slides9 - Market power and pricing applications Steve Allen...

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Market power and pricing: applications Steve Allen ECG 507 Fall 2005
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1. Bundling Bundling is packaging two or more  products to gain a pricing advantage. Conditions necessary for bundling Heterogeneous customers Price discrimination is not possible Text: demands must be negatively correlated  (we will see about that)
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2. Example of bundling Reservation price: group A Reservation price: group B Jackets 130 50 Pants 20 100
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3. Example of mixed bundling Group 1 Group 2 Group 3 Cost Appetizer 5 6 0 3 Dinner 10 8 10 5 Dessert 0 6 5 2
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4. Bundling Impact in IT sector Much greater payoff because MC very low,  sometimes zero Creates entry barriers
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5. Bundling Tying Combines the purchase of one product with a  complementary product, usually with a contract. Typically one product useless without the other, but  competing firms produce other product Examples: Xerox copiers, IBM mainframes Economic rationale: price discrimination, protect  brand name
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6. Oligopoly
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slides9 - Market power and pricing applications Steve Allen...

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