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1 Teck-Hua Ho Pricing Policy March 12 I. Economic and Behavioral Foundations of Pricing II. Innovative Pricing Concepts and Tools III. Internet Pricing.

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Presentation on theme: "1 Teck-Hua Ho Pricing Policy March 12 I. Economic and Behavioral Foundations of Pricing II. Innovative Pricing Concepts and Tools III. Internet Pricing."— Presentation transcript:

1 1 Teck-Hua Ho Pricing Policy March 12 I. Economic and Behavioral Foundations of Pricing II. Innovative Pricing Concepts and Tools III. Internet Pricing Models Cambridge Software / Pricing Bundle

2 2 Teck-Hua Ho Pricing Policy March 12 Outline Price Bundling Pure Bundling Mixed Bundling

3 3 Teck-Hua Ho Pricing Policy March 12 Examples Microsofts Office bundle Lexuss car + maintenance services Dells PC + monitor Comcasts cable package consists of up to 200 channels of cable TV Holidays package

4 4 Teck-Hua Ho Pricing Policy March 12 Types of Price Bundling Pure Bundling Products can only be bought together E.g., Block booking of movie rights, Buffet Mixed Bundling Products can be purchased either individually or jointly E.g., CPU+Monitor or separately; Buffet + a la carte. Traditional pure component pricing forms the benchmark for evaluating the advantages of bundling

5 5 Teck-Hua Ho Pricing Policy March 12 Movie Distribution Example Should Bundle Pricing be offered? Movie distributors often sell packages of films rather than selling individual film rights because the package values vary less across buyers than do values of individual films Buyer ABuyer B Movie 1$9000$5000 Movie 2$1000$5000 Total$10000$10000 Using a la carte pricing can sell movie 1 to both buyers for $5000 each and movie 2 to buyer B for $5000. Total revenue is $ By bundling, both buyers will buy the bundle for $ So total revenue = $20000.

6 6 Teck-Hua Ho Pricing Policy March 12 Mobile Phone Operator Example Basic mobile-phone service is provided at a fixed monthly fee. The firm offers a number of value-added services including voice mail and a hot line for customer support. What prices should be charged for these services? While the fixed cost of providing each of the two services is substantial, the unit variable cost per customer is low (is set to zero for pricing purposes).

7 7 Teck-Hua Ho Pricing Policy March 12 Mobile Phone Operator: Data Requirements Equal segment size

8 8 Teck-Hua Ho Pricing Policy March 12 Optimal Pure Components Pricing P v = 8 P h =8.5 Price for Voice Mail Group 4 Group 3 Group 2 Group 1 Price for Hot Line

9 9 Teck-Hua Ho Pricing Policy March 12 Optimal Pure Bundling Price Group 4 Group 3 Group 2 Group 1 Price for Voice Mail Price for Hot Line 9 1.5

10 10 Teck-Hua Ho Pricing Policy March 12 Optimal Mixed Bundling Price Group 4 Group 3 Group 2 Group 1 Price for Hot Line Ph=9 Pv=9 Pv+Ph=13 Price for Voice Mail

11 11 Teck-Hua Ho Pricing Policy March 12 Optimal Prices and Revenues for Different Forms of Pricing

12 12 Teck-Hua Ho Pricing Policy March 12 Key Observation and Insight Willingness to pays for component products are negatively correlated. Bundling improves profit because unexploited customer surplus (money left on the table) from one product is transferred to a second product.

13 13 Teck-Hua Ho Pricing Policy March 12 Product and Service Bundling – Machine Tools

14 14 Teck-Hua Ho Pricing Policy March 12 Different Forms of Pricing

15 15 Teck-Hua Ho Pricing Policy March 12 Rationale for Legal Restrictions Restricts competition in the target product market Microsoft case: Office Suite Extends economic power to related markets Microsoft case: Internet Explorer tie-ins Hurts consumers Forced to buy items that are of poor quality, or of limited use

16 16 Teck-Hua Ho Pricing Policy March 12 Punchline Price bundling can work when willingness to pays for component products are negatively correlated. Bundling can improve profit because unexploited customer surplus (money left on the table) from one product is transferred to a second product. Price bundling can appear in the form of pure and mixed bundling. The distribution of WTPs determines which form is superior.


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