3) The New Zealand government has decided to privatise it's Antarctic base, Scott Base, to make it pay it's way rather than be a drain on the public purse. As a result, it has converted its base into a hotel, the Emperor Penguin Hotel.

You are the only New Zealand firm selling vacation trips to the South Pole. You know only three customers are in the market (the government also converted the base into an oil-drilling platform and was surprised that not many people want to see oil or oil rigs).

You offer two services, a round-trip airfare and a stay at the Emperor Penguin Hotel. It costs you $300 to host a traveler at the Emperor Penguin Hotel and $300 for the airfare. If you do not bundle the services, a customer might buy your airfare but not stay at the hotel. A customer could also travel to the South Pole in some other way (by private plane), but still stay at the Emperor Penguin. The customer has the following reservation prices for the services:

Reservation Prices ($)

Customer Airfare Hotel

1 100 800

2 500 500

3 800 100

a) If you do not bundle the hotel and airfare, what are the optimal prices for the airfare (PA) and the hotel (PH )? What profits do you earn?

b) If you only sell the hotel and airfare in a bundle, what is the optimal price of the bundle (PB) and what profits do you earn?

c) Mixed bundling occurs when consumers are offered a choice between the purchasing the entire bundle or one of the separate parts of the bundle only. If you follow a strategy of mixed bundling, what are the optimal prices of the separate hotel, the separate airfare, and the bundle (PH , PA, and PB, respectively) and what profits do you earn?