MBA201a: More Advanced Pricing Techniques

Professor Wolfram MBA201a - Fall 2009 Page 2

Multi-part tariff examples

• Amusement Parks.

• Costco.

• Cell phones.

• Bars.

• Razors and Blades.

• Many more…

Professor Wolfram MBA201a - Fall 2009 Page 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?

Professor Wolfram MBA201a - Fall 2009 Page 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?

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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

Willingness to Pay

American Idiot Coming Home Both

Music lover $140 $80 $220

Drama lover $50 $130 $180

Green Day fan $85 $10 $95

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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

Willingness to Pay

American Idiot Coming Home Both

Music lover $140 $80 $220

Drama lover $50 $130 $180

Green Day fan $85 $10 $95

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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

Willingness to Pay

American Idiot Coming Home Both

Music lover $140 $80 $220

Drama lover $50 $130 $180

Green Day fan $85 $10 $95

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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.

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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.