bundling

bundling - Commodity Bundling Introduction Firms often...

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Commodity Bundling
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Introduction ± Firms often bundle the goods that they offer ² Microsoft bundles Windows and Explorer ² Office bundles Word, Excel, PowerPoint, Access ± Bundled package is usually offered at a discount
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Introduction • Definition: selling products together (bundle) • Typically at a price that is less than sum of components • Possible motives: - quality enhancing - Metering consumption (for price discrimination) - Strategic advantage (extend an advantage from one market to the other) - Price discrimination
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Bundling – basic idea 12 3 2 1 entree 3 •Price goods separately: p E = p D = 3 Profits = 6 • Better alternative: • sell menus for $4 Profits = 8 • Key idea: Make consumers more homogeneous by aggregation. Can be less extreme. Necessary condition: Negative correlation in values ( Rank reversal ) dessert • Two consumers • Two goods (E,D) • Valuations of consumers: (3,1), (1,3)
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Bundling: an example ± Two television stations offered two old Hollywood films ² Casablanca and Son of Godzilla ± Arbitrage is possible between the stations ± Willingness to pay is: 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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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
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Bundling ± Extend this example to allow for ² costs ² mixed bundling : offering products in a bundle and separately
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Extension: mixed bundling • Alternative 1: bundle $7, profits = $21 • Sell good 2 at $6 and bundle at $9 • Total profits = $24 1 3 8 6 3 1 Good 1 A B 6 C Good 2 7 6 1 C 9 3 6 B 9 1 8 A bundle 2 1
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Self-selection 17 8 6 2 1 Good 1 A B 6 C Good 2 7 6 1 C 9 7 2 B 9 1 8 A bundle 2 1 • Try same as before: p B = 9 p 2 = 6 Does this work?
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This note was uploaded on 10/15/2008 for the course ECON 171 taught by Professor Hopenhayn during the Winter '07 term at UCLA.

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bundling - Commodity Bundling Introduction Firms often...

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