ManEconCh09 - MANAGERIAL ECONOMICS THEORY APPLICATIONS AND...

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Unformatted text preview: MANAGERIAL ECONOMICS: THEORY, APPLICATIONS, AND CASES W. Bruce Allen | Keith Weigelt | Neil Doherty | Edwin Mansfield CHAPTER 9 Bundling and Intrafirm Pricing OBJECTIVES • Explain how managers can use bundling and tying strategies to increase profit when customers have heterogeneous tastes • Explain how firms use transfer pricing to provide incentives to wholly-owned subsidiaries and divisions and to shelter profit from taxes in a global environment DEFINITIONS • Simple bundling: When managers offer several products or services as one package so consumers do not have an option to purchase package components separately • Example: Inclusion of a service contract with a product DEFINITIONS • Mixed bundling: Allows consumers to purchase package components either as a single unit or separately • The bundle price is generally less than the sum of the prices of the individual components. • Examples: Season tickets to sporting events or value meals at McDonald’s DEFINITIONS • Negative correlation: When some customers have higher reservation prices for one item in the bundle but lower reservation prices for another item in the bundle, whereas another group of customers has the reverse preferences • Managers form bundles so as to increase profit by creating negative correlations across consumers. THE MECHANICS OF BUNDLING • Advantages of bundling • Bundling can increase the seller’s profit as customers have varied tastes. • Bundling can emulate first-degree price discrimination when it is not otherwise possible because individual reservation prices cannot be determined or laws prohibit price discrimination. • Bundling does not require knowledge of individual consumers’ reservation prices, but only the distribution of consumers’ reservation prices. THE MECHANICS OF BUNDLING • Strategies • Assumption: Goods are independent, so the value of a bundle is equal to the sum of the reservation prices of the goods in the bundle. • Separate pricing: Goods are not bundled. • Prices are set equal to profit-maximizing monopoly prices. THE MECHANICS OF BUNDLING • Strategies (Continued) • Pure bundling • Bundle price is set to maximize profit. • Mixed bundling • Bundle price and individual good prices are set to maximize profit. • Optimal strategy is that which maximizes profit THE MECHANICS OF BUNDLING • Example Figures • Notation • r i = Reservation price of good i • p i # = Price charged for good i • P B # = Price of bundle THE MECHANICS OF BUNDLING • Example Figures (Continued) • Figure 9.1: Price Separately • If r 1 < p 1 # and r 2 < p 2 # , then consumer buys neither...
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This note was uploaded on 03/30/2011 for the course ECON 3020 taught by Professor Lucas during the Spring '10 term at Hawaii Pacific.

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ManEconCh09 - MANAGERIAL ECONOMICS THEORY APPLICATIONS AND...

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