Consider a monopolist which sells two different goods to two independent markets. The firm sets the profit maximizing price in the two separate markets and suppose one of those prices is high and the other is low. Now suppose the firm bundles the two goods: they are no longer sold separately but instead if you want one you must buy both. The profit-maximizing price of the bundle will be higher than the low priced good but lower than the high priced good. Consumers of the previously low-priced good are worse off, consumers of the previously high-priced good are better off because of the bundling.
This is one simple point to have in mind when thinking about bundling of cable channels versus a la carte pricing. The bundling mixes the elasticities of the two separate demand curves and leads to pricing in between the individual profit-maximizing prices. If sports channels are in high demand and food channels are in low demand then people who like food but not sports are justified in complaining about bundling.
But as Alex Tabarrok points out, these complaints are often poorly targeted, instead focusing on the differential costs cable networks charge the cable companies for access. Bundling is often viewed as a way of cross-subsidizing high-cost cable channels by raising prices on subscribers who view low-cost channels. For example Kevin Drum, responding to an article in the LA Times breaking down the cable companies’ balance sheets, asks for a la carte pricing so that
“sports fans would be forced to pay the actual cost of their sports programming without being subsidized by the rest of us.”
Alex presents a simple example to demonstrate that this focus on costs is misguided. But just because they’ve got their reasoning wrong doesn’t mean they came to the wrong conclusion. And in debunking the analysis Alex himself overlooks the basic point about bundling above.
Cheap Talk 
5 comments
Comments feed for this article
January 22, 2013 at 5:25 am
michael costello (@mcmc)
I think one element of cable bundling that makes it tougher to swallow is that a large proportion of the public places zero value on the sports channels. In most bundling cases, there are a range of values imputed to the various components, but usually not zero. I’ll take the leather seats to get the satnav. The leather is nice, and even applying my private values to the leather and the satnav, the bundle price is attractive to me. Few carbuyers would value the leather option at zero, so the bundle makes a large swathe of customers happy. The cable bundle can cause infuriation in some customers, as their private value is zero (or even negative, if they can’t omit it from their tuner menu, and thus have to waste time skipping it while browsing).
January 22, 2013 at 7:31 am
PLW
Does the analysis in the post require zero marginal cost? If not, I don’t follow it. If so, does that seem like the right model for a cable provider who pays the content provider on a per-viewer basis?
March 18, 2014 at 10:36 pm
Shubh
This is getting a bit more suvtbcjiee, but I much prefer the Zune Marketplace. The interface is colorful, has more flair, and some cool features like Mixview’ that let you quickly see related albums, songs, or other users related to what you’re listening to. Clicking on one of those will center on that item, and another set of neighbors will come into view, allowing you to navigate around exploring by similar artists, songs, or users. Speaking of users, the Zune Social is also great fun, letting you find others with shared tastes and becoming friends with them. You then can listen to a playlist created based on an amalgamation of what all your friends are listening to, which is also enjoyable. Those concerned with privacy will be relieved to know you can prevent the public from seeing your personal listening habits if you so choose.
January 22, 2013 at 8:01 am
Dismalist
Bundling should not occur when there is “low” demand for one item and “high” demand for another item in the bundle. Under such circumstances, the provider would reap bigger profits by not bundling.
Rather, bundling is the result of “high” demand and “low” demand on the part of different people for different elements of the bundle: It makes sense if some are willing to pay a high price for one element of the bundle, and others are willing to pay a high price for a different element of the bundle [and if everybody has to be charged the same fee for a particular service].
July 16, 2013 at 3:34 pm
Software revenue recogition rules | Bi101 | Subscription accounting
[…] the CFO’s job would be easy. Usually though, the subscription fee that was negotiated includes multiple bundled elements like training, and consulting. To recognize revenue for these elements, software companies need to […]