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Click to edit Master subtitle style  4/28/11 Lecture 7 Advanced Pricing Strategies (Continued) Econ 121: Industrial Organization UC Berkeley Fall 2010 Prof. Cristian Santesteban

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4/28/11 Overview Bundling (continued) Tying General Non-Linear Pricing Damaged Goods Peak Load Pricing
4/28/11 Bundling What does it mean for demands to be “positively correlated” and “negatively correlated”? Positively correlated demands means that a consumer who values good 1 more than the other person will also value good 2 more than the other person. The positive correlation is in the preferences (relative to the other person) across the two goods. Negatively correlated demands means that a consumer who values good 1 more than the other person will value good 2 less than the other person. This is independent of how much either consumer values good 1 relative to good 2. Both consumers can overwhelmingly prefer good 1 over good 2 and their demands may be positively or negatively correlated.

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BUNDLING Bundling in Practice Mixed Bundling in Practice The dots in this figure are estimates of reservation prices for a representative sample of consumers. A company could first choose a price for the bundle, PB , such that a diagonal line connecting these prices passes roughly midway through the dots. The company could then try individual prices P 1 and P 2. Given P 1, P 2, and PB , profits can be calculated for this sample of consumers. Managers can then raise or lower P 1, P 2, and PB and see whether the new pricing leads to higher profits. This procedure is repeated until total profit is roughly maximized.
4/28/11 Tying versus Bundling Bundling (or Package Tie-in): Two or more products are sold in fixed proportions. Examples: Spreadsheet and word processor; keyboard, monitor, and PC unit Tying (or Requirements Tie-in): If you purchase one product from a firm, you are required to make all of the purchases of another product from

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4/28/11 Tying and Bundling As with all methods of price discrimination, in order for tying or bundling to work, the firm must prevent consumers from trading. For example, a bundle cannot work if consumers can resell the component products in the open market. In the case of tying, a consumer must be unable to purchase the tied
4/28/11 Tying Simplest case is an application of a two-part tariff Assume that the firm has a monopoly in the production of the primary (tying) good and that the secondary (tied) good would be supplied competitively at marginal cost in the absence of a tie. Assume also that consumers differ in

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