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Cambridge Software / Pricing Bundle

Cambridge Software / Pricing Bundle. I. Economic and Behavioral Foundations of Pricing. II. Innovative Pricing Concepts and Tools. III. Internet Pricing Models. Outline. Price Bundling Pure Bundling Mixed Bundling. Examples. Microsoft’s “Office” bundle

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Cambridge Software / Pricing Bundle

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  1. Cambridge Software / Pricing Bundle • I. Economic and Behavioral • Foundations of Pricing • II. Innovative Pricing • Concepts and Tools • III. Internet Pricing • Models

  2. Outline • Price Bundling • Pure Bundling • Mixed Bundling

  3. Examples • Microsoft’s “Office” bundle • Lexus’s car + maintenance services • Dell’s PC + monitor • Comcast’s cable package consists of up to 200 channels of cable TV • Holiday’s package

  4. Types of Price Bundling • Pure Bundling • Products can only be bought together • E.g., Block booking of movie rights, Buffet • Mixed Bundling • Products can be purchased either individually or jointly • E.g., CPU+Monitor or separately; Buffet + a la carte. • Traditional pure component pricing forms the benchmark for evaluating the advantages of bundling

  5. Movie Distribution Example Should Bundle Pricing be offered? • Movie distributors often sell packages of films rather than selling individual film rights because the package values vary less across buyers than do values of individual films Buyer A Buyer B Movie 1 $9000 $5000 Movie 2 $1000 $5000 Total $10000 $10000 • Using a la carte pricing can sell movie 1 to both buyers for $5000 each and movie 2 to buyer B for $5000. Total revenue is $15000. • By bundling, both buyers will buy the bundle for $10000. So total revenue = $20000.

  6. Mobile Phone Operator Example • Basic mobile-phone service is provided at a fixed monthly fee. • The firm offers a number of value-added services including voice mail and a hot line for customer support. • What prices should be charged for these services? • While the fixed cost of providing each of the two services is substantial, the unit variable cost per customer is low (is set to zero for pricing purposes).

  7. Mobile Phone Operator: Data Requirements Equal segment size

  8. Group 4 Group 3 Price for Hot Line Group 2 Group 1 Price for Voice Mail Optimal Pure Components Pricing Pv = 8 Ph=8.5

  9. Optimal Pure Bundling Price Group 4 Group 3 Price for Hot Line Group 2 Group 1 1.5 9 Price for Voice Mail

  10. Optimal Mixed Bundling Price Pv=9 Ph=9 Group 4 Group 3 Pv+Ph=13 Group 2 Price for Hot Line Group 1 Price for Voice Mail

  11. Optimal Prices and Revenues for Different Forms of Pricing

  12. Key Observation and Insight • Willingness to pays for component products are negatively correlated. • Bundling improves profit because unexploited customer surplus (“money left on the table”) from one product is transferred to a second product.

  13. Product and Service Bundling – Machine Tools

  14. Different Forms of Pricing

  15. Rationale for Legal Restrictions • Restricts competition in the target product market • Microsoft case: Office Suite • Extends economic power to related markets • Microsoft case: Internet Explorer tie-ins • Hurts consumers • Forced to buy items that are of poor quality, or of limited use

  16. Punchline • Price bundling can work when willingness to pays for component products are negatively correlated. • Bundling can improve profit because unexploited customer surplus (“money left on the table”) from one product is transferred to a second product. • Price bundling can appear in the form of pure and mixed bundling. The distribution of WTPs determines which form is superior.

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