bundling - combining 2 or more products in a sale to gain a pricing advantage  

• sometimes customers want 1 product but not the other
• conditions for bundling:
  • heterogeneous customers
  • can't price discriminate (and profit at the same time)
  • demands negatively correlated
• consumers will buy bundle if the cost of the entire bundle is less than the the sum of the amount they're willing to pay for both goods individually
  • ie. if customer is willing to pay $4 for good A and $6 for good B, then as long as the bundle costs $10 or less, they'll purchase it
  • also, this bundle would also appeal to customer willing to pay $1 for good A and $9 for good B
• best used when customers each really only want 1 of the goods in the package
• examples of bundling: features in cars (sunroof, anything non-standard), hotel w/ airfare, premium channels

advertising - only done by firms w/ market power  

• no point for price takers to make advertisements
• new demand function Q(P,A)
  • quantity demanded not a function of price (P) and amount spent on advertising (A)
• profit = PQ(P,A) - C[Q(P,A)] - A
  • revenue = price x quantity demanded
  • cost = calculated by quantity
  • subtract A for amount spent on advertising (another fixed cost)
• if demand price inelastic and advertising effective >> advertise more
  • ie. diamond (Kay's jewelers)