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Review. Two-parts pricing: Definition and Examples Best practice of two-parts pricing (with homogeneous consumers). Lecture 16 Bundling and Tying. BUNDLING. Definitions. A bundle is a group of products or services sold as a package.

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Review

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  1. Review Two-parts pricing: Definition and Examples Best practice of two-parts pricing (with homogeneous consumers)

  2. Lecture 16Bundling andTying

  3. BUNDLING

  4. Definitions • A bundle is a group of products or services sold as a package. • The constituents, which can be sold separately, are called ‘components’. • Three commonly used terms: • Pure bundling. Only the bundle is offered by the seller (at a bundle price). • Pure components. Only the components are offered (at their separate prices). • Mixed bundling – The bundle as well as some or all components, or smaller bundles, are priced and offered for sale.

  5. Examples • Pure bundling • Music CD (when singles are not sold) • Block booking of movies • Mixed bundling (bundle and components) • Gateway computer, monitor and printer • Car with insurance • Restaurant menus • Cable channels • Holiday package • Pure components

  6. Illustration • Two components A and C. Let A + C = bundle B. • Pure bundling: B is offered at PB and A & C not offered. (Offering A & C at extremely high prices is effectively the same). • Pure components: A is offered at PA and C at PC, and no bundle. (Customers can make their own bundle at price PA+PC). • If A, B, and C are offered at prices PA, PB, and PC, then the following relationships are likely to hold • PB < PA + PC (else customers will not buy the bundle) • PA, PC < PB (else customers will not buy the components)

  7. Exceptions to PB < PA + PC • The bundle price can be higher than the sum of component prices when it offers a convenience, lower assembly cost, guarantee of quality • Example – A TV-VCR combo may be higher than the price of standalone TV and VCR.

  8. The “value meal” example $300 $400

  9. Take-away • A demand side explanation for bundling is that heterogeneous customer segments have demands for the components products that negatively correlate. • Bundling improves profit by transferring customer surplus (“money left on the table”) from one component to the other. • Bundling reduces heterogeneity in valuations, which causes inefficiency in pricing.

  10. TYING

  11. Definitions • Tying differs from bundling as: • Bundlingoccurs if the firm sells packages containing at least two different products or services. • Tying occurs if the firm sells packages containing at least two units of the same product or service. • Two commonly used terms: • Pure tying. Only one package containing at least two units of the good is offered for sale. • Mixed tying. If more than one package is offered for sale, and at least one package contains at least two units.

  12. Examples • Pure tying • Shopping TV which “doubles the offer” • Dozens of eggs • Mixed tying (bundle and components) • Season and daily ski pass • CU football Season and single-event tickets

  13. The “ski pass” example “A la carte” approach (cost = $0)

  14. The “ski pass” example “Season pass” approach (cost = $0) “Season pass” approach (cost = $3)

  15. Take-away • A demand side explanation for tying is that consumers have diminishing values for additional units of the same product/service, thus these values are negatively correlated. • Tying improves profit by transferring customer surplus (“money left on the table”) from one unit to the other. • Tying reduces heterogeneity in valuations, which causes inefficiency in pricing. • The size of the package is negatively related with the marginal cost

  16. Next Lecture • Revenue Management I

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