for each consumer whose demand can be identified after the purchase of the product.

Question

Quizplus · Accepted Answer

Bundling requires a firm to have market power, prevent arbitrage (to ensure consumers cannot buy products separately at a lower total cost), and sell two products where the demand for one is negatively correlated with the demand for the other. This strategy allows the firm to maximize profit by selling the bundle at a price that captures more consumer surplus. Positive correlation in demand or setting prices equal to marginal cost for identifiable consumer demand after purchase are not necessary conditions for effective bundling.

The Practice of Bundling Necessitates That a Firm