Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 31

Bundling of Cable and Satellite Television Offerings
The huge expansion in television offerings made possible by improvements in cable and satellite technology has created the possibility for many options for bundling programs to appeal to different categories of consumers.
Theory of Program Bundling
Figure 1 illustrates the theory of program bundling in a very simple case. The figure shows four consumers' willingness to pay for either sports or movie programming. Consumers A and D are true devotees, willing to pay $20 per month for sports (A) or movies (D) and nothing for the other option. Consumers B and C are more diverse in their interests, though their preferences are still rather different from each other. If the firm opts to sell each of the two packages separately, it should charge $15 for each. This will yield $60 to the firm. A bundling scheme, however, that charges $20 for each package if bought individually, but $23 if both are bought,1 would yield $86. Bundling can offer a substantial increase in revenue to this provider.
Bundling by DIRECTV
These features of bundling are illustrated by DIRECTV's monthly fee schedule for 2014 (see Table 1). DIRECTV limits
the ability of subscribers to pick and choose individual channels as they would in a so-called à la carte system. Even the lower end Choice package is a bundle-indeed a big bundle-already including 150 channels of news, sports, movies, general interest, and other content. Each step up in package includes a bundle of additional channels, mostly additional sports and movie channels. The monthly fee is higher, but the price per channel drops, at least for the Xtra and Ultimate packages.
While you might think there can be nothing beyond Ultimate, in fact there is, Premier, which involves a large jump up in both monthly and per-channel fees. One explanation for the jump in price of the top-end bundle is that it includes premium movie channels such as HBO and Showtime and regional sports networks, all of which are quite costly for DIRECTV to provide. Another explanation is that DIRECTV believes some subscribers will simply opt for "the works" without any careful weighing of marginal benefits and costs.
Why isn't bundling more extensive in retailing? For example, could supermarkets gain by offering shoppers prefilled shopping bags at modestly reduced prices?