You are hired by Safeway and put in charge of pricing the firm's private-label generic medication. You start on the over-the-counter cold and pain-reliever market in the Midwestern United States. A customers, who have a cold, typically need two remedies: a decongestant and a pain reliever. B customers, with a headache but little stuffiness, place a high value on the pain reliever, while C customers, with a stuffy nose, value the decongestant most. There are approximately 1 million customers of each type per year (they only consider purchasing the store-brand medication). After some market research you find the following willingness-to-pay from the different customer types.

Pain Reliever

A: $5

B: $6

C: $1.50

Decongestant

A: $4.50

B: $1

C:$5.50

The marginal cost of the pain reliever and the decongestant is $0.50.

If you were to sell the pain reliever and the decongestant separately, which price would you choose for each? What are your profits per year?

You have the ability to combine these two drugs into Safeway Super Cold Relief, which contains both a pain reliever and a decongestant, for a marginal cost of $1. Each customer type's willingness-to-pay for the combined medication is the sum of their willingness-to-pay for the active ingredients it contains. If you were to sell only the combined medication and not the two separately, what price would charge for Super Cold Relief? What is your profit per year?

If you were to offer three products (mixed bundling), the pain reliever, the decongestant and Super Cold Relief, how would you price them? What would your profits be?

Hint:think about a solution thatinvolves both a bundled price and individual prices for each product.