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Tips for solving bundling problems

Tips for solving bundling problems. Check which individual price gives you more profit Check which bundled price gives more profit See if mixed bundling gives you more Think like the consumer…. Which would you buy?

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Tips for solving bundling problems

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  1. Tips for solving bundling problems • Check which individual price gives you more profit • Check which bundled price gives more profit • See if mixed bundling gives you more • Think like the consumer…. Which would you buy? • If the consumer is indifferent between two items (i.e. their consumer surplus is equal) then give them a price incentive to buy the item that gives you more profit!

  2. Solve for individual pricing • Look at first product • Consider each of the reservation prices • Ask yourself how many consumers would buy at that price (note: customer would buy as long as the price is at or below their reservation price) • Calculate the profit at each price you are considering. Profit = (P – MC) X number of people willing to buy • Whichever price gives you the highest profit, that will be the price you charge for the first product • Repeat for the second product • Add the maximum profit for product 1 and product 2 to get the total profit under individual pricing

  3. Solve for pure bundling • Make a new column called bundle and fill in by adding together the first two columns • Consider each price to see which gives you the most profit, just like you did for individual pricing • Calculate the maximum profit and its related price • Compare this to individual pricing

  4. Solve for mixed bundling • Look at your reservation price table that includes the bundle column • Consider each customer separately and ask yourself, “if he/she could buy only one thing, what would give me the most profit assuming I charged their full reservation price?” Circle the item (or more if there’s a tie) • Do you see any possible way that you could earn more profit than under individual pricing or pure bundling? Look at the maximum profit you could get per customer and add it up. If it’s not more than the other solutions, just price it to give you the same results and you are done. • If you see the possibility of greater profit, ask yourself, “would the consumers really buy what I want them to if I offered those prices?” • You may not be able to do better than the individual pricing profit or the pure bundle profit but you shouldn’t do worse… you can always charge those same prices and make the products you don’t want to sell expensive • Suppose an individual is indifferent between an individual product and the bundle (i.e. the consumer surplus is the same), we assume they buy the bundle • If a consumer has the same consumer surplus between an individual product and a bundle and you WANT THEM TO BUY THE INDIVIDUAL PRODUCT, try lowering the price of the individual product to encourage them to buy it. Now they will have more consumer surplus for the individual product and they won’t buy the bundle.

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