Tax Fighters, Inc., develops, markets, and sells software for tax preparation. Tax Fighters, Inc. sells IRS Tax Fighter, a software for completing federal income tax forms and Gopher Basher, a software for completing Minnesota state income tax forms. For simplicity, assume that all of the costs in this industry are the fixed costs of developing the software packages themselves. The marginal cost of producing another disk is approximately zero.Consider the following information about the demand for tax software. There are an equal number of consumers in each group. Figure 7.1 shows the maximum that each type of consumer is willing to pay for each product. As vice president for pricing, explain your optimal bundling and pricing strategy to maximize Tax Fighter profits from the sale of tax

software. Be sure to clearly explain why your strategy is optimal.



What will be an ideal response?

Group 2 consumers have very low willingness to pay. It is more profitable to try to sell to Group 1 and Group 3 consumers. We can exploit the relative preference of Group 1 consumers for Tax Fighter and the relative preference of Group 3 consumers for Gopher Basher through bundling the two products for $17.
If we priced each item individually, we could only charge $7 for IRS Tax Fighter in order to entice 2/3 of the customers to buy the product. We could only charge $7 for Gopher Basher and still have 2/3 of the consumers to buy Gopher Basher. However, we can get $17 in revenue out of both Group1 and Group 2 customers by offering only a $17 bundle of both tax programs, instead of the lower $14 of revenue we would receive from selling each program separately. Let n be the number of customers in each group.
If P = $17, then TR = $17 x 2n = 34n.
If P = $7, then TR = $7 x 3n = 21n.
If P = $22, then TR = $22n.
So $17 is the best bundled price.
For nonbundled pricing
$7 for each product; then TR is $7 x 2n + $7 x 2n = 28n.
$4 for first and $3 for second; then TR is $4 x 3n + $3 x 3n = 21n.
So if n people are in each group, profits and total revenue are both maximized by charging $17 for the two software products as a single bundle, given the firm's extra revenue of 34n.