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MBA201a: More Advanced Pricing Techniques

MBA201a: More Advanced Pricing Techniques. Multi-part tariff examples. Amusement Parks. Costco. Cell phones. Bars. Razors and Blades. Many more…. Multi-part tariffs: summary. Firms can reduce deadweight loss by charging price close to MC  expand consumer surplus.

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MBA201a: More Advanced Pricing Techniques

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  1. MBA201a: More Advanced Pricing Techniques

  2. Multi-part tariff examples • Amusement Parks. • Costco. • Cell phones. • Bars. • Razors and Blades. • Many more… MBA201a - Fall 2009

  3. Multi-part tariffs: summary • Firms can reduce deadweight loss by charging price close to MC  expand consumer surplus. • Firms can capture maximal profits by charging the fixed fee that extracts as much surplus as possible  recover surplus as profits for firm! • So, why aren’t more goods sold with at least a two-part tariff? MBA201a - Fall 2009

  4. Berkeley Rep ticket pricing • If you like theatre, you could see the following performances this season at the Berkeley Rep: • American Idiot, Tiny Kushner, Aurelia’s Oratorio, Coming Home, Concerning Strange Devices from the Distant West, Girlfriend, A new play written by Lisa Kron • If you want premium seats for the Saturday, 8PM show, you could buy: • Season tickets: $65 per ticket for all 7 plays ($65*7 = $455) • A la carte tickets: $71 per ticket plus $86 for American Idiot ($71x6 + $86 = $512) • Is this quantity discounting? MBA201a - Fall 2009

  5. Bundling example: season tickets • Assume MC =0. Let’s consider some pricing strategies. • Strategy 0 (simple pricing): p = 10  q = 6  Revenue = 60 • p = 50  q = 5  Revenue = 250 • p = 80  q = 4  Revenue = 320 • p = 85  q = 3  Revenue = 255 • p = 130  q = 2  Revenue = 260 • p = 140  q = 1  Revenue = 140 MBA201a - Fall 2009

  6. Bundling example: season tickets • Strategy 1 (diff. by show): pA = 50  q = 3  Revenue = 150 • pA = 85  q = 2  Revenue = 170 • pA = 140  q = 1  Revenue = 140 • pC = 10  q = 3  Revenue = 30 • pC = 80  q = 2  Revenue = 160 • pC = 130  q = 1  Revenue = 130 • TOTAL REVENUE = 170 + 160 = 330 MBA201a - Fall 2009

  7. Bundling example: season tickets • Strategy 2 (bundle): pB = 95  q = 3  Revenue = 285 • pB = 180  q = 2  Revenue = 360 • pB = 220  q = 1  Revenue = 220 MBA201a - Fall 2009

  8. When is bundling advantageous? • When we sell separately, two things happen: • We give people extra consumer surplus: the music lover was able to buy a ticket to American Idiot for $85 when he values it at $140 (called “rents”). • We can generate deadweight loss (not apparent in this case). • What does bundling do? • We generate goods (the bundle) for which many people have a high willingness to pay. • BOTTOM LINE: Bundling can help extract surplus if consumers value both products and if they are heterogeneous in what they prefer most. MBA201a - Fall 2009

  9. Takeaways • With all advanced pricing strategies, firms succeed by generating as much consumer surplus as possible, • …and then find the pricing mechanism to capture it. • Pay attention to: • Opportunities to sort consumers based on exogenous characteristics. • Opportunities to offer consumers different menus (simple- or multi-part), even if it involves defining a whole new product. • Whether your consumers’ tastes are heterogeneous or homogeneous. MBA201a - Fall 2009

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