9-Bundling and Tie-In Sales

9-Bundling and Tie-In Sales - Commodity Bundling and TieIn...

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Commodity Bundling and Tie- In Sales 1
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Firms often bundle the goods that they offer Microsoft bundles Windows and Explorer Office bundles Word, Excel, PowerPoint, Access Bundled package is usually offered at a discount Bundling may increase market power GE merger with Honeywell Tie-in sales ties the sale of one product to the purchase of another Tying may be contractual or technological IBM computer card machines and computer cards Kodak tie service to sales of large-scale photocopiers Tie computer printers and printer cartridges Why? To make money! 2 Introduction
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Two television stations offered two old Hollywood films Casablanca and Son of Godzilla Arbitrage is possible between the stations Willingness to pay is: 3 Bundling: an example Station A Station B Willingness to pay for Casablanca Willingness to pay for Godzilla $8,000 $7,000 $2,500 $3,000 How much can be charged for Casablanca? How much can be charged for Casablanca? $7,000 How much can be charged for Godzilla? How much can be charged for Godzilla? $2,500 If the films are sold separately total revenue is $19,000
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4 Bundling: an example 2 Station A Station B Willingness to pay for Casablanca Willingness to pay for Godzilla $8,000 $7,000 $2,500 $3,000 Total Willingness to pay $10,500 $10,000 Now suppose that the two films are bundled and sold as a package Now suppose that the two films are bundled and sold as a package How much can be charged for the package? How much can be charged for the package? $10,000 If the films are sold as a package total revenue is $20,000 Bundling is profitable because it exploits aggregate willingness pay
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Extend this example to allow for costs mixed bundling : offering products in a bundle and separately 5 Bundling
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6 Bundling: another example All consumers in region A buy both goods All consumers in region A buy both goods R 2 R 1 Consumer x has reservation price p x1 for good 1 and p x2 for good 2 Consumer x has reservation price p x1 for good 1 and p x2 for good 2 x p x2 p x1 y p y2 p y1 Consumer y has reservation price p y1 for good 1 and p y2 for good 2 Consumer y has reservation price p y1 for good 1 and p y2 for good 2 Suppose that the firm sets price p 1 for good 1 and price p 2 for good 2 Suppose that the firm sets price p 1 for good 1 and price p 2 for good 2 p 1 p 2 Suppose that there are two goods and that consumers differ in their reservation prices for these goods Suppose that there are two goods and that consumers differ in their reservation prices for these goods Each consumer buys exactly one unit of a good provided that price is less than her reservation price Each consumer buys exactly one unit of a good provided that price is less than her reservation price A B D C Consumers split into four groups Consumers split into four groups All consumers in region B buy only good 2 All consumers in region B buy only good 2 All consumers in region C buy neither good All consumers in region C buy neither good All consumers in region D buy only good 1 All consumers in
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